As filed with the Securities and Exchange Commission on September 8, 1995
Registration No. 33-62001
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------
PRE-EFFECTIVE AMENDMENT NO. 2 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------------
SPECIALTY RETAILERS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 5311 04-3034294
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
10201 MAIN STREET
HOUSTON, TEXAS 77025
TELEPHONE: (713) 667-5601
(ADDRESS, INCLUDING ZIP CODE, AND
TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-----------------------------
MR. CARL TOOKER
10201 MAIN STREET
HOUSTON, TEXAS 77025
TELEPHONE: (713) 667-5601
(NAME, ADDRESS, INCLUDING ZIP CODE,
AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF AGENT FOR SERVICE)
COPY TO:
LANCE C. BALK
KIRKLAND & ELLIS
153 EAST 53RD STREET
NEW YORK, NEW YORK 10022-4675
TELEPHONE: (212) 446-4800
-----------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered
in connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [ ]
The registrant hereby amends this Registration Statement on such
date or dates as may be necessary to delay its effective date until the
registrant shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
<PAGE>
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
SHOWING LOCATION IN PROSPECTUS OF INFORMATION
REQUIRED BY ITEMS OF PART I OF FORM S-4
<TABLE>
<CAPTION>
REGISTRATION STATEMENT
ITEM NUMBER AND CAPTION CAPTION OR LOCATION IN PROSPECTUS
----------------------- ---------------------------------
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1. FOREPART OF REGISTRATION STATEMENT AND OUTSIDE
FRONT COVER PAGE OF PROSPECTUS.......................... OUTSIDE FRONT COVER PAGE
2. INSIDE FRONT AND OUTSIDE BACK COVER PAGES OF
PROSPECTUS.............................................. INSIDE FRONT COVER PAGE; OUTSIDE BACK COVER
PAGE
3. RISK FACTORS, RATIO OF EARNINGS TO FIXED CHARGES
AND OTHER INFORMATION.................................. PROSPECTUS SUMMARY; THE COMPANY; RISK
FACTORS; SELECTED HISTORICAL AND PRO FORMA
FINANCIAL DATA
4. TERMS OF THE TRANSACTION................................ OUTSIDE FRONT COVER PAGE; PROSPECTUS SUMMARY;
THE EXCHANGE OFFER; DESCRIPTION OF NEW
SECURITIES; CERTAIN FEDERAL INCOME TAX
CONSEQUENCES
5. PRO FORMA FINANCIAL INFORMATION......................... SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
6. MATERIAL CONTRACTS WITH THE COMPANY BEING
ACQUIRED................................................ INAPPLICABLE
7. ADDITIONAL INFORMATION REQUIRED......................... INAPPLICABLE
8. INTERESTS OF NAMED EXPERTS AND COUNSEL.................. LEGAL MATTERS; EXPERTS
9. DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES.......... INAPPLICABLE
10. INFORMATION WITH RESPECT TO S-3 REGISTRANTS............. INAPPLICABLE
11. INCORPORATION OF CERTAIN INFORMATION BY REFERENCE....... INAPPLICABLE
12. INFORMATION WITH RESPECT TO S-3 OR S-2 REGISTRANTS...... INAPPLICABLE
13. INCORPORATION OF CERTAIN INFORMATION BY REFERENCE....... INAPPLICABLE
14. INFORMATION WITH RESPECT TO REGISTRANTS OTHER THAN
S-3 OR S-2 REGISTRANTS.................................. OUTSIDE FRONT COVER PAGE; PROSPECTUS SUMMARY;
RISK FACTORS; USE OF PROCEEDS; CAPITALIZATION;
SELECTED HISTORICAL AND PRO FORMA FINANCIAL
DATA; MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS;
BUSINESS; MANAGEMENT; PRINCIPAL STOCKHOLDERS;
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
i
15. INFORMATION WITH RESPECT TO S-3 COMPANIES............... INAPPLICABLE
16. INFORMATION WITH RESPECT TO S-3 OR S-2 COMPANIES........ INAPPLICABLE
17. INFORMATION WITH RESPECT TO COMPANIES OTHER THAN
S-3 OR S-2 COMPANIES.................................... INAPPLICABLE
18. INFORMATION IF PROXIES, CONSENTS OR AUTHORIZATIONS
ARE TO BE SOLICITED..................................... INAPPLICABLE
19. INFORMATION IF PROXIES, CONSENTS OR AUTHORIZATIONS
ARE NOT TO BE SOLICITED OR IN AN EXCHANGE OFFER......... OUTSIDE FRONT COVER PAGE OF PROSPECTUS;
SUMMARY; PRINCIPLE STOCKHOLDERS; CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS; THE
EXCHANGE OFFER
</TABLE>
ii
<PAGE>
******************************************************************************
* Information contained herein is subject to completion or amendment. A *
* registration statement relating to these securities has been filed *
* with the Securities and Exchange Commission. These securities may not *
* be sold nor may offers to buy be accepted prior to the time the *
* registration statement becomes effective. This prospectus shall not *
* constitute an offer to sell or the solicitation of an offer to buy nor *
* shall there be any sale of these securities in any State in which such *
* offer, solicitation or sale would be unlawful prior to registration or *
* qualification under the securities laws of any such State. *
******************************************************************************
SUBJECT TO COMPLETION, DATED SEPTEMBER 8, 1995
PROSPECTUS
SPECIALTY RETAILERS, INC.
OFFER TO EXCHANGE ITS
11% SERIES D SENIOR SUBORDINATED NOTES DUE 2003
FOR ANY AND ALL OF ITS OUTSTANDING
11% SERIES C SENIOR SUBORDINATED NOTES DUE 2003
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON OCTOBER __,
1995, UNLESS EXTENDED.
Specialty Retailers, Inc., a Delaware corporation (" SRI" or 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
$1,000 principal amount of its 11% Series D Senior Subordinated Notes due 2003
(the "New Securities"), which will have been registered under the Securities Act
of 1933, as amended (the "Securities Act") pursuant to a Registration Statement
(as defined herein) of which this Prospectus is a part, for each $1,000
principal amount of its outstanding 11% Series C Senior Subordinated Notes due
2003 (the "Old Securities"). The form and terms of the New Securities are the
same as the form and terms of the Old Securities (which they replace) except
that the New Securities will have been registered under the Securities Act and,
therefore, will not bear legends restricting their transfer. The New Securities
will evidence the same debt as the Old Securities (which they replace) and will
be issued under and be entitled to the benefits of the indenture governing the
Old Securities dated July 27, 1995 (the "Indenture"). See "The Exchange Offer"
and "Description of New Securities."
The Company will accept for exchange any and all Old Securities
validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on
October __, 1995, unless extended by the Company in its sole discretion (the
"Expiration Date"). Tenders of Old Securities may be withdrawn at any time prior
to 5:00 p.m. on the Expiration Date. The Exchange Offer is subject to certain
customary conditions. The Old Securities were sold by the Company on July 27,
1995 to the Initial Purchaser (as defined herein) in transactions not registered
under the Securities Act in reliance upon the exemption provided in Section 4(2)
of the Securities Act. The Initial Purchaser subsequently placed the Old
Securities with qualified institutional buyers in reliance upon Rule 144A under
the Securities Act. Accordingly, the Old Securities may not be reoffered, resold
or otherwise transferred in the United States unless so registered or unless an
applicable exemption from the registration requirements of the Securities Act is
available. The New Securities are being offered hereunder in order to satisfy
the obligations of the Company under the Registration Rights Agreement (as
defined herein). See "The Exchange Offer."
Based on no-action letters issued by the staff of the Securities
and Exchange Commission (the "Commission") to third parties, the Company
believes the New Securities issued pursuant to the Exchange Offer may be offered
for resale, resold and otherwise transferred by any holder thereof (other than
any such holder that 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 New
Securities are acquired in the ordinary course of such holder's business and
such holder has no arrangement or understanding with any person to participate
in the distribution of such New Securities. See "The Exchange Offer - Purpose
and Effect of the Exchange Offer" and "-Resale of the New Securities." Each
broker-dealer that receives New Securities for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver a Prospectus in connection
with any resale of such New Securities. The Letter of Transmittal states that by
so acknowledging 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. This Prospectus, as it may be amended or supplemented from time to time,
may be used by a broker-dealer in connection with resales of New Securities
received in exchange for Old Securities where such Old Securities were acquired
by such broker-dealer as a result of market-making activities or other trading
activities. The Company has agreed that, for a period of 90 days after the
Expiration Date, it will make this Prospectus available to any broker-dealer for
use in connection with any such resale. See "Plan of Distribution."
Holders of Old Securities not tendered and accepted in the
Exchange Offer will continue to hold such Old Securities and will be entitled to
all the rights and preferences and will be subject to the limitations applicable
thereto under the Indenture and with respect to transfer under the Securities
Act. The Company will pay all the expenses incurred by it incident to the
Exchange Offer. See "The Exchange Offer."
There has not previously been any public market for the Old
Securities or the New Securities. The Company does not intend to list the New
Securities on any securities exchange or to seek approval for quotation through
any automated quotation system. There can be no assurance that an active market
for the New Securities will develop. See "Risk Factors - Lack of a Public
Market." Moreover, to the extent that Old Securities are tendered and accepted
in the Exchange Offer, the trading market for untendered and tendered but
unaccepted Old Securities could be adversely affected.
SEE "RISK FACTORS" BEGINNING ON PAGE 16 FOR A DESCRIPTION OF
CERTAIN RISKS TO BE CONSIDERED BY HOLDERS WHO TENDER THEIR OLD SECURITIES IN THE
EXCHANGE OFFER.
-----------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS ________, 1995.
<PAGE>
The New Securities will be available initially only in book-entry
form. The Company expects that the New Securities issued pursuant to this
Exchange Offer will be issued in the form of Global Securities (as defined
herein), which will be deposited with, or on behalf of, The Depository Trust
Company (the "Depositary") and registered in its name or in the name of Cede &
Co., its nominee. Beneficial interests in the Global Securities representing the
New Securities will be shown on, and transfers there to qualified institutional
buyers will be effected through, records maintained by the Depositary and its
participants. After the initial issuance of the Global Securities, New
Securities in certificated form will be issued in exchange for the Global
Securities on the terms set forth in the Indenture. See "Description of New
Securities - Book-Entry, Delivery and Form."
-----------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE 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. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY
SECURITY OTHER THAN THE NEW SECURITIES OFFERED HEREBY, NOR DOES IT CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY OF THE NEW SECURITIES
TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER
OR SOLICITATION TO SUCH PERSON. 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 DATE SUBSEQUENT TO THE
DATE HERETO.
Until December __, 1995, (90 days after commencement of the
Exchange Offer), all dealers effecting transactions in the New Securities,
whether or not participating in the Exchange Offer, may be required to deliver a
Prospectus.
TABLE OF CONTENTS
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PAGE PAGE
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<S> <C> <C> <C>
Available Information................... 2 Beneficial Ownership ........................... 42
Prospectus Summary...................... 4 Certain Relationships and Related Transactions.. 44
The Company............................. 15 Description of Certain Indebtedness............. 45
Risk Factors............................ 16 Description of New Securities................... 47
Use of Proceeds......................... 18 The Exchange Offer.............................. 65
Capitalization.......................... 19 Certain Federal Income Tax
Selected Historical and Pro Forma Consequences.................................. 72
Financial Data........................ 20 Plan of Distribution............................ 73
Management's Discussion and Analysis
of Financial Condition and Results
of Operations......................... 23 Legal Matters................................... 74
Business of the Company................. 29 Experts......................................... 74
Management.............................. 34 Index to Consolidated Financial Statements..... F-1
</TABLE>
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration
Statement on Form S-4 under the Securities Act, for the registration of the New
Securities offered hereby (the "Registration Statement"). This Prospectus, which
constitutes a part of the Registration Statement, contains a description of all
material matters related to the Exchange Offer but does not contain all of the
information set forth in the Registration Statement, certain items of which are
contained in exhibits and schedules to the Registration Statement as permitted
by the rules and regulations of the Commission. For further information with
respect to the Company and the New Securities offered hereby, reference is made
to the Registration Statement, including the exhibits thereto, and financial
statements and notes filed as a part thereof. Statements made in this Prospectus
concerning the contents of any document referred to herein are not necessarily
complete. With respect to each such document filed with the Commission as an
exhibit to the Registration Statement, reference is made to the exhibit for a
more complete description of the matter involved, and each such statement shall
be deemed qualified in its entirety by such reference.
2
The Company is subject to the information requirements of the
Securities and Exchange Act of 1934 (the "Exchange Act"), and in accordance
therewith files reports and other information with the Commission. Such reports
and other information filed by the Company can be inspected and copied at the
public reference facilities of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and the regional offices of the Commission located at 7
World Trade Center, New York, New York 10048 and 500 West Madison Street, 14th
Floor, Chicago, Illinois 60661. Copies of such materials may be obtained from
the Public Reference Section of the Commission, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at its public reference facilities in
New York, New York and Chicago, Illinois at prescribed rates.
In the event that the Company ceases to be subject to the
information requirements of the Exchange Act, the Company has agreed that, so
long as the Old Securities or the New Securities remain outstanding, it will
file with the Commission and distribute to the holders of the Old Securities or
the New Securities, as applicable, copies of the financial information that
would have been contained in such annual reports and quarterly reports,
including management's discussion and analysis of financial condition and
results of operations, that the Company would have been required to file with
the Commission pursuant to the Exchange Act. Such financial information shall
include annual reports containing consolidated financial statements and notes
thereto, together with an opinion thereon expressed by an independent public
accounting firm, as well as quarterly reports containing unaudited consolidated
condensed financial statements for the first three quarters of each fiscal year.
The Company will also make such reports available to prospective purchasers of
the New Securities or the Old Securities, as applicable, securities analysts and
broker-dealers upon their request. In addition, the Company has agreed that for
so long as any of the Old Securities remain outstanding it will make available
to any prospective purchaser of the Old Securities or beneficial owner of the
Old Securities in connection with any sale thereof the information required by
Rule 144A(d)(4) under the Securities Act, until such time as the Company has
either exchanged the Old Securities for the New Securities or until such time as
the holders thereof have disposed of such Old Securities pursuant to an
effective registration statement filed by the Company.
3
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE
DETAILED INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. THE COMPANY'S
FISCAL YEAR ENDS ON THE SATURDAY NEAREST TO JANUARY 31 IN THE FOLLOWING CALENDAR
YEAR. REFERENCES TO YEARS MEAN THE COMPANY'S FISCAL YEAR. FOR EXAMPLE,
REFERENCES TO "1994" MEAN THE FISCAL YEAR ENDED JANUARY 28, 1995.
THE COMPANY
Specialty Retailers, Inc. ("SRI" or the "Company") operates
family apparel stores primarily under the names "Bealls", "Palais Royal" ,
"Stage" and "Fashion Bar" offering branded fashion apparel and accessories for
women, men and children. During 1993, at the direction of the shareholders of
SRI, SRI became a wholly-owned subsidiary of Apparel Retailers, Inc. ("ARI").
ARI has no operations of its own and its primary asset is the common stock of
SRI.
The Company currently operates 248 stores in thirteen states
primarily throughout the central United States. The Company's stores are
typically between eighteen and thirty thousand square feet in size which is
smaller than typical department stores yet larger than most specialty stores.
The store format allows the Company to operate in either small towns and
communities with as few as fifteen thousand people or large metropolitan and
suburban areas. The Company's store format is large enough to offer apparel and
accessories for all members of the family yet small enough to allow for
strategic location in rural markets or in numerous, convenient locations in
metropolitan and suburban areas.
The Company believes that its store format, merchandising
strategy and management systems have enabled it to develop a strong franchise in
all of its trading areas. The Company believes that its ability to operate
stores profitably in markets with as few as fifteen thousand people is an
important competitive advantage over department stores, which are generally
unable to operate profitably in small communities. In addition, the Company's
stores have an advantage over locally operated retailers due to the Company's
ability to offer a broader and better assortment of continuously replenished,
branded merchandise at everyday fair prices. In larger communities, the
Company's retailing concept differentiates it from both department and specialty
stores. As compared to department stores, the Company offers multiple convenient
locations and better customer service. As compared to specialty stores, the
Company's stores offer more leading brand names and a greater assortment of
merchandise. All of the Company's stores have several distinctive features such
as store size, layout and location, merchandise strategy and personalized
customer service, which are designed to provide a convenient shopping experience
and to build strong customer loyalty.
RETAIL CONCEPT
The Company has successfully implemented its retail concept with
an emphasis on management systems and technology, centralized decision making
and tight control of operating expenses. The Company believes that its
distinctive retail concept and strong operating systems have positioned the
Company for future growth with only incremental increases in overhead expenses.
The following features distinguish the Company from other apparel retailers:
ABILITY TO OPERATE PROFITABLY IN SMALLER MARKETS. The Company's
store format and locations are designed to offer a convenient and efficient
shopping experience for customers. The stores are typically between eighteen
thousand and thirty thousand square feet in size, which is smaller than typical
department stores yet larger than most specialty stores. The Company's store
format is large enough to offer branded apparel and accessories for all members
of the family and small enough to allow for profitable strategic location either
in rural markets where the Company faces lower levels of competition, or in
numerous, convenient locations in metropolitan/suburban areas. The Company's
smaller market stores generally experience higher profit margins due to lower
levels of competition.
EFFECTIVE MERCHANDISING STRATEGY. The Company's merchandising
strategy focuses on the traditionally higher margin merchandise categories of
women's, men's and children's apparel and accessories offered at an everyday
fair price. Sales associates are encouraged to adopt a "can do" attitude in
order to "exceed a customer's expectations". The Company offers a selected
assortment of branded first-quality, moderately priced merchandise which is
divided into distinct departments including, misses, men's, boy's, shoes,
intimate apparel, juniors, children's, accessories, cosmetics and gifts.
Merchandise mix may vary significantly from store to store to accommodate
differing demographic factors. The Company offers leading national brand names
such as Liz Claiborne,
4
Haggar, Guess, Hanes, Nike and Reebok and other moderately priced, high quality
brands. The Company's buyers are constantly evaluating new vendors and the
market for unique merchandise. Each buyer is responsible for specific
merchandise categories in order to enhance his or her knowledge of the related
vendors and the merchandise generally available. The Company may augment its
merchandise presentation with private label product based on opportunities to
maximize mix. This focused buying approach, combined with the Company's in-depth
understanding of each of its individual markets and its highly automated
merchandise allocation system, enables the Company to keep each of its stores
stocked with a broad, frequently replenished assortment of high quality
merchandise that has been finely tuned to meet the fashion needs of its
customers. The Company's management believes that the combination of the size
and experience base of its buyer group, its strong merchandising systems and its
participation in the Associated Merchandising Corporation ("AMC") buying
cooperative allows the Company to compete effectively with department and
specialty stores.
EMPHASIS ON CUSTOMER SERVICE. Providing excellent customer
service through stores staffed with highly trained and motivated sales
associates is a primary corporate objective. The Company has implemented its
"Team One" operating format in many of its smaller stores which focuses
employees on selling and customer service during peak hours while handling
non-customer oriented tasks such as shipping/receiving and security tagging
during off-peak hours. The Company monitors the quality of its customer service
and actively solicits feedback by conducting over 1,700 telephone surveys with
customers each month. The Company believes that its strong customer service is a
significant competitive advantage over department stores which generally offer
lower levels of customer service. The Company's private label credit card
program includes over 1.5 million active accounts and comprised approximately
55% of net sales during the first six months of 1995. The Company communicates
with its private label credit cardholders through targeted mailings.
STRONG OPERATING SYSTEMS AND TECHNOLOGY. The Company supports its
retail concept with highly automated, integrated systems in such areas as
merchandising, sales promotion, credit, personnel management, store design,
accounting and distribution. The Company believes that its automated systems
provide it with a significant competitive advantage over competitors that lack
similar capabilities. For example, the Company has developed and has begun to
utilize an automated store personnel scheduling system which analyzes historical
hourly sales trends to schedule sales personnel accordingly. This system
optimizes labor costs while producing a higher level of customer service. The
Company believes that these systems increase sales per square foot, reduce
markdowns and overhead and create important efficiencies and cost savings in the
most labor intensive areas of the business. The Company's merchandising systems
assist merchandise planners in allocating inventory to each store based on its
specific attributes and recent sales trends. Additional systems allow the
Company to efficiently transfer slow moving merchandise to stores selling such
items more rapidly, identify merchandise requiring mark downs and maintain
in-stock positions in basic items such as hosiery and jeans. These systems have
enabled the Company to better manage its inventory while reducing costs.
GROWTH STRATEGY
The following are the primary elements of the Company's growth
strategy:
CONTINUED MARGIN IMPROVEMENTS THROUGH AUTOMATED MERCHANDISE
ALLOCATION. The Company believes it can increase sales and profitability through
automated inventory planning, allocation and transfer systems. During the past
four years, the Company has devoted significant computer programming resources
to the design and development of its automated, algorithm-based merchandise
allocation and transfer systems. These systems allow specific merchandise to be
allocated and, if necessary, transferred to stores where it is being more
rapidly sold. By continuing to maximize in-stock positions by merchandise
classification, the Company believes that the use of this proprietary system
should continue to increase sales and reduce markdowns, thereby improving
margins.
NEW STORE OPENINGS IN SMALLER MARKETS. The Company has identified
locations in both its existing and new markets which are potential sites for new
stores. Such sites are primarily located in smaller communities, where the
Company experiences its highest margins and where the Company believes it has a
competitive advantage over local retailers and where it is also difficult for
larger department stores to profitably operate. In addition, expansion into
existing markets may be accomplished at a lower cost, as the Company can utilize
its existing systems such as merchandising, credit, distribution and store
personnel scheduling in these markets, thereby minimizing the incremental cost
of opening new stores.
5
MAKING SELECTED STRATEGIC ACQUISITIONS. The Company believes that
it can continue to benefit from selected strategic acquisitions by (i)
consolidating overhead functions, (ii) introducing its superior management
systems and (iii) applying its merchandising, sales and customer service methods
to acquired retail concerns. The Company believes that such acquisitions will
allow it to improve overall profitability by amortizing its fixed cost structure
over a larger revenue base and by improving sales per square foot and
profitability of acquired small town stores. The Company believes that retail
chains operating in small towns offer attractive acquisition opportunities, as
such markets typically have only limited competition from locally owned
retailers and little or no competition from regional department stores. During
1994, this strategy resulted in the acquisition of forty-five store leases from
the Beall-Ladymon Corporation ("Beall-Ladymon"), located primarily in Louisiana,
Arkansas and Mississippi. See Note 1 to the Consolidated Financial Statements.
6
THE OLD SECURITIES OFFERING
Series C Notes...................... The Old Securities were sold by the
Company on July 27, 1995 (the "Offering")
to Donaldson, Lufkin & Jenrette
Securities Corporation (the "Initial
Purchaser"), pursuant to a Purchase
Agreement dated July 20, 1995 (the
"Purchase Agreement"). The Initial
Purchaser subsequently resold the Old
Securities to qualified institutional
buyers pursuant to Rule 144A under the
Securities Act.
Registration Rights
Agreement........................... Pursuant to the Purchase Agreement, the
Company and the Initial Purchaser entered
into a Registration Right Agreement dated
July 27, 1995 (the "Registration Rights
Agreement"), which grants the holders of
the Old Securities certain exchange and
registration rights. The Exchange Offer
is intended to satisfy such exchange
rights which terminate upon the
consummation of the Exchange Offer.
THE EXCHANGE OFFER
Securities Offered.................. $18,250,000 in aggregate principal amount
of 11% Series D Senior Subordinated Notes
due 2003.
The Exchange
Offer............................... $1,000 principal amount of the New
Securities in exchange for each $1,000
principal amount of Old Securities. As of
the date hereof, $18,250,000 in aggregate
principal amount of Old Securities are
outstanding. The Company will issue the
New Securities to holders on or promptly
after the Expiration Date.
Based on an interpretation by the staff
of the Commission set forth in no-action
letters issued to third parties, the
Company believes that the New Securities
issued pursuant to the Exchange Offer in
exchange for Old Securities may be
offered for resale, resold and otherwise
transferred by any holder thereof (other
than 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 New Securities are
acquired in the ordinary course of such
holder's business and that such holder
does not intend to participate and has no
arrangement or understanding with any
person to participate in the distribution
of such New Securities.
Each broker-dealer that receives New
Securities for its own account pursuant
to the Exchange Offer must acknowledge
that it will deliver a Prospectus in
connection with any resale of such New
Securities. The Letter of Transmittal
states that by so acknowledging 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. This Prospectus, as it
may be amended or supplemented from time
to time, may be used by a broker-dealer
in connection with resales of New
Securities received in exchange for Old
Securities where such Old Securities were
acquired by such broker-dealer as a
result of market-making activities or
other trading activities. The Company has
agreed that, for a period of 90 days
after the Expiration Date, it will make
this Prospectus available to any
broker-dealer for use in connection with
any such resale. See "Plan of
Distribution."
7
Any holder who tenders in the Exchange
Offer with the intention to participate,
or for the purpose of participating, in a
distribution of the New Securities could
not rely on the position of the staff of
the Commission enunciated in EXXON
CAPITAL HOLDINGS CORPORATION (available
April 13, 1989) or similar no-action
letters and, in the absence of any
exemption therefrom, must comply with the
registration and prospectus delivery
requirements of the Securities Act in
connection with any resale transaction.
Failure to comply with such requirements
in such instance may result in such
holder incurring liability under the
Securities Act for which the holder is
not indemnified by the Company.
Expiration Date..................... 5:00 p.m., New York City time, on
October __ , 1995 unless the Exchange
Offer is extended, in which case the term
"Expiration Date" means the latest date
and time to which the Exchange Offer is
extended.
Accrued Interest
on the New
Securities and Old
Securities.......................... Each New Security will bear interest from
its issuance date. Holders of Old
Securities that are accepted for exchange
will receive, in cash, accrued interest
thereon to, but not including, the
issuance date of the New Securities. Such
interest will be paid with the first
interest payment on the New Securities.
Interest on the Old Securities accepted
for exchange will cease to accrue upon
issuance of the New Securities.
Conditions to the
Exchange Offer...................... The Exchange Offer is subject to certain
customary conditions, which may be waived
by the Company. See "The Exchange
Offer--Conditions."
Procedures for
Tendering Old
Securities.......................... Each holder of Old Securities wishing to
accept the Exchange Offer must complete,
sign and date the accompanying Letter of
Transmittal, or a facsimile thereof, in
accordance with the instructions
contained herein and therein, and mail or
otherwise deliver such Letter of
Transmittal, or such facsimile, together
with the Old Securities and any other
required documentation to the Exchange
Agent (as defined herein) at the address
set forth herein. By executing the Letter
of Transmittal, each holder will
represent to the Company that, among
other things, the New Securities acquired
pursuant to the Exchange Offer are being
obtained in the ordinary course of
business of the person receiving such New
Securities, whether or not such person is
the holder, that neither the holder nor
any such person has any arrangement or
understanding with any person to
participate in the distribution of such
New Securities and that neither the
holder nor any such other person is an
"affiliate," as defined under Rule 405 of
the Securities Act. See "The Exchange
Offer--Purpose and Effect of the Exchange
Offer" and "--Procedures for Tendering."
Untendered Old
Securities......................... Following the consummation of the
Exchange Offer, holders of Old Securities
eligible to participate but who do not
tender their Old Securities will not have
any further registration rights and such
Old Securities will continue to be
subject to certain restrictions on
transfer. Accordingly, the liquidity of
the market for such Old Securities could
be adversely affected.
8
Consequences of
Failure to
Exchange............................ The Old Securities that are not exchanged
pursuant to the Exchange Offer will
remain restricted securities.
Accordingly, such Old Securities may be
resold only (i) to the Company, (ii)
pursuant to Rule 144A under the
Securities Act or pursuant to some other
exemption under the Securities Act, (iii)
outside the United States to a foreign
person pursuant to the requirements of
Rule 904 under the Securities Act or (iv)
pursuant to an effective registration
statement under the Securities Act. See
"The Exchange Offer-Consequences of
Failure to Exchange."
Shelf Registration
Statement........................... If any holder of the Old Securities
(other than any such holder which is an
"affiliate" of the Company within the
meaning of Rule 405 under the Securities
Act) is not eligible under applicable
securities laws to participate in the
Exchange Offer and such holder has
satisfied certain conditions relating to
the provision of information to the
Company for use therein, the Company has
agreed to register the Old Securities on
a shelf registration statement (the
"Shelf Registration Statement") and use
its best efforts to cause it to be
declared effective by the Commission as
promptly as practical on or after the
consummation of the Exchange Offer. The
Company has agreed to maintain the
effectiveness of the Shelf Registration
Statement for, under certain
circumstances, a maximum of three years,
to cover resales of the Old Securities
held by any such holders.
Special Procedures
for Beneficial
Owners.............................. Any beneficial owner whose Old Securities
are registered in the name of a broker-
dealer, commercial bank, trust company or
other nominee and who wishes to tender
should contact such registered holder
promptly and instruct such registered
holder to tender on such beneficial
owner's behalf. If such beneficial owner
wishes to tender on such owner's own
behalf, such owner must, prior to
completing and executing the Letter of
Transmittal and delivering its Old
Securities, either make appropriate
arrangements to register ownership of the
Old Securities in such owner's name or
obtain a properly completed bond power
from the registered holder. The transfer
of registered ownership may take
considerable time.
Guaranteed
Delivery
Procedures.......................... Holders of Old Securities who wish to
tender their Old Securities and whose Old
Securities are not immediately available
or who cannot deliver their Old
Securities, the Letter of Transmittal or
any other documents required by the
Letter of Transmittal to the Exchange
Agent (or comply with the procedures for
book-entry transfer) prior to the
Expiration Date must tender their Old
Securities according to the guaranteed
delivery procedures set forth in "The
Exchange Offer--Guaranteed Delivery
Procedures."
Withdrawal Rights................... Tenders may be withdrawn at any time
prior to 5:00 p.m., New York City time,
on the Expiration Date.
9
Acceptance of Old
Securities and
Delivery
of New Securities................... The Company will accept for exchange any
and all Old Securities which are properly
tendered in the Exchange Offer prior to
5:00 p.m., New York City time, on the
Expiration Date. The New Securities
issued pursuant to the Exchange Offer
will be delivered promptly following the
Expiration Date. See "The Exchange
Offer--Terms of the Exchange Offer."
Federal Income
Tax Consequences.................... The exchange pursuant to the Exchange
Offer should not be a taxable event for
Federal Income Tax purposes. See
"Certain Federal Income Tax
Consequences."
Use of Proceeds..................... There will be no cash proceeds to the
Company from the exchange pursuant to the
Exchange Offer.
Exchange Agent...................... The First National Bank of Boston.
SUMMARY OF TERMS OF NEW SECURITIES
The form and terms of the New Securities are the same as the form
and terms of the Old Securities (which they replace) except that (i) the New
Securities have been registered under the Securities Act and, therefore, will
not bear legends restricting the transfer thereof, and (ii) the holders of New
Securities will not be entitled to certain rights under the Registration Rights
Agreement, which rights will terminate when the Exchange Offer is consummated.
The New Securities will evidence the same debt as the Old Securities and will be
entitled to the benefits of the Indenture. See "Description of New Securities."
The Old Securities and the New Securities are referred to herein collectively as
the "Securities."
NEW SECURITIES:
Maturity Date................. August 15, 2003.
Interest Rate................. The New Securities bear interest at the
rate of 11% per annum payable semi-
annually on February 15 and August 15,
commencing February 15, 1996.
Ranking....................... The New Securities will be general
unsecured obligations of the Company,
will rank junior to all existing and
future Senior Debt (as defined herein),
pari passu with the existing $100.0
million in aggregate principal amount of
11% senior subordinated notes due 2003
(the "11% Notes") and senior to all
existing and future subordinated
Indebtedness of the Company, including
the 7% FB Holdings Subordinated Notes (as
defined herein), the 9% Bealls Holdings
Subordinated Debentures (as defined
herein) and the 7% Bealls Holdings Junior
Subordinated Debentures (as defined
herein). The Old Securites were never
guaranteed by any subsidiary or parent of
the Company and the New Securities will
not be guaranteed by any subsidiary or
parent of the Company. The existing 11%
Notes, however, are guaranteed on a
senior subordinated basis by the
Company's wholly-owned subsidiary, Palais
Royal, Inc. ("Palais Royal").
10
Optional Redemption........... The New Securities may not be redeemed by
the Company at any time prior to August
15, 1998. Thereafter, the New Securities
may be redeemed at the option of the
Company at a premium declining ratably to
par in 2002. In the event of an IPO at
any time prior to August 15, 1996, the
New Securities will be callable at 110%
of par; provided that at least
$11,929,000 in aggregate principal amount
of Securities remain outstanding
following the redemption.
Mandatory Redemption.......... The Company will be required to redeem
40% in aggregate principal amount of the
Securities on September 15, 2002 to the
extent not already repurchased.
Covenants..................... The Indenture contains restrictions
relating to, among other things, the
repurchase of stock and subordinated debt
and the making of certain other payments,
the incurrence of additional
Indebtedness, the creation of certain
Liens, certain Asset Sales and
transactions with subsidiaries and other
Affiliates (each of such terms as defined
herein). See "Description of New
Securities."
11
<PAGE>
The following table presents summary historical consolidated financial
data derived from the Company's financial statements and summary pro forma
financial information derived from unaudited pro forma financial data. The
summary pro forma financial data for the year ended January 28, 1995 and the
three months ended April 29, 1995 give effect to the issuance of the Old
Securities. The summary pro forma financial data does not purport to represent
what the Company's results of operations actually would have been if the
issuance of the Old Securities had occurred as of the beginning of or will be
for any future periods. The information in the table should be read in
conjunction with "Selected Historical and Pro Forma Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company, included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED THREE MONTHS ENDED
--------------------------------------------------------------- --------------------------------
PRO PRO
FORMA FORMA
FEB. 2, FEB. 1, JAN. 30, JAN. 29, JAN. 28, JAN. 28, APRIL 30, APRIL 29, APRIL 29,
1991 1992 1993(1) 1994 1995 1995(10) 1994 1995 1995(10)
-------- -------- -------- -------- -------- -------- -------- --------- --------
(dollars in thousands, except store data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:(2)
Net sales ................... $426,158 $447,142 $504,401 $557,422 $581,463 $581,463 $128,073 $ 142,353 $142,353
Gross profit ................ 126,707 135,569 154,265 172,579 182,804 182,804 39,856 46,283 46,283
Selling, general and
administrative
expenses(3) ............... 109,441 116,658 129,313 135,209 140,359 140,359 30,045 34,127 34,127
Service charge
income (4) ................ 20,197 22,840 29,670 20,003 8,515 8,515 2,133 2,683 2,683
Operating income ............ 37,463 41,751 54,622 57,373 50,960 50,960 11,944 14,839 14,839
Net interest expense ........ 35,874 33,407 31,771 30,925 28,089 30,303 7,132 7,351 7,903
Extraordinary item (5) ...... -- -- -- 16,208 308 308 326 -- --
Net income .................. 1,274 3,961 12,235 910 14,224 12,851 2,755 4,569 4,227
Ratio of earnings
to fixed charges(6) ....... -- 1.16x 1.47x 1.63x 1.57x 1.49x 1.49x 1.71x 1.62x
MARGIN DATA:
Gross profit margin ......... 29.7% 30.3% 30.6% 31.0% 31.4% 31.4% 31.1% 32.5% 32.5%
Operating income
margin .................... 8.8% 9.3% 10.8% 10.3% 8.8% 8.8% 9.3% 10.4% 10.4%
STORE DATA:
Comparable store sales
growth (7) ................ 0.4% 3.0% 2.2% 5.9% 3.1% -- 5.4% (0.7)% --
Net sales per square
foot ...................... $ 135 $ 142 $ 137 $ 145 $ 149 -- -- -- --
Number of stores open
at end of period (8) ...... 152 159 229 231 206 -- 231 240 --
BALANCE SHEET DATA (AT
END OF PERIOD):
Working capital ............. $182,907 $200,050 $214,430 $156,414 $147,595 -- $150,692 $ 140,814 $156,678
Total assets ................ 356,248 365,381 403,824 341,621 362,521 -- 332,814 359,820 376,378
Long-term debt(9) ........... 288,207 298,266 296,587 262,235 253,027 -- 252,303 253,084 269,542
</TABLE>
12
NOTES TO SUMMARY HISTORICAL AND
PRO FORMA FINANCIAL DATA
(DOLLARS IN THOUSANDS)
(1) The selected financial data for 1992 include the operations of Fashion Bar
from May 30, 1992, the effective date of its acquisition.
(2) The statement of operations data include reclassifications from amounts
reported in previous years. Non- interest credit expenses of $14,894,
$17,429 and $18,930 have been reclassified to selling, general and
administrative expenses for 1990, 1991 and 1992, respectively. These
reclassifications had no impact on operating income or net income for the
years presented.
(3) Selling, general and administrative expense for 1994 includes costs of
$5,232 associated with the Store Closure Plan (as defined herein). See Note
2 to the Consolidated Financial Statements.
(4) Service charge income decreased during 1993 and 1994 due to the sale of
accounts receivable to a trust pursuant to the Accounts Receivable Program
(as defined herein). See Note 4 to the Consolidated Financial Statements.
(5) The extraordinary item represents the loss on the early extinguishment of
certain debt of the Company.
(6) Earnings used in computing the ratio of earnings to fixed charges consist
of income before income taxes and minority interest, plus fixed charges
charged to income. Fixed charges consist of interest on indebtedness,
amortization of debt issue costs and one-third of rental expense, which
management believes to be a reasonable estimate of the interest factor of
rental payments. Earnings were insufficient to cover fixed charges in 1990
by $183.
(7) Comparable stores sales ("Comparable Store Sales") growth includes sales of
stores that have been open for the full previous period and the full period
for which the calculation is made. Comparable Store Sales growth for 1990,
1991, 1992 and 1993 excludes Fashion Bar stores acquired in June 1992.
(8) Stores open at February 1, 1992, January 30, 1993 and January 29, 1994
included four, five and ten stores, respectively, which were previously
excluded under the Bealls store closure program. Such stores are only
included in the Company's results of operations subsequent to their removal
from the Bealls store closure program. See Note 7 to the Consolidated
Financial Statements. Stores open at January 28, 1995 exclude 29 Fashion
Bar stores closed during 1994 pursuant to the Store Closure Plan (as
defined herein).
(9) Long-term debt at January 29, 1994 and January 28, 1995 includes the impact
of the refinancing of certain debt of the Company. See Note 3 to the
Consolidated Financial Statements.
13
(10) Pro forma statement of operations data for 1994 and the three months ended
April 29, 1995 reflect the following adjustments related to the issuance of
the Old Securities:
THREE MONTHS
YEAR ENDED ENDED
JAN. 28, 1995 APRIL 29, 1995
------------- --------------
Increase in interest expense ...... $2,214 $552
Decrease in net income ............ 1,373 342
Pro forma balance sheet data at April 29, 1995 reflect the following
adjustments related to the issuance of the Old Securities:
Net proceeds to the Company ................. $15,964
Additional debt issue costs ................. 594
Accrual of certain costs related to the
offering of the Securities ................ 100
Additional debt ............................. 16,458
The above pro forma data does not include any adjustment related to the
acquisition of Beall-Ladymon on October 31, 1994. See Note 1 to the
Consolidated Financial Statements.
14
THE COMPANY
The Company operates family apparel stores primarily under the names
"Bealls", "Palais Royal", "Stage" and "Fashion Bar" offering branded fashion
apparel and accessories for women, men and children. During 1993, the Company
became the wholly-owned subsidiary of ARI. ARI has no operations of its own and
its primary asset is the common stock of the Company. The Company currently
operates 248 stores in thirteen states primarily throughout the central United
States.
The principal executive offices of the Company are located at 10201 Main
Street, Houston, Texas 77025, and their telephone number is (713) 667-5601.
15
RISK FACTORS
Holders of the Old Securities should consider carefully the information set
forth below, as well as the other information set forth in this Prospectus,
before accepting the Exchange Offer.
LEVERAGE AND DEBT SERVICE
As of April 29, 1995, on a pro forma basis after giving effect to the
issuance of the Old Securities, the Company's total long-term indebtedness would
have been $269.5 million (including the New Securities).
Any material adverse developments affecting the business of the Company
could significantly limit its ability to withstand competitive pressures or
adverse economic conditions, take advantage of significant business
opportunities that may arise, or meet its financial obligations as they become
due. The Company's ability to make principal and interest payments on the New
Securities and to make payments to ARI to pay interest on ARI's debt obligations
(the "ARI Debentures") and to repay the ARI Debentures at maturity will depend
on the Company's future operating performance, which is itself dependent on a
number of factors many of which are beyond its control. No cash interest
payments are required on the ARI Debentures until 1999. Although there can be no
assurance that the current level of the Company's operating results will
continue or improve, the Company believes that, based upon current operations
and anticipated growth, it will be able to meet its obligations as they come due
and make sufficient distributions to ARI to enable ARI to meet its obligations
as they come due through cash flow from operations and proceeds from the
accounts receivable securitization program (the "Accounts Receivable Program").
SUBORDINATION OF SECURITIES
The New Securities will be general unsecured obligations of the Company,
will rank junior to all existing and future Senior Debt (as defined herein),
pari passu with the existing 11% Notes and senior to all existing and future
subordinated Indebtedness of the Company, including the 7% FB Holdings
Subordinated Notes (as defined herein), the 9% Bealls Holdings Subordinated
Debentures (as defined herein) and the 7% Bealls Holdings Junior Subordinated
Debentures (as defined herein). The Old Securities were never guaranteed by any
subsidiary or parent of the Company and the New Securities will not be
guaranteed by any subsidiary or parent of the Company. The existing 11% Notes,
however, are guaranteed on a senior subordinated basis by Palais Royal.
GENERAL ECONOMIC CONDITIONS AND SEASONALITY
Substantially all of the Company's operations are located in the central
United States. As a result, the Company's operations are affected by local
economic conditions which are beyond the Company's control. Any decline in the
economic conditions in this region could have an adverse effect on the Company.
For example, continued weak economic conditions in Mexico, which have resulted
in the devaluation of the peso, adversely affected sales of six Bealls stores
located near the Texas-Mexico border during the first quarter of 1995.
Comparable store sales, adjusting for this impact, would have increased 1.7%
versus a 0.7% decrease as reported. Although this may be a temporary aberration,
its continued duration and resulting impact on these and possibly other stores'
sales can not be predicted at this time.
The Company's business is seasonal and its sales and profits traditionally
have been lower during the first three quarters of the year (February through
October) and higher during the fourth quarter of the year (November through
January). Any substantial decrease in sales for the fourth quarter of the year
could have a material adverse effect on the Company's profitability.
COMPETITION
The retail apparel industry is highly competitive and the Company faces
substantial competition, particularly in the Houston market, from national and
regional department and specialty stores. Some of the Company's competitors are
considerably larger than the Company and have substantially greater financial
and other resources. The Company believes its store format, merchandising
strategy and customer service, combined with an emphasis
16
on operating systems and technology, enable it to effectively compete with
department stores and specialty stores located in the Company's markets. The
Company believes that its knowledge of local markets, developed over seventy
years of service, has enabled it to establish a strong franchise in most of its
markets.
LACK OF PUBLIC MARKET
The Old Securities are currently owned by a relatively small number of
beneficial owners. Prior to the Exchange Offer, there has not been any public
market for the Old Securities. The Old Securities have not been registered under
the Securities Act and will be subject to restrictions on transferability to the
extent that they are not exchanged for New Securities by holders who are
entitled to participate in this Exchange Offer. The holders of Old Securities
(other than any such holder that is an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act) who are not eligible to
participate in the Exchange Offer are entitled to certain registration rights,
and the Company is required to file a Shelf Registration Statement with respect
to such Old Securities. The New Securities will constitute new issues of
securities with no established trading market. The Company does not intend to
list the New Securities on any national securities exchange or to seek the
admission thereof to trading in the National Association of Securities Dealers
Automated Quotation System. The Initial Purchaser has advised the Company that
it currently intends to make a market in the New Securities, but it is not
obligated to do so and may discontinue such market making at any time. In
addition, such market making activity will be subject to the limits imposed by
the Securities Act and the Exchange Act and may be limited during the Exchange
Offer and the pendency of the Shelf Registration Statement. See "Description of
New Securities--Registration Rights; Liquidated Damages." Accordingly, no
assurance can be given that an active public or other market will develop for
the New Securities or as to the liquidity of the trading market for the New
Securities. If a trading market does not develop or is not maintained, holders
of the New Securities may experience difficulty in reselling the New Securities
or may be unable to sell them at all. If a market for the New Securities
develops, any such market may be discontinued at any time.
If a public trading market develops for the New Securities, future trading
prices of such securities will depend on many factors, including, among other
things, prevailing interest rates, the Company's results of operations and the
market for similar securities. Depending on prevailing interest rates, the
market for similar securities and other factors, including the financial
condition of the Company, the New Securities may trade at a discount from the
principal amount.
EXCHANGE OFFER PROCEDURES
Issuance of the New Securities in exchange for the Old Securities pursuant
to the Exchange Offer will be made only after a timely receipt by the Company of
such Old Securities, a properly completed and duly executed Letter of
Transmittal and all other required documents. Therefore, holders of the Old
Securities desiring to tender such Old Securities in exchange for New Securities
should allow sufficient time to ensure timely delivery. The Company is under no
duty to give notification of defects or irregularities with respect to the
tenders of Old Securities for exchange. Old Securities that are not tendered or
are tendered but not accepted will, following the consummation of the Exchange
Offer, continue to be subject to the existing restrictions upon transfer thereof
and, upon consummation of the Exchange Offer, certain registration rights under
the Registration Rights Agreement will terminate. In addition, any holder of Old
Securities who tenders in the Exchange Offer for the purpose of participating in
a distribution of the New Securities may be deemed to have received restricted
securities and, if so, will be required to comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction. Each broker-dealer that receives New Securities for its own
account in exchange for Old Securities, where such Old Securities were acquired
by such broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a Prospectus in connection
with any resale of such New Securities. See "Plan of Distribution." To the
extent that Old Securities are tendered and accepted in the Exchange Offer, the
trading market for untendered and tendered but unaccepted Old Securities could
be adversely affected. See "The Exchange Offer."
17
USE OF PROCEEDS
This Exchange Offer is intended to satisfy certain of the Company's
obligations under the Purchase Agreement and the Registration Rights Agreement.
The Company will not receive any cash proceeds from the issuance of the New
Securities offered hereby. In consideration for issuing the New Securities
contemplated in this Prospectus, the Company will receive in exchange Old
Securities in like principal amount, the form and terms of which are the same as
the form and terms of the New Securities (which they replace), except as
otherwise described herein. The Old Securities surrendered in exchange for New
Securities will be retired and canceled and cannot be reissued. Accordingly,
issuance of the New Securities will not result in any increase or decrease in
the indebtedness of the Company. As such, no effect has been given to the
Exchange Offer in the pro forma financial data or capitalization tables.
The net proceeds from the sale of Old Securities in the Offering were
$15,964,187 in the aggregate after deduction of discounts and commissions.
Substantially all of such net proceeds will be used for new store openings and
other general corporate purposes.
18
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of April 29, 1995 and as adjusted to give effect to the issuance of
the Old Securities. This presentation should be read in conjunction with the
Consolidated Financial Statements of the Company and the related notes thereto
and other information appearing elsewhere in this Prospectus.
HISTORICAL PRO FORMA
APRIL 29, APRIL 29,
1995 1995
-------- --------
(in thousands)
Short-term debt and current maturities of long-term debt $ 276 $ 276
======== ========
Long-term debt:
Senior Notes ........................................ $130,000 $130,000
11% Notes ........................................... 100,000 100,000
Revolving credit agreement with a bank .............. -- --
Old Securities, net of discount of $1,792 ........... -- 16,458
9% Bealls Holding Subordinated Debentures,
net of discount of $4,148 ........................ 10,835 10,835
7% FB Holdings Subordinated Notes, net of
discount of $286 ................................. 3,949 3,949
7% Bealls Holding Junior Subordinated Debentures,
net of discount of $8,191 ........................ 6,122 6,122
Other long-term debt ................................ 2,178 2,178
-------- --------
Total long-term debt ................................... 253,084 269,542
-------- --------
Stockholder's equity ................................... 9,395 9,395
-------- --------
Total capitalization ................................... $262,479 $278,937
======== ========
19
SELECTED HISTORICAL AND
PRO FORMA FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT STORE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED THREE MONTHS ENDED
------------------------------------------------------------------ ----------------------------------
PRO PRO
FORMA FORMA
FEB. 2, FEB. 1, JAN. 30, JAN. 29, JAN. 28, JAN. 28, APRIL 30, APRIL 29, APRIL 29,
1991 1992 1993(1) 1994 1995 1995(10) 1994 1995 1995(10)
--------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:(2)
Net sales ................ $ 426,158 $ 447,142 $ 504,401 $ 557,422 $ 581,463 $ 581,463 $ 128,073 $ 142,353 $ 142,353
Cost of sales and related
buying, occupancy and
distribution expenses ... (299,451) (311,573) (350,136) (384,843) (398,659) (398,659) (88,217) (96,070) (96,070)
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Gross profit ............. 126,707 135,569 154,265 172,579 182,804 182,804 39,856 46,283 46,283
Selling, general and
administrative,
expenses(3) ............. (109,441) (116,658) (129,313) (135,209) (140,359) (140,359) (30,045) (34,127) (34,127)
Service charge
income(4) ............... 20,197 22,840 29,670 20,003 8,515 8,515 2,133 2,683 2,683
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Operating income ......... 37,463 41,751 54,622 57,373 50,960 50,960 11,944 14,839 14,839
Net interest expense ..... (35,874) (33,407) (31,771) (30,925) (28,089) (30,303) (7,132) (7,351) (7,903)
Other non-operating
income (expense) ........ 426 359 (2,276) -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Income before income tax,
minority interest and
extraordinary item ...... 2,015 8,703 20,575 26,448 22,871 20,657 4,812 7,488 6,936
Income tax expense ....... -- (3,993) (8,340) (9,330) (8,339) (7,498) (1,731) (2,919) (2,709)
Minority interest
expense ................. (741) (749) -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Income before
extraordinary item ...... 1,274 3,961 12,235 17,118 14,532 13,159 3,081 4,569 4,227
Extraordinary item -
Early extinguishment
of debt (5) ............. -- -- -- (16,208) (308) (308) (326) -- --
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Net income ............... $ 1,274 $ 3,961 $ 12,235 $ 910 $ 14,224 $ 12,851 $ 2,755 $ 4,569 $ 4,227
========= ========= ========= ========= ========= ========= ========= ========= =========
Ratio of earnings to fixed
charges (6) ............. -- 1.16x 1.47x 1.63x 1.57x 1.49x 1.49x 1.71x 1.62x
MARGIN AND OTHER DATA:
Gross profit margin ...... 29.7% 30.3% 30.6% 31.0% 31.4% 31.4% 31.1% 32.5% 32.5%
Operating income margin .. 8.8% 9.3% 10.8% 10.3% 8.8% 8.8% 9.3% 10.4% 10.4%
STORE DATA:
Comparable store sales
growth (7) .............. 0.4% 3.0% 2.2% 5.9% 3.1% -- 5.4% (0.7)% --
Net sales per square foot $ 135 $ 142 $ 137 $ 145 $ 149 -- -- -- --
Number of stores open at
end of period (8) ....... 152 159 229 231 206 -- 231 240 --
BALANCE SHEET DATA (AT END
OF PERIOD):
Working capital .......... $ 182,907 $ 200,050 $ 214,430 $ 156,414 $ 147,595 -- $ 150,692 $ 140,814 $ 156,678
Total assets ............. 356,248 365,381 403,824 341,621 362,521 -- 332,814 359,820 376,378
Long-term debt(9) ........ 288,207 298,266 296,587 262,235 253,027 -- 252,303 253,084 269,542
Redeemable preferred
stock ................... 12,407 15,200 17,500 -- -- -- -- -- --
Stockholder's equity
(deficit) ............... (20,744) (19,500) (9,605) (9,263) 4,826 -- (6,508) 9,395 9,395
</TABLE>
20
NOTES TO SELECTED HISTORICAL AND
PRO FORMA FINANCIAL DATA
(DOLLARS IN THOUSANDS)
(1) The selected financial data for 1992 include the operations of Fashion Bar
from May 30, 1992, the effective date of its acquisition.
(2) The statement of operations data include reclassification from amounts
reported in previous years. Non-interest credit expenses of $14,894,
$17,429 and $18,930 have been reclassified to selling, general and
administrative expenses for 1990, 1991 and 1992, respectively. These
reclassifications had no impact on operating income or net income for the
years presented.
(3) Selling, general and administrative expense for 1994 includes costs of
$5,232 associated with the Store Closure Plan (as defined herein). See Note
2 to the Consolidated Financial Statements.
(4) Service charge income decreased during 1993 and 1994 due to the sale of
accounts receivable to a trust pursuant to the Accounts Receivable Program.
See Note 4 to the Consolidated Financial Statements.
(5) The extraordinary item represents the loss on the early extinguishment of
certain debt of the Company.
(6) Earnings used in computing the ratio of earnings to fixed charges consist
of income before income taxes and minority interest, plus fixed charges
charged to income. Fixed charges consist of interest on indebtedness,
amortization of debt issue costs and one-third of rental expense, which
management believes to be a reasonable estimate of the interest factor of
rental payments. Earnings were insufficient to cover fixed charges in 1990
by $183.
(7) Comparable Stores Sales growth includes sales of stores that have been open
for the full previous period and the full period for which the calculation
is made. Comparable Store Sales growth for 1990, 1991, 1992 and 1993
excludes Fashion Bar stores acquired in June 1992.
(8) Stores open at February 1, 1992, January 30, 1993 and January 29, 1994
included four, five and ten stores, respectively, which were previously
excluded under the Bealls store closure program. Such stores are only
included in the Company's results of operations subsequent to their removal
from the Bealls store closure program. See Note 7 to the Consolidated
Financial Statements. Stores open at January 28, 1995 exclude 29 Fashion
Bar stores closed during 1994 pursuant to the Store Closure Plan (as
defined herein).
(9) Long-term debt at January 29, 1994 and January 28, 1995 includes the impact
of the refinancing of certain debt of the Company. See Note 3 to the
Consolidated Financial Statements.
21
(10) Pro forma statement of operations data for 1994 and the three months ended
April 29, 1995 reflect the following adjustments related to the issuance of
the Old Securities:
THREE MONTHS
YEAR ENDED ENDED
JAN. 28, 1995 APRIL 29, 1995
------------- --------------
Increase in interest expense........ $2,214 $552
Decrease in net income.............. 1,373 342
Pro forma balance sheet data at April 29, 1995 reflects the following
adjustments related to the issuance of the Old Securities:
Net proceeds to the Company .................. $15,964
Additional debt issue costs .................. 594
Accrual of certain costs related to the
offering of the Securities ................. 100
Additional debt .............................. 16,458
The above pro forma data does not include any adjustment related to the
acquisition of Beall-Ladymon on October 31, 1994. See Note 1 to the
Consolidated Financial Statements.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company operates family apparel stores primarily under the names
"Bealls", "Palais Royal", "Stage" and "Fashion Bar" offering branded fashion
apparel and accessories for women, men and children. During 1993, The Company
became the wholly-owned subsidiary of ARI. ARI has no operations of its own and
its primary asset is the common stock of SRI.
The Company currently operates 248 stores in thirteen states primarily
throughout the central United States. The Company's stores are typically between
eighteen and thirty thousand square feet in size which is smaller than typical
department stores yet larger than most specialty stores. The store format allows
the Company to operate in either small towns and communities with as few as
fifteen thousand people or large metropolitan and suburban areas. The Company's
store format is large enough to offer apparel and accessories for all members of
the family and small enough to allow for strategic location in rural markets or
in numerous, convenient locations in metropolitan and suburban areas.
During 1993, management formalized its growth strategy for expanding the
Company's business. The strategy provides for (i) the opening and profitable
operation of new stores in small market areas where the Company can become a
dominant retailer in the local community by providing quality and value priced
merchandise for the whole family and (ii) the acquisition of selected apparel
retail concerns in markets compatible with the Company's growth strategy. During
1994, this growth strategy resulted in the opening of ten new stores in Texas,
Oklahoma and Missouri and the acquisition of forty-five store leases from
Beall-Ladymon located primarily in Louisiana, Arkansas and Mississippi. The
former Beall-Ladymon stores reopened in the first quarter of 1995 under the name
of Stage, the banner the Company has registered nationally and intends to
promote in all new markets where its traditional names are unrecognized. These
new stores are similar in size, appearance and merchandise content to the
Company's other stores. Management continues to actively search for other
potential locations that meet its site selection criteria including market size,
economic demographics, customer profile and competitive environment and, as a
result, expects to open sixteen additional new stores during the remainder of
1995. Many of these stores will be opened as Stage stores in new markets
including Missouri, Illinois, Kansas and Iowa.
In order to finance the new planned store openings and possible future
acquisitions, the Company initiated an overall refinancing plan during 1993
which included the implementation of the Accounts Receivable Program and the
issuance of new long-term debt instruments which replaced certain existing debt
and preferred stock (the "Refinancing"). See Note 3 to the Consolidated
Financial Statements and "Liquidity and Capital Resources" below.
The Company approved a store closure plan (the "Store Closure Plan") during
the fourth quarter of 1994, pursuant to which it would close forty Fashion Bar
stores, primarily located in major regional malls within the Denver area. To
date, the Company has closed all but one of such stores. Management determined
that the return on the investment needed to upgrade these stores and the
promotional efforts required to make these stores more competitive were neither
justified nor compatible with the Company's overall merchandising philosophies.
Upon completion of the Store Closure Plan during 1995, twelve Fashion Bar stores
will remain open. Management anticipates that two of the twelve remaining stores
will close once lease termination agreements are reached with the respective
landlords or upon the expiration of their leases between August 1996 and January
1998. These two stores are not included in the Store Closure Plan as management
is unsure of the cost and timing of the store closures. Management is optimistic
that merchandising and pricing strategies consistent with its other stores can
be successfully applied to the ten Fashion Bar stores which will remain open.
Management plans to gradually remodel the majority of these stores in order to
update their look and provide its customers with a fashionable, pleasant
shopping environment. Nine of the remaining ten Fashion Bar stores will be
converted to Stage stores during 1995. The downtown Denver location will
continue to be a Fashion Bar store. See Note 2 to the Consolidated Financial
Statements.
23
During the first quarter of 1995, continued weak economic conditions in
Mexico, which have resulted in the devaluation of the peso, adversely affected
sales of six Bealls stores located near the Texas-Mexico border. Comparable
store sales, adjusting for this impact, would have increased 1.7% versus a 0.7%
decrease as reported. Although this may be a temporary aberration, its continued
duration and resulting impact on these and possibly other stores' sales can not
be predicted at this time.
RESULTS OF OPERATIONS
FIRST QUARTER 1994 COMPARED TO FIRST QUARTER 1995. Sales for the first
quarter of 1994 and 1995 were $128.1 million and $142.4 million, respectively,
representing an increase of 11.2%. The increase was due to a 16.6% increase in
sales generated from stores opened during 1994 and 1995, partially offset by a
4.7% decrease in sales as a result of the closure of stores in the Store Closure
Plan combined with a 0.7% decrease in comparable store sales. The decrease in
comparable store sales was primarily due to the weak economic conditions in
Mexico. Excluding the six Bealls stores located near the Texas-Mexico border,
comparable store sales would have increased 1.7%.
Gross profit as a percent of sales for the first quarter of 1994 and 1995
was 31.1% and 32.5%, respectively. This increase was due to favorable profit
margins associated with sales at the Company's newly opened stores combined with
the application of fixed costs related to buying, occupancy and distribution
expenses to a greater volume of sales.
Selling, general and administrative expenses as a percent of sales for the
first quarter of 1994 and 1995 were 23.5% and 24.0%, respectively. This increase
resulted from an increase in costs associated with the Accounts Receivable
Program partially offset by the reversal of a $0.8 million reserve as a result
of a favorable court ruling in a litigation matter.
Service charge income for the first quarter of 1994 and 1995 was $2.1
million and $2.7 million, respectively, an increase of $0.6 million. Service
charge income increased due to increased accounts receivable balances resulting
from higher sales volume and the purchase of accounts receivable from
Beall-Ladymon. This increase was partially offset by an increase in accounts
receivable sold to the trust under the Company's Accounts Receivable Program.
Interest income decreased from $0.4 million for the first quarter of 1994
to $0.2 million for the first quarter 1995 due to the Company's lower cash
balances. The decrease in the Company's cash balances is primarily attributable
to inventory purchases and capital expenditures associated with new store
openings.
Interest expense for the first quarter of 1994 and 1995 was $7.5 million.
Interest savings which resulted from the retirement of $10.0 million of the
Senior Notes (as defined herein) during the first quarter of 1994 was offset by
increased interest rates on certain debt combined with increased borrowings and
associated fees under the Credit Agreement (as defined herein).
The extraordinary charge of $0.3 million in the first quarter of 1994 was
comprised of acquisition premiums and the write-off of debt issue costs
associated with the retirement of $10.0 million of Senior Notes (as defined
herein), net of applicable income taxes.
As a result of the foregoing, the Company's net income increased from $2.8
million for first quarter of 1994 to $4.6 million for first quarter of 1995.
1993 COMPARED TO 1994. Sales for 1993 and 1994 were $557.4 million and
$581.5 million, respectively, representing an increase of $24.1 million or 4.3%.
Comparable store sales were $525.2 and $541.7 million for 1993 and 1994,
respectively, representing an increase of $16.5 million or 3.1%. The overall
increase in sales was a result of an increase in Comparable Store Sales combined
with a net increase in sales from store openings and closings during 1994. The
increase in Comparable Store Sales was a result of (i) the greater visual impact
derived from the Company's continued remodeling program, (ii) automated
scheduling which enables the Company to properly match sales associates to peak
traffic hours, (iii) the favorable reaction to the relocation of four store
locations, (iv) more professional and dramatic presentations in print and
television advertising, (v) increased sales in the Company's private label
apparel,
24
(vi) the acceptance of third party charge cards in Palais Royal stores beginning
in early 1994 and (vii) a higher level of consumer confidence due to slightly
improved general economic conditions.
Gross profit as a percentage of sales was 31.0% and 31.4% of sales for 1993
and 1994, respectively. The increase in the gross profit percentage was
primarily due to increased sales in the Company's private label apparel which
generally has higher margins than brand name apparel.
Selling, general and administrative expenses were $135.2 million and $135.1
million for 1993 and 1994, respectively. Selling, general and administrative
expenses as a percentage of sales were 24.3% and 23.2% for 1993 and 1994,
respectively. The decrease as a percentage of sales is due primarily to the sale
of accounts receivable to a trust pursuant to the Accounts Receivable Program
which began during August 1993 and the Company's ability to effectively manage
variable selling, general and administrative expenses.
Service charge income decreased from $20.0 million for 1993 to $8.5 million
for 1994 due primarily to the sale of receivables pursuant to the Accounts
Receivable Program. See Note 4 to the Consolidated Financial Statements.
Operating income as a percentage of sales declined from 10.3% for 1993 to
8.8% for 1994 due primarily to costs associated with the Store Closure Plan in
1994 of $5.2 million combined with the implementation of the Accounts Receivable
Program in 1993 which resulted in an initial gain of $2.7 million. See Note 2 to
the Consolidated Financial Statements.
Net interest expense decreased $2.8 million from $30.9 million for 1993 to
$28.1 million for 1994. The decrease in net interest expense is due to the
purchase and retirement of $20.0 million of the Company's Senior Notes (as
defined herein), $10.0 million of which were purchased during the latter portion
of 1993.
As a result of the foregoing, the Company's net income increased from $0.9
million for 1993 (which includes an extraordinary charge related to the
Refinancing of $16.2 million) to $14.2 million for 1994.
1992 COMPARED TO 1993. Sales for 1993 were $557.4 million compared to sales
of $504.4 million for 1992, an increase of $53.0 million or 10.5%. This increase
was due to (i) an increase in Comparable Store Sales of $26.6 million or 5.3%,
(ii) the acquisition of Fashion Bar effective May 30, 1992 which added $39.4
million of sales in 1992 compared to $55.2 million in 1993, an increase of $15.8
million or 3.1%, (iii) the addition of sales from five Bealls stores which were
removed from the store closure program during 1993 of $5.5 million or 1.1% and
(iv) an increase in sales from stores opened during 1993 net of sales from
stores closed during the year, of $5.1 million or 1.0%. The Company achieved
these sales increases despite continued sales weaknesses in the Colorado
markets. Increased advertising efforts which included (i) a higher visibility in
television, (ii) over eighteen million units of 101 different catalogs, flyers,
letters, brochures and postcards sent to targeted customers, primarily the
Company's private label credit card holders and (iii) the purchase of
advertising space and spots in 174 newspapers and on 252 radio and television
stations had a positive impact on the Company's Comparable Store Sales in 1993.
Gross profit as a percentage of sales increased from 30.6% in 1992 to 31.0%
in 1993 due to the 10.5% growth in sales discussed above coupled with continued
efficiencies gained from the consolidation of the Fashion Bar buying operations
into the Company and the consolidation of the former Fashion Bar and Palais
Royal distribution centers into the Jacksonville distribution center.
Selling, general and administrative expenses increased from $129.3 million
for 1992 to $135.2 million for 1993. This increase is primarily due to the
increased sales during 1993. Selling, general and administrative expenses as a
percentage of sales were 25.6% and 24.3% for 1992 and 1993, respectively. This
decrease is due to the gain on sale of receivables discussed below, coupled with
continued benefits derived from the consolidation of the Company's operations.
25
Service charge income decreased from $29.7 million for 1992 to $20.0
million for 1993 due to the sale of receivables to a trust which resulted in a
gain of $3.3 million. This gain has been reflected as a reduction in selling,
general, and administrative expenses. See Note 4 to the Consolidated Financial
Statements.
Operating income as a percentage of sales declined slightly from 10.8% for
1992 to 10.3% for 1993 due primarily to the implementation of the Accounts
Receivable Program. See Note 4 to the Consolidated Financial Statements.
Net interest expense decreased $0.9 million from $31.8 million for 1992 to
$30.9 million for 1993. The decrease in net interest expense is due to more
favorable interest rates resulting from the Refinancing.
In connection with the Refinancing, the Company recorded an extraordinary
charge of $16.2 million, net of applicable income taxes of $8.8 million,
representing (i) the write-off of the debt issue costs associated with the
replaced debt and the existing accounts receivable facility, (ii) the write-off
of an interest rate cap agreement associated with the existing accounts
receivable facility, (iii) the write-off of unamortized debt discounts
associated with the senior subordinated notes and subordinated debentures, (iv)
the repurchase premiums associated with the subordinated debentures and the
14 5/8% senior subordinated notes repurchased through a tender offer and (v) the
costs of defeasing the remaining 14 5/8% senior subordinated notes. See Note 3
to the Consolidated Financial Statements.
As a result of the foregoing, the Company's net income decreased from $12.2
million to $0.9 million for 1992 and 1993, respectively.
SEASONALITY AND INFLATION
The Company's business is seasonal and sales and profits traditionally have
been lower during the first three quarters of the year (February through
October) and higher during the fourth quarter of the year (November through
January). Working capital requirements fluctuate during the year and generally
reach their highest levels during the third and fourth quarters.
The following table shows certain unaudited financial information for the
Company by quarter (in thousands):
<TABLE>
<CAPTION>
1994 1995
-------------------------------------------------------------- --------
Q1 Q2 Q3 Q4 Q1
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales ................................. $128,073 $132,060 $134,939 $186,391 $142,353
Gross profit .............................. 39,856 39,163 41,110 62,675 46,283
Operating income .......................... 11,944 10,574 10,030 18,412 14,839
Quarter's operating income as a
percent of annual .................... 23% 21% 20% 36% --
Income before extraordinary item .......... $ 3,081 $ 2,286 $ 1,963 $ 7,202 $ 4,569
Net income ................................ 2,755 2,286 2,001 7,182 4,569
</TABLE>
The Company does not believe that inflation had a material effect on its
results of operations during the past two years. However, there can be no
assurance that the Company's business will not be affected by inflation in the
future.
LIQUIDITY AND CAPITAL RESOURCES
At April 29, 1995, the Company's consolidated long-term debt included
$130.0 million in aggregate principal amount of 10% senior notes due 2000, (the
"Senior Notes"), $100.0 million of 11% Notes, $2.1 million of indebtedness under
industrial development revenue bonds and certain other debt of its subsidiaries.
See Note 8 to the Consolidated Financial Statements.
26
Working capital decreased $6.8 million during the first quarter of 1995
primarily due to capital expenditures. Significant changes within working
capital components included cash, accounts receivable and merchandise
inventories. The Company's cash balances decreased from $27.8 million at January
28, 1995 to $8.7 million at April 29, 1995. This decrease was due primarily to
capital expenditures related to the new store openings and seasonal purchases of
inventory. Accounts receivable decreased $21.8 million during the first quarter
of 1995 as a result of collections generated from seasonal fourth quarter 1994
sales combined with an increase in accounts receivable sold to the trust.
Merchandise inventories increased $27.6 million during the first quarter of 1995
as a result of seasonal purchases of merchandise and merchandise purchased for
newly opened stores.
During 1993, the Company implemented the Accounts Receivable Program which
provides a source of funds from the sale of accounts receivable to a master
trust (the "Trust"). Pursuant to the Accounts Receivable Program, the Company
sells all of the accounts receivable generated by the holders of the Company's
private label credit card accounts to its wholly-owned subsidiary SRI
Receivables Purchase Co., Inc. ("SRPC"), on a daily basis. SRPC is a separate
limited-purpose subsidiary that is operated in a fashion intended to ensure that
its assets and liabilities are distinct from those of the Company and its other
affiliates as SRPC's creditors have a claim on its assets prior to becoming
available to any creditor of the Company. SRPC sells, on a daily basis, the
accounts receivable purchased from the Company to the Trust in exchange for cash
or a certificate representing an undivided interest in the Trust. At its
inception, the Trust issued $140.0 million of term certificates and a $40.0
million revolving certificate representing undivided interest in the Trust. On
August 15, 1995, the Trust issued an additional $25.0 million of term
certificates representing an undivided interest in the Trust. The Trust did not
receive any cash immediately from the issuance of the revolving certificate.
Instead, the holder of the revolving certificate agreed to purchase interests in
the Trust equal to the amount of accounts receivable in the Trust above the
level required to support the term certificates and the transferor's retained
interest (currently $200.1 million), up to a maximum of $40.0 million. If
receivable balances in the Trust fall below the level required to support the
term certificates and revolving certificates, certain principal collections may
be retained in the Trust until such time as the receivable balances exceed the
certificates then outstanding and the required transferor's interest. The
Company owns and undivided interest in the accounts receivable in the trust not
represented by the term or revolving certificates and will continue to service
all of the accounts receivable in the Trust. The Trust may issue additional
series of certificates from time to time. Terms of any future series will be
determined at the time of issuance. The outstanding balance of the revolving
certificate was $10.3 million at April 29, 1995.
Total accounts receivable sold to the Trust during 1993 and 1994 were
$285.1 million and $278.6 million, respectively. In addition, the Company
transferred $10.0 million of accounts receivable purchased from Beall-Ladymon to
the Trust on February 1, 1995. The cash flows generated from the accounts
receivable in the Trust are dedicated to (i) the purchase of new accounts
receivable generated by the Company, (ii) payment of a return on the
certificates and (iii) the payment of a servicing fee to SRI. Any remaining cash
flows are remitted to the Company. The term certificates entitle the holders to
receive a return, based upon the London Interbank Offered Rate ("LIBOR"), plus a
specified margin paid on a quarterly basis. Principal payments commence on
December 31, 1999 but can be accelerated upon occurrence of certain events. The
revolving certificates entitle the holders to receive a return based upon a
floating LIBOR rate, plus a specified margin, or prime rate, at the option of
the Company paid on a monthly basis. The Company is protected against increases
above 10% under an agreement entered into with a bank. The Company is exposed to
loss in the event of non-performance by the bank. However, the Company does not
anticipate non-performance by the bank. At April 29, 1995, the average rate of
return on the term certificates was 7.3%. The purchase commitment for the
Revolving certificate has been extended until December 1999, subject to renewal
at the option of the parties. The revolving certificate holders are entitled to
repayment in the event the accounts receivable decrease below that required to
support such certificates.
The Company entered into a Credit Agreement and a Seasonal Credit Agreement
(as defined herein) with a bank on January 28, 1994 and March 31, 1995,
respectively. Funds available under the Credit Agreement total $25.0 million of
which $15.0 million may be used to collateralize letters of credit. As of April
29, 1995, $11.8 million of the total commitment was used to collateralize
letters of credit resulting in available funds of $13.2 million. Funds available
under the Seasonal Credit Agreement total $10.0 million from August 15 to
January 15 of each fiscal year. Both agreements are available through February
3, 1998.
27
The Company's primary capital requirements are for working capital,
including interest payments and capital expenditures. Management expects
interest payments and capital expenditures during the last three quarters of
1995 to be approximately $15.6 million and $12.5 million, respectively. During
1994, capital improvements were made to 37 stores, 23 of which were extensively
remodeled and 14 of which received betterments consisting of new carpeting,
brighter, more economical lighting and other cosmetic improvements. Management
expects to extensively remodel 15 stores during 1995.
Management believes that funds provided by operations, together with funds
available under the Credit Agreement, the Seasonal Credit Agreement, the
Accounts Receivable Program and the proceeds from the issuance of the Old
Securities will be adequate to meet the Company's anticipated requirements for
working capital, interest payments and planned capital expenditures. Estimates
as to working capital needs and other expenditures may be materially affected if
the foregoing sources are not available or do not otherwise provide sufficient
funds to meet the Company's obligations.
28
BUSINESS OF THE COMPANY
GENERAL
The Company operates family apparel stores primarily under the names
"Bealls", "Palais Royal", "Stage" and "Fashion Bar" offering branded fashion
apparel and accessories for women, men and children. During 1993, The Company
became the wholly-owned subsidiary of ARI. ARI has no operations of its own and
its primary asset is the common stock of SRI.
The Company currently operates 248 stores in thirteen states primarily
throughout the central United States. The Company's stores are typically between
eighteen and thirty thousand square feet in size which is smaller than typical
department stores yet larger than most specialty stores. The store format allows
the Company to operate in either small towns and communities with as few as
fifteen thousand people or large metropolitan and suburban areas. The Company's
store format is large enough to offer apparel and accessories for all members of
the family and small enough to allow for strategic location in rural markets or
in numerous, convenient locations in metropolitan and suburban areas.
The Company believes that its store format, merchandising strategy and
management systems have enabled it to develop a strong franchise in all of its
trading areas. Many Company stores are located in small towns and communities
with as few as fifteen thousand to thirty thousand people. The Company believes
that its ability to operate stores profitably in markets with as few as fifteen
thousand people is an important competitive advantage over department stores,
which are generally unable to operate profitably in small communities. In
addition, the Company's stores have an advantage over locally operated retailers
due to the Company's ability to offer a broader and better assortment of
continuously replenished, branded merchandise at everyday fair prices. In larger
communities, the Company's retailing concept differentiates it from both
department and specialty stores. As compared to department stores, the Company
offers multiple convenient locations and better customer service. As compared to
specialty stores, the Company's stores offer more leading brand names and a
greater assortment of merchandise. All of the Company's stores have several
distinctive features such as store size, layout and location, merchandise
strategy and personalized customer service, which are designed to provide a
convenient shopping experience and to build strong customer loyalty.
RETAIL CONCEPT
The Company has successfully implemented its retail concept through an
emphasis on management systems and technology, centralized decision making and
tight control of operating expenses. The Company believes that its distinctive
retail concept and strong operating systems have positioned the Company for
future growth with limited increases in overhead expenses. The following
features distinguish the Company from other apparel retailers:
ABILITY TO OPERATE PROFITABLY IN SMALLER MARKETS. The Company's store
format and locations are designed to offer a convenient and efficient shopping
experience for customers. The stores are typically between eighteen thousand and
thirty thousand square feet in size, which is smaller than typical department
stores yet larger than most specialty stores. The Company's store format is
large enough to offer apparel and accessories for all members of the family and
small enough to allow for profitable strategic location either in rural markets
where the Company faces lower levels of competition, or in numerous, convenient
locations in metropolitan/suburban areas. The Company's smaller market stores
generally experience higher profit margins due to lower levels of competition.
EFFECTIVE MERCHANDISING STRATEGY. The Company's merchandising strategy
focuses on the traditionally higher margin merchandise categories of women's,
men's and children's apparel and accessories, offered at an everyday fair price.
Sales associates are encouraged to adopt a "can do" attitude in order to "exceed
a customer's expectations". The Company offers a selected assortment of
first-quality, moderately priced merchandise which is divided into distinct
departments including, misses, men's, boy's, shoes, intimate apparel, juniors,
children's, accessories, cosmetics and gifts. Merchandise mix may vary
significantly from store to store to accommodate differing demographic factors.
The Company offers leading national brand names such as Liz Claiborne, Haggar,
Guess, Hanes, Nike and Reebok and other moderately priced, high quality brands.
The Company's buyers are constantly evaluating new vendors and the market for
unique merchandise. The Company may augment its merchandise presentation with
private label product based on
29
opportunities to maximize mix. Each buyer is responsible for specific
merchandise categories to enhance his or her knowledge of the related vendors
and the merchandise generally available. This focused buying approach, combined
with the Company's in-depth understanding of each of its individual markets and
its highly automated merchandise allocation system, enables the Company to keep
each of its stores stocked with a broad, frequently replenished assortment of
high quality merchandise that has been finely tuned to meet the fashion needs of
its customers. The Company management believes that the combination of the size
and experience base of its buyer group, its strong merchandising systems and its
participation in the AMC buying cooperative allows the Company to compete
effectively with department and specialty stores.
EMPHASIS ON CUSTOMER SERVICE. Providing excellent customer service through
stores staffed with highly trained and motivated sales associates is a primary
corporate objective. The Company has implemented its "Team One" operating format
in many of its smaller stores which focuses employees on selling and customer
service during peak hours while handling non-customer oriented tasks such as
shipping/receiving and security tagging during off-peak hours. The Company
monitors the quality of its customer service and actively solicits feedback by
conducting over 1,700 telephone surveys with customers each month. The Company
believes that its strong customer service is a significant competitive advantage
over department stores which generally offer lower levels of customer service.
The Company's private label credit card program includes over 1.5 million active
accounts and comprised approximately 55% of net sales during the first six
months of 1995. The Company communicates with its private label credit
cardholders through targeted mailings.
STRONG OPERATING SYSTEMS AND TECHNOLOGY. The Company supports its retail
concept with highly automated, integrated systems in such areas as
merchandising, sales promotion, credit, personnel management, store design,
accounting and distribution. The Company believes that its automated systems
provide it with a significant competitive advantage over competitors that lack
similar capabilities. For example, the Company has developed and is utilizing an
automated store personnel scheduling system which analyzes historical hourly
sales trends to schedule sales personnel accordingly. This system optimizes
labor costs while producing a higher level of customer service. The Company
believes that these systems increase sales per square foot, reduce markdowns and
overhead and create important efficiencies and cost savings in the most labor
intensive areas of the business. The Company's merchandising systems assist
merchandise planners in allocating inventory to each store based on its specific
attributes and recent sales trends. Additional systems allow the Company to
efficiently transfer slow moving merchandise to stores selling such items more
rapidly, identify merchandise requiring mark downs and maintain in-stock
positions in basic items such as hosiery and jeans. These systems have enabled
the Company to better manage its inventory while reducing costs.
GROWTH STRATEGY
The following are the primary elements of the Company's growth strategy:
CONTINUED MARGIN IMPROVEMENTS THROUGH AUTOMATED MERCHANDISE ALLOCATION. The
Company believes it can increase sales and profitability through automated
inventory planning, allocation and transfer systems. During the past four years,
the Company has devoted significant computer programming resources to the design
and development of its automated, algorithm-based merchandise allocation and
transfer systems. These systems allow specific merchandise to be allocated and,
if necessary, transferred to stores where it is being more rapidly sold. By
continuing to maximize instock positions by merchandise classification, the
Company believes that the use of this proprietary system should continue to
increase sales and reduce markdowns, thereby improving margins.
NEW STORE OPENINGS IN SMALLER MARKETS. The Company has identified locations
in both its existing and new markets which are potential sites for new stores.
Such sites are primarily located in smaller communities, where the Company
experiences its highest margins and where the Company believes it has a
competitive advantage over local retailers and where it is also difficult for
larger department stores to profitably operate. In addition, expansion into
existing markets may be accomplished at a lower cost, as the Company can utilize
its existing systems such as merchandising, credit, distribution and store
personnel scheduling in these markets, thereby minimizing the incremental cost
of opening new stores.
30
MAKING SELECTED STRATEGIC ACQUISITIONS. The Company believes that it can
continue to benefit from selected strategic acquisitions by (i) consolidating
overhead functions, (ii) introducing its superior management systems and (iii)
applying its merchandising, sales and customer service methods to acquired
retailers. The Company believes that such acquisitions will allow it to improve
overall profitability by amortizing its fixed cost structure over a larger
revenue base and by improving sales per square foot and profitability of
acquired small town stores. The Company believes that retail chains operating in
small towns offer attractive acquisition opportunities, as such markets
typically have only limited competition from locally owned retailers and little
or no competition from regional department stores. During 1994, this strategy
resulted in the acquisition of forty-five store leases from Beall-Ladymon,
located primarily in Louisiana, Arkansas and Mississippi. Management continues
to actively search for other potential locations that meet its site selection
criteria including market size, economic demographics, customer profile and
competitive environment and, as a result, expects to open sixteen additional new
stores during the remainder of 1995. Many of these stores will be opened as
Stage stores in new markets including Missouri, Illinois, Kansas and Iowa.
STORE CLOSURES
The Company approved the Store Closure Plan during the fourth quarter of
1994, pursuant to which it would close forty Fashion Bar stores, primarily
located in major regional malls within the Denver area. To date, the Company has
closed all but one of such stores. Management determined that the return on the
investment needed to upgrade these stores and the promotional efforts required
to make these stores more competitive were neither justified nor compatible with
the Company's overall merchandising philosophies. Upon completion of the Store
Closure Plan during 1995, twelve Fashion Bar stores will remain open. Management
anticipates that two of the twelve remaining stores will close once lease
termination agreements are reached with the respective landlords or upon the
expiration of their leases between August 1996 and January 1998. These two
stores are not included in the Store Closure Plan as management is unsure of the
cost and timing of the store closures. Management is optimistic that
merchandising and pricing strategies consistent with its other stores can be
successfully applied to the ten Fashion Bar stores which will remain open.
Management plans to gradually remodel the majority of these stores in order to
update their look and provide its customers with a fashionable, pleasant
shopping environment. Nine of the remaining ten Fashion Bar stores will be
converted to Stage stores during 1995. The downtown Denver location will
continue to be a Fashion Bar store. See Note 2 to the Consolidated Financial
Statements.
COMPANY OPERATIONS
The Company's merchandising strategy focuses on the traditionally higher
margin categories of women's, men's and children's apparel and accessories
offered at an everyday fair price. Sales associates are encouraged to adopt a
"can do" attitude in order to "exceed a customer's expectations." The Company
offers a selected assortment of first-quality, moderately priced merchandise
which is divided into distinct departments including, misses, men's, boy's,
shoes, intimate apparel, juniors, children's accessories, cosmetics and gifts.
Merchandise mix may vary significantly from store to store to accommodate
differing demographic factors.
The Company purchases merchandise from a vendor base of over two thousand
suppliers. The Company's leading vendors for 1994 were Levi Strauss, Liz
Claiborne, Haggar, Guess, Hanes, Nike and Reebok. No one supplier accounted for
more than 9% of the Company's 1994 purchases. The Company, through its
membership in AMC, a cooperative buying service, purchases imported merchandise
for its private label program. The membership provides the Company with group
purchasing opportunities.
31
Set forth below is the percentage of sales by major merchandise departments
for 1993 and 1994.
Department 1993 1994
---------- ---- ----
Mens/Young Men ....................................... 21% 20%
Juniors .............................................. 15 15
Misses Sportswear .................................... 14 15
Accessories & Gifts .................................. 9 10
Children ............................................. 9 9
Shoes ................................................ 8 8
Intimate ............................................. 6 6
Special Sizes ........................................ 5 5
Misses Dresses ....................................... 4 4
Cosmetics ............................................ 4 4
Boys ................................................. 3 3
Furs & Coats ......................................... 2 1
--- ---
100% 100%
=== ===
The Company's integrated merchandising systems are designed to provide its
buyers with necessary information and analytical support and include, among
others, (i) an automated merchandise financial planning and allocation system
which recognizes the attributes and current merchandise needs by classification
for each store, (ii) a staple stock replenishment system to ensure the Company
is in stock on basic items such as hosiery, foundation garments, dress shirts
and jeans and (iii) markdown exception analysis and merchandise transfer
exception reporting. The Company also maintains an assortment planning system to
closely tailor the merchandise assortment in each store based on local
demographics and historical trends and to automatically allocate merchandise
accordingly. The Company's information systems monitor slow and fast moving
merchandise to enable the Company to transfer slower moving merchandise from one
store to another store where such merchandise may be selling more rapidly.
The Company maintains a four hundred fifty thousand square foot
distribution center with the capacity to support approximately one billion
dollars in aggregate annual sales volume. The automated and centralized
distribution center enables the Company to distribute most merchandise within
forty-eight hours of receipt.
CREDIT SERVICES
The Company offers its own private label credit card program which enhances
the Company's relationship with core customers by tailoring credit availability
to individual customers and facilitating frequent communication of promotional
offerings. The private label credit card program includes over 1.5 million
active accounts and comprised approximately 55% of sales during the first six
months of 1995. The Company's independent dedicated communications system links
its corporate headquarters with each store enabling immediate point-of-sale
credit approval for the use of private label credit cards.
COMPETITION
The retail apparel industry is highly competitive and the Company faces
substantial competition, particularly in the Houston market, from national and
regional department and specialty stores. Some of the Company's competitors are
considerably larger than the Company and have substantially greater financial
and other resources. The Company believes its store format, merchandising
strategy and customer service, combined with an emphasis on operating systems
and technology, enable it to effectively compete with department stores and
specialty stores located in the Company's
32
markets. The Company believes that its knowledge of local markets, developed
over seventy years of service, has enabled it to establish a strong franchise in
most of its markets.
EMPLOYEES
During 1994, the Company employed an average of (i) 273 salaried and 176
hourly employees in its Houston corporate headquarters, (ii) 26 salaried and 429
hourly employees in its Jacksonville, Texas distribution center and credit
facility and (iii) 663 salaried and 7,083 hourly employees (including 4,775
part-time workers) at store locations. The Company traditionally hires temporary
store employees and increases the hours of part-time store employees during peak
seasonal selling periods. There are no collective bargaining agreements in
effect with respect to any of the Company's employees and the Company believes
that it has excellent relationships with its employees.
PROPERTIES
The Company's corporate headquarters is located in a one hundred thirty
thousand square foot building in Houston, Texas. The Company leases the building
and most of the land at its Houston, Texas facility. See "Certain Relationships
and Related Transactions - Transactions with Management." The Company owns its
four hundred fifty thousand square foot distribution center and its credit
department facility, both located in Jacksonville, Texas. The Jacksonville
distribution center collateralizes the Company's $25.0 million revolving credit
facility entered into during January 1994.
At April 29, 1995, the Company operated 248 stores located in Texas (157
stores), Louisiana (25 stores), Colorado (13 stores), Oklahoma (12 stores),
Arkansas (12 stores), New Mexico (8 stores), Mississippi (6 stores), Illinois (4
stores), Alabama (3 stores), Missouri (3 stores), Kansas (2 stores), Iowa (2
stores) and Wyoming (1 store). Stores range in size from nine thousand to fifty
thousand square feet with the majority between twenty thousand and thirty
thousand square feet. The majority of the Palais Royal stores are located in
metropolitan Houston in both strip shopping centers and enclosed malls. Bealls
stores are located in strip shopping centers in small rural markets primarily in
Texas. The Fashion Bar stores are principally located in Colorado, the majority
of which are operated in enclosed malls. All store locations are leased except
for three Bealls stores and two Fashion Bar stores which are owned. All leases
provide for a base rent amount plus contingent rentals, generally based upon a
percentage of gross sales.
LEGAL PROCEEDINGS
From time to time the company and its subsidiaries are involved in various
litigation matters arising in the ordinary course of the Company's business.
None of the matters in which the Company or its subsidiaries are currently
involved, either individually or in the aggregate, is material to the Company or
its subsidiaries.
33
MANAGEMENT
The following sets forth certain information with respect to the directors
and executive officers of the Company. Pursuant to an equity stock purchase
agreement (the "Equity Purchase Agreement"), the Company, Bain Capital, Inc.
("Bain"), certain affiliates of Bain, Citicorp Venture Capital Ltd.
("Citicorp"), Acadia Partners, L.P. ("Acadia") and certain other stockholders
have agreed that until certain designated events occur, such parties will vote
for Bain's nominees to the Board of Directors, and that so long as Acadia and
its affiliates hold at least 5% of the outstanding Common Stock, such parties
will vote for one Acadia nominee to the Board of Directors. Certain affiliates
of Bain, an affiliate of Citicorp, Acadia and certain of Acadia's affiliates are
stockholders. The current Bain nominees serving on the Board of Directors are
Joshua Bekenstein and Adam Kirsch. The current Acadia nominee serving on the
Board of Directors is Peter Mulvihill.
NAME AGE POSITION
---- --- --------
Bernard Fuchs (1) .... 68 Chairman
Carl Tooker .......... 47 Director, President and Chief Executive Officer
Mark Shulman ......... 46 Executive Vice President/Chief Merchandising Officer
James Marcum ......... 36 Executive Vice President/Chief Financial Officer
Stephen Lovell ....... 40 Executive Vice President/Director of Stores
Vivian Baker ......... 53 Senior Vice President/General Merchandising Manager
Jerry Ivie ........... 62 Senior Vice President, Secretary and Treasurer
Myrna Phillips ....... 56 Senior Vice President/Marketing Director
Joshua Bekenstein (1) 37 Vice Chairman
Adam Kirsch(2) ....... 33 Director, Vice President and Assistant Secretary
Peter Mulvihill(2) ... 36 Director
Lasker Meyer ......... 69 Director
------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
Mr. Fuchs has been involved in retailing since 1944. He began his career
with Grayson shops of California and subsequently served as Executive Vice
President and Chief Operating Officer of S. Klein in New York from 1960 through
1967. He came to Palais Royal as Executive Vice President and Chief Operating
Officer in 1967 and became President and Chief Executive Officer in 1979. Mr.
Fuchs was Chairman and Chief Executive Officer of the Company from December 1988
until July 1994 when Mr. Tooker was appointed Chief Executive Officer. Mr. Fuchs
continues to serve as Chairman.
Mr. Tooker joined the Company as a Director, President and Chief Operating
Officer on July 1, 1993 and, effective July 1, 1994, Mr. Tooker was appointed
Chief Executive Officer. Mr. Tooker has 24 years of experience in the retail
industry, 18 of which were spent in various management positions at the May
Company where he most recently served as Chairman and Chief Operating Officer of
Filene's of Boston from 1988 to 1990. In 1990, Mr. Tooker joined Rich's, a
division of Federated Department Stores, Inc., as President and Chief Operating
Officer, and in 1991 Mr. Tooker was promoted to Rich's Chief Executive Officer.
34
Mr. Shulman joined the Company in January 1994 as Executive Vice President
and Chief Merchandising Officer with 24 years of retailing experience. Prior to
joining the Company, Mr. Shulman held varying positions with Bloomingdales,
Rikes and I. Magnin, all of which are divisions of Federated Department Stores,
Inc. Since 1985, Mr. Shulman has served as President of Ann Taylor (Allied
Stores), Henri Bendel (The Limited), Bon Jour and most recently, Leslie Fay.
Mr. Marcum joined the Company in June 1995 as Executive Vice President and
Chief Financial Officer. Prior to joining the Company, Mr. Marcum served as
Treasurer of the Melville Corporation from 1986 to 1989, Vice President and
Controller of Marshalls, Inc., a division of the Melville Corporation, from
1989-1990 and most recently as Senior Vice President and Chief Financial Officer
of Marshalls, Inc.
Mr. Lovell joined the Company in June 1995 as Executive Vice President and
Director of Stores. Prior to joining the Company, Mr. Lovell spent 15 years
with Hit or Miss, a division of TJX Companies. Mr. Lovell's first position
with Hit or Miss was Store Manager. He served as a District Manager, Regional
Manager, Territorial Vice President and since January 1987, Senior Vice
President and Director of Stores.
Ms. Baker has served as the Company's Senior Vice President and General
Merchandising Manager since December 1988 and was with Bealls since 1983 where
she served as General Merchandising Manager. Ms. Baker was with Dillards for
three years and Woodward and Lothrop for 15 years prior to joining Bealls.
Mr. Ivie has served as Senior Vice President, Secretary and Treasurer
since December 1988 and was with Palais Royal since 1976. Mr. Ivie previously
spent 15 years in the finance department of Burdine's, a division of Federated
Department Stores.
Ms. Phillips joined the Company in October 1990 following three years of
consulting work in retail communications. Previously, Ms. Phillips was Senior
Vice President of Marketing at Foley's where she worked for 13 years after
spending 14 years in the advertising departments at Gimbel's and Abraham &
Straus.
Mr. Bekenstein has been an officer and director since December 1988 and was
elected Vice Chairman and Chief Financial Officer in May 1992. Mr. Bekenstein
resigned as Chief Financial Officer upon the appointment of Mr. Marcum. Mr.
Bekenstein has been a General Partner of Bain since its inception in 1987 and a
Managing Director of Bain Capital, Inc. since May, 1993. Mr. Bekenstein also
currently serves as a director of The Holson Burnes Group, Inc.
Mr. Kirsch has been a Managing Director of Bain since May, 1993 and a
General Partner of Bain since 1990 and was a Associate and Principal of Bain
from 1987 to 1990. Mr. Kirsch also currently serves as a director of
Brookstone, Inc., Duane Reade and Dade International Inc.
Mr. Mulvihill has been a director since December 1988. Mr. Mulvihill has
served as a Managing Director to Oak Hill Partners, Inc. (the management
company for Acadia) since January 1993. From June 1987 through June 1991, Mr.
Mulvihill was a Senior Vice President of Rosecliff, Inc., (the former management
company for Acadia) and as a consultant to Acadia from June 1991 through
December 1992.
Mr. Meyer served as Vice-Chairman and Chief Merchandising Officer from
May 1989 until he retired in December 1993. Mr. Meyer has been a director since
1988 and continues to serve as a director. Mr. Meyer was in Foley's from 1959
until 1987, when he retired from his position as Chairman and Chief Executive
Officer. From 1987 until May 1989, Mr. Meyer was an officer and director of
Spoetzel Brewery, Inc.
35
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following summarizes the principal components of compensation of the
Company's Chief Executive Officer and the four highest compensated executive
officers.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION
----------
COMPENSATION AWARDS
--------------------------- ----------
SECURITIES
UNDERLYING ALL OTHER
FISCAL SALARY BONUS OPTIONS/ COMP.
NAME AND PRINCIPAL POSITION YEAR ($) ($) SARs(#) ($)(1)
--------------------------- ------ ------- ------ --------- --------
<S> <C> <C> <C> <C> <C>
1994 450,000 65,265 -- 36,885 (2)
Bernard Fuchs, 1993 450,000 59,200 197,000 1,260
Chairman 1992 150,000 489,000 -- 1,260
Carl Tooker, 1994 468,750 56,128 50,000 67,774 (3)
President and 1993 247,916 75,000 200,000 132,116 (4)
Chief Executive Officer 1992 -- -- -- --
Mark Schulman, 1994 276,614 37,820 -- 394,144 (5)
Executive Vice President and 1993 -- -- -- --
Chief Merchandising Officer 1992 -- -- -- --
Vivian Baker,
Senior Vice President and 1994 205,625 -- -- 3,020
General Merchandising 1993 195,000 3,750 1,175 3,020
Manager 1992 185,000 10,000 -- 3,020
Jerry Ivie, 1994 175,008 20,000 -- 702
Senior Vice President, 1993 173,731 5,000 1,762 702
Secretary and Treasurer 1992 171,600 -- -- 450
</TABLE>
(1) Unless otherwise indicated, amounts shown represent premiums paid on behalf
of the officers for life insurance coverage.
(2) Amount shown reflects a distribution related to options vested of $35,625
and premiums for life insurance coverage of $1,260 paid to Mr. Fuchs during
1994.
36
(3) Amount shown reflects a distribution related to options vested of $38,000,
premiums for life insurance coverage of $174 and housing and auto
allowances of $29,600 paid to Mr. Tooker during 1994.
(4) Amount shown reflects moving expenses of $114,861 and housing and auto
allowances of $17,255 paid to Mr. Tooker during 1993.
(5) Amount shown reflects moving expenses of $385,184, premiums for life
insurance coverage of $160 and housing and auto allowances of $8,800 paid
to Mr. Shulman during 1994.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following discloses options granted during 1994 for the names
executives in the compensation table above.
<TABLE>
<CAPTION>
Potential Realizable Value at Assumed
Annual Rates of Stock Price Appreciation
Individual Grants For Option Term
----------------------------------------------------------------- ---------------------------------------
Number of % of Total
Securities Options/
Underlying SAR's Excercise
Options/ Granted to or Base 0% Annual 5% Annual 10% Annual
SAR's Employees in Price Growth Growth Growth Rate
Name Granted(#) (1) Fiscal Year (%) ($) Expiration Date Rate ($) Rate ($) ($)
<S> <C> <C> <C> <C> <C> <C> <C>
Carl Tooker 50,000 51.5% $2.15 07/01/04 -- $67,500 $172,500
</TABLE>
(1) All of such options were granted under the Company's stock option plan.
The options granted under such plan are subject to vesting and repurchase
provisions upon termination of employment.
37
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION/SAR VALUES
THE FOLLOWING SUMMARIZES EXERCISES OF STOCK OPTIONS (GRANTED IN PRIOR
YEARS) BY THE HIGHEST PAID EXECUTIVE OFFICERS IN THE PAST YEAR, AS WELL AS THE
NUMBER AND VALUE OF ALL UNEXERCISED OPTIONS HELD BY THE NAMED OFFICERS AT THE
END OF 1994.
Number of
Securities Value of
Underlying Unexercised In-
Unexercised the-Money
Options/SARs at Options/SARs at
FY-End(#) FY-End ($)(1)
Shares ------------- -------------
Acquired on Value Exercisable/ Exercisable/
Name Excercise(#) Realized($) Unexercisable Unexercisable
------------- ------------- ----------- ------------- -------------
Bernard Fuchs -- -- 49,250 / 147,750 $76,875 / $230,625
Carl Tooker -- -- 40,000 / 210,000 82,000 / 328,000
Mark Shulman -- -- -- / 100,000 -- / --
Vivian Baker -- -- -- / 1,175 -- / --
Jerry Ivie -- -- -- / 1,762 -- / --
(1) Value is based upon the stock price as of January 28, 1995 ($2.15) minus
the exercise price. Market value is determined in good faith by the
Board of Directors and is based upon the historical and projected
financial performance of the Company.
COMPENSATION OF DIRECTORS
During 1994, Dr. Berry and Mr. Meyer received cash compensation of $8,750
and $54,167, respectively, for services rendered as directors. No other
directors received compensation.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of the Compensation Committee are Mr. Fuchs and Mr.
Bekenstein, who served in such capacities during the last fiscal year. Each
member of the Compensation Committee abstains from voting on matters relating
directly to such member's compensation as an executive officer. Mr. Bekenstein
is a Managing Director of Bain, an affiliate of a principal stockholder. See
"Certain Relationships and Related Transactions" for a description of certain
transactions between Mr. Fuchs and the Company and Bain and the Company.
38
MANAGEMENT AGREEMENTS
The Company, Bain and certain of its affiliates, Citicorp and Bernard Fuchs
entered into a management agreement (the "Fuchs Management Agreement"), dated as
a May 26, 1989 and amended effective February 1, 1993, pursuant to which (i) the
Company employed Mr. Fuchs as an executive officer and (ii) Mr. Fuchs purchased
from Bain and certain of its affiliates, and an affiliate of Citicorp, in the
aggregate, 293,750 shares of the Company's common stock for $0.09 per share and
250 shares of the Company's senior preferred stock for $1,000 per share
(subsequently redeemed in connection with a refinancing of the Company in 1993).
The Fuchs Management Agreement provides that transfers of common stock by Mr.
Fuchs are subject to certain rights to first offer and refusal of the Company
and the other parties of the Fuchs Management Agreement.
Pursuant to the Fuchs Management Agreement, Mr. Fuchs served as Chairman of
the Board and Chief Executive Officer until July 1, 1994 when Mr. Tooker was
appointed Chief Executive Officer. Mr. Fuchs will continue to serve as Chairman.
The Fuchs Management Agreement, as amended, provides for a base salary plus an
annual incentive bonus based on an increase in the Company's pretax income
(excluding any increase or decrease in pretax income attributable to any
financial restructuring) as compared to the fiscal year in which the bonus is
being paid. The incentive bonus is applicable to fiscal years 1993 through 1998.
Mr. Fuchs may also be awarded discretionary bonuses by the Company's
Compensation Committee elected by the Board of Directors. The Fuchs Management
Agreement generally restricts Mr. Fuchs from competing with the Company or its
subsidiaries for a period of 24 months after his termination, except for
termination without cause. Mr. Fuchs' base salary for the next four fiscal years
shall be $450,000, $300,000, $200,000 and $100,000, respectively.
In connection with the February 1993 amendment to the Fuchs Management
Agreement, the Company also entered into a stock option agreement with Mr. Fuchs
providing the grant of options to acquire up to 150,000 shares of the Company's
common stock at a original purchase price of $5.00 per share. Such options are
subject to vesting and repurchase restrictions. In connection with the formation
of ARI, such options were converted into options to acquire shares of ARI common
stock (the "Common Stock") at a price of $0.10 per share and the right to
receive payments equaling $0.95 per option share ratably over the vesting
schedule.
On July 1, 1993, the Company and Carl Tooker entered into an employment
agreement (the "Tooker Management Agreement") providing for Mr. Tooker's
employment as Director, President and Chief Operating Officer. As discussed
above, Mr. Tooker was appointed Chief Executive Officer effective July 1, 1994.
The Tooker Management Agreement provides for an initial base salary of $425,000
plus and annual incentive bonus based on an increase in the Company' pretax
income (excluding any increase or decrease in pretax income attributable to any
financial restructuring) as compared to the fiscal year in which the Company
recorded its highest pretax income prior to the fiscal year for which the bonus
is being paid. The Tooker Management Agreement also provided for an initial
grant of options to purchase 200,000 shares of the Company's common stock at
$5.00 per share, subsequently converted into options to acquire shares of Common
Stock as described above for Mr. Fuchs. Pursuant to Mr. Tooker's appointment to
CEO, he was awarded additional options to purchase 50,000 shares of Common Stock
with an exercise price of $2.15 per share and his annual salary was adjusted to
$500,000. Such options and the related Common Stock are subject to vesting and
repurchase restrictions.
On January 31, 1994, the Company and Mark Shulman entered into an
employment agreement (the "Shulman Employment Agreement") providing for Mr.
Shulman's employment as Executive Vice President and Chief Merchandising
Officer. The Shulman Employment Agreement provides for an initial base salary of
$275,000 plus an annual incentive bonus based on an increase in the Company's
pretax income (excluding any increase or decrease in pretax income attributable
to any financial restructuring) as compared to the fiscal year in which the
Company recorded its highest pretax income prior to the fiscal year for which
the bonus is being paid. The Shulman Employment Agreement also provided for an
initial grant of options to purchase 100,000 shares of Common Stock with an
exercise price of $2.15 per share. Such options and the related Common Stock are
subject to vesting and repurchase requirements.
On June 1, 1995, the Company and James Marcum entered into an employment
agreement (the "Marcum Employment Agreement") providing for Mr. Marcum's
employment as Executive Vice President and Chief Financial
39
Officer. The Marcum Employment Agreement provides for an initial base salary of
$275,000 plus an annual incentive bonus based on the Company's actual versus
planned pretax income. The Marcum Employment Agreement also provided for an
initial grant of options to purchase 100,000 shares of Common Stock with an
exercise price of $2.88 per share. Such options and the related Common Stock are
subject to vesting and repurchase requirements.
On June 1, 1995, the Company and Steven Lovell entered into an employment
agreement (the "Lovell Employment Agreement") providing for Mr. Lovell's
employment as Executive Vice President and Director of Stores. The Lovell
Employment Agreement provides for an initial base salary of $275,000 plus an
annual incentive bonus based on the Company's actual versus planned pretax
income. The Lovell Employment Agreement also provided for an initial grant of
options to purchase 75,000 shares of Common Stock with an exercise price of
$2.88 per share. Such options and the related Common Stock are subject to
vesting and repurchase requirements.
The Company, Bain and certain of its affiliates and Citicorp also entered
into management agreements with Vivian Baker and Jerry Ivie as well as certain
other officers, pursuant to which such officers purchased from either Bain and
certain of its affiliates, and affiliates of Citicorp or the Company, shares of
Common Stock and senior preferred stock of ARI (subsequently redeemed in
connection with the Refinancing). The shares of Common Stock acquired pursuant
to such management agreements ("Executive Stock") are subject to certain vesting
provisions in addition to restrictions on transfer and repurchase options. The
management agreements give the Company, or if the Company does not exercise its
repurchase right, Bain and certain of its affiliates, Citicorp and Acadia, the
right to repurchase all or a portion of such Executive Stock upon termination of
the officer's employment. If the officer's termination of employment is for any
reason other than cause or voluntary (as defined in the management agreement),
the officer has the option to require the Company to repurchase the Executive
Stock. The repurchase price upon termination is the lower of the fair market
value or the original cost of the officer for unvested Executive Stock and the
fair market value for vested Executive Stock. Executive Stock vests 40% two
years from the date of issue and in 20% annual increments thereafter.
If the Board of Directors and the holders of a majority of the Common Stock
then outstanding approve the sale of the Company to an independent third party
(whether by merger, consolidation, sale of all or substantially all of the
outstanding capital stock), the holders of Executive Stock are required to
consent and raise no objections against such transaction. Additionally, holders
of Executive Stock are required to agree to sell all of their Executive Stock
and rights to acquire Common Stock issued pursuant to the stock Option Plan (as
defined herein) if the transaction is structured as a sale of stock. The Company
has the right to redeem the Executive Stock held by any holder who fails to
comply with these provisions.
COMPANY RETIREMENT PLAN
The Specialty Retailers, Inc. Retirement Plan (the "Company Retirement
Plan") is a qualified defined benefit plan. Benefits under the Company
Retirement Plan are administered through a trust arrangement providing benefits
in the form of monthly payments or a single lump sum payment. The Company
Retirement Plan covers substantially all employees who have completed one year
of service with 1,000 hours of service. The Company Retirement Plan is
administered by the retirement plan committee (the "Committee"), and its three
to five members are appointed by the Company. All determinations of the
Committee are made in accordance with the provision of the Company Retirement
Plan in a uniform and nondiscriminatory manner.
Generally, a participant is eligible for a benefit on his/her normal
retirement date, which is the later of age 65 or the fifth anniversary of the
date of hire. A participant may elect an early retirement benefit if he/she is
at least 55 years old, has 10 Years of Service (as defined below) and retires
from active employment with the Company. Early retirement benefits are reduced
according to a formula established in the Company Retirement Plan based upon
each full month that the participant's age is less than 65 on the date the
payments commence. If a participant who is vested terminates employment, he/she
is entitled to deferred benefit payable at his/her normal retirement date or an
earlier date, if requested, but not before age 55.
The amount of a participant's retirement benefit is based on each Year of
Credited Service (as defined below) and on his/her earnings for that year. The
individual yearly benefits are then totaled to determine the annual benefit at
40
age 65. A participant's accrued benefits in the superseded plan are determined
in accordance with the terms of those plans except as modified by the terms of
the Company Retirement Plan. The annual amount of the participant's normal
retirement benefit is derived, subject to certain limitations, by adding (i) 1%
of earning up to $30,600 plus 1 1/2% of the excess of such earnings over $30,600
for each Year of Credited Service earned on or after July, 1989 through December
31, 1991 (ii) 1% of earnings upon to 31,800 plus 1 1/2% of the excess of such
earnings over $31,800 for each Year of Credited Service earned after December
31, 1991 (iii) 1% of earnings up to $42,500 plus 1 1/2% of the excess of such
earnings over $42,500 for each year of credited service earned after December
31, 1994 and (iv) accrued benefits determined in accordance with the terms of
the Company Retirement Plan under any superseded plan. The normal retirement
benefit formula produces an annual benefit which is paid to the participant in
equal monthly installments. The standard form of payment for a single
participant is a monthly benefit payable for the participant's life only. The
standard form of payment for a married participant is a 50% joint and survivor
benefit, which provides a reduced monthly benefit to the participant during
his/her lifetime, and 50% of that benefit to the participant's spouse for
his/her lifetime in the event of the participants' death. Other forms of the
payment are also provided including lump sum payouts, but they require
participant election. In addition, the Committee may elect to pay the benefit
equivalent of a benefit payable at normal retirement date in the form of a lump
sum payment, if the lump sum payment does not exceed $3,500.
Any participant who is credited with 1,000 or more hours of service in a
calendar year receives a "Year of Service", while any participant who is
credited with 1,284 or more of service in a calendar year receives a "Year of
Credited Service". Years of Service determine a participant's eligibility for
benefits under the Company Retirement Plan, and the percentage vested in those
benefits. After five Years of Service, a participant is 100% vested.
Participants in any superseded plan earn Years of Service and Years of Credited
Service pursuant to sightly different criteria for plan years beginning prior to
January 1, 1990.
The Company Retirement Plan is funded entirely by Company contribution
which are held by a trustee for the exclusive benefit of the participants. The
company voluntarily agreed to contribute the amounts necessary to provide the
assets required to meet the future benefits payable to Company Retirement Plan
participants. Under the Company Retirement Plan, contributions are not
specifically allocated to individual participants. Although the Company intends
to continue the Company Retirement Plan indefinitely, it can terminate the plan
at any time, upon which all participants will become 100% vested in any benefit
accrued to the extend funds are available in trust. In this event, assets will
be allocated to benefit categories in the order specified in the Company
Retirement Plan.
As of January 28, 1995, the estimated annual benefits payable upon
retirement at normal retirement age subject to certain adjustments permitted by
applicable federal law, for individuals named in the cash compensation table
above would be as follows: Mr. Fuchs-$0; Mr. Tooker-$0; Mr. Shulman-$0; Ms.
Baker-$19,225; and Mr. Ivie-$40,250. No amounts were paid or distributed during
1994 pursuant to the Company Retirement Plan to any of the individuals named or
included in the group in the cash compensation table above.
41
BENEFICIAL OWNERSHIP
ARI's authorized equity consist of the Common Stock and the Class B common
stock (the "Class B Common Stock"). Except as otherwise described herein, all
shares of the Common Stock and the Class B Common Stock are identical and
entitle the holders thereof to the same rights and privileges (except as
described below). Holders of the Class B Common Stock may elect at any time to
convert any or all of such shares into the Common Stock, on a share-for-share
basis, to the extent the holder thereof is not prohibited from owning additional
voting securities by virtue of regulatory restrictions. The holders of the
Common Stock are entitled to one vote per share on all matters to the voted upon
by the stockholders. Except as required by law, holders of the Class B Common
Stock do not have the right to vote on any matters to be voted upon the
stockholders. As of April 17, 1995, 1,468,750 shares of the Class B Common Stock
were outstanding, 1,320,198 of which is owned by Court Square Capital Limited
(see note (3) to ownership table below). Except as described in note (3) below,
the percentage of shares of the Common Stock is calculated assuming no Class B
Common Stock is converted.
The table below sets forth certain information regarding ownership of the
Common Stock as of April 17, 1995 assuming exercise of options exercisable
within sixty days of such date by (i) each person or entity who owns of record
or beneficially 5% or more of the Common Stock, (ii) each director and named
executive officer and (iii) all executive officers and directors as a group.
Each of such stockholders is assumed to have sole voting and investment power as
to the shares shown. Known exceptions are noted.
NUMBER OF PERCENTAGE OF
SHARES OF SHARES OF
NAME COMMON STOCK COMMON STOCK (7)
Joshua Bekenstein (5)....................... 5,358,143 46.2%
Adam Kirsch (5)............................. 5,340,645 46.1%
Bain and the Tyler Entities (1)............. 5,291,911 45.7%
Acadia Partners, L.P. (2)................... 3,515,466 30.3%
Bernard Fuchs (4)........................... 1,073,000 9.3%
Court Square Capital, Limited (3)........... 390,667 3.4%
Carl Tooker (4)............................. 49,800 --
Vivian Baker................................ 34,310 --
Jerry Ivie.................................. 32,665 --
Mark Shulman................................ 20,000 --
Lasker Meyer................................ 11,750 --
Peter Mulvihill (6)......................... -- --
All executive officer and directors as a
group (10 Persons) (4).................... 6,647,672 57.4%
(1) The Tyler Entities include Tyler Capital Fund, L.P., Tyler Massachusetts,
L.P. and Tyler International, L.P.-II. Such entities are managed by Bain.
Bain is a California limited partnership with seven individuals serving as
general partners, including Joshua Bekenstein, Vice Chairman and a director
of the Company, and Adam Kirsch, a director of the Company. The address of
Bain and the Tyler Entities is Bain Capital Inc., Two Copley Place, Boston,
Massachusetts 02116.
(2) Amounts shown represent shares held by the nominee of Acadia and shares held
by FWHY-Coinvestment I Partners, L.P. ("FCP") and Oak Hill Partners, Inc.,
("Oak Hill"), both affiliates of Acadia. The address of Acadia and FCP is
201 Main Street, Fort Worth, Texas 76102. The address of Oak Hill is 65
East 55th Street, New York, New York 10022.
(3) Court Square Capital Limited, a Delaware corporation, is a direct
wholly-owned subsidiary of Citicorp Banking Corporation, a Delaware
corporation, which is a direct wholly-owned subsidiary of Citicorp, a
Delaware corporation. Amount and percentage shown do not include 1,320,198
shares of the Class B Common Stock, owned by Court Square Capital Limited.
Each share of Class B Common Stock is convertible, subject to substantial
restrictions, into one share
42
of Common Stock. Assuming full conversion of all shares of Class B Common
Stock, Court Square Capital would own 13.3% of the then outstanding Common
Stock. The address of Court Square Capital Limited is 399 Park Avenue, 6th
Floor, New York, New York 10043.
(4) Amounts shown include shares of Common Stock that such persons or group
could acquire upon the exercise of options exercisable within sixty days.
Options for 486,212 shares of Common Stock were held by all executive
officers and directors as a group (10 persons) of which 62,350 are
exercisable within sixty days. Amount shown for Mr. Fuchs includes (i)
470,000 shares held by the Fuchs Family Limited Partnership for which Mr.
Fuchs may be deemed to possess beneficial ownership and (ii) 2,350 options
which are exercisable.
(5) Amounts shown include shares beneficially owned by Bain and the Tyler
Entities. Mr. Bekenstein and Mr. Kirsch may be deemed to share voting
and dispositive power as to all shares owned by Bain and the Tyler
Entities.
(6) Mr. Mulvihill is a director and a managing director of the investment
advisor to Acadia. In addition, Mr. Mulvihill holds indirectly a limited
interest in Acadia and holds directly a limited interest in Oak Hill.
However, he does not hold or share voting or dispositive power as to shares
beneficially owned by Acadia or Oak Hill.
(7) No percentage of class is shown for holdings less than 1%.
43
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH MANAGEMENT
The Company's corporate headquarters in Houston, Texas and the land and
buildings in which six Palais Royal stores are located are leased from PR
Investments, Ltd ("PR Investments"), a partnership in which Mr. Fuchs, his wife
and certain former owners of Palais Royal are general partners. The lease
relating to the corporate headquarters is for a term of 50 years expiring in
2032 and includes an established minimum annual rent adjusted periodically for
changes in the Consumer Price Index ("CPI"). Three of the Palais Royal store
leases with PR Investments are for terms of 20 years expiring in the years 1999,
1999 and 2000, respectively. The remaining three Palais Royal store leases with
PR Investments are for 25-year terms expiring in the years 2005, 2010 and 2010,
respectively. All of the Palais Royal store leases with PR Investments provide
the option to extend the term of the lease for two consecutive five-year terms.
One of the Palais Royal leases with PR Investments provides for the option to
extend the term of the lease for an additional 20 years. In addition to an
established minimum annual rent adjusted for changes in the CPI, the above
described store leases include additional rent calculated at 4% of gross sales
exceeding established levels per store. During 1994, the Company paid PR
Investments an aggregate of $2.0 million under all leases described above. The
Company believes that the terms of the leases with PR Investments are comparable
to leases with unaffiliated third parties covering similar properties.
During 1993, the Company entered into an employment agreement with its new
President and Chief Executive Officer. As part of this agreement, the Company
agreed to purchase his former residence for $1.2 million and loaned $0.3 million
to him. The loan is due October 2, 1996 and bears a market rate of interest.
As of April 17, 1995, executive officers and directors as a group (10
persons) owned 1,293,451 shares of Common Stock and 486,212 options to purchase
Common Stock (excluding shares beneficially owned by Bain and the Tyler
Entities).
TRANSACTIONS WITH BAIN
Pursuant to a professional service agreement, Bain received fees for
professional services rendered and expense reimbursements in the amount of $0.6
million in 1994. The agreement provides for Bain to render financial,
acquisition and management services and receive its usual and customary fees,
based upon actual services rendered. The agreement is terminable at any time at
the discretion of the board of directors of the Company.
44
DESCRIPTION OF CERTAIN INDEBTEDNESS
The following discussion sets forth information concerning the material
terms of the Company's indebtedness outstanding after giving effect to issuance
of the New Securities.
The Senior Notes were originally issued in an aggregate principal amount of
$150.0 million and bear interest at 10% payable semi-annually on February 15 and
August 15. The Company is required to make a mandatory sinking fund payment on
August 15, 1999 equal to twenty five percent of the original principal amount.
The Company has purchased $20.0 million of the Senior Notes which satisfied a
portion of the August 15, 1999 sinking fund requirement. The Senior Notes are
general unsecured obligations and rank senior to all subordinated debt of the
Company including the 11% Notes.
The 11% Notes were originally issued in an aggregate principal amount of
$100.0 million and bear interest at 11% payable semi-annually on February 15 and
August 15. The Company is required to make a mandatory sinking fund payment on
August 15, 2002 equal to forty percent of the original principal amount. The 11%
Notes are subordinated to the obligations under the Senior Notes.
The Company currently has outstanding $14,983,000 principal amount of 9%
Bealls Holding Subordinated Debentures due 2002 (the "9% Bealls Holding
Subordinated Debentures") and $14,313,000 principal amount of 7% Bealls Holding
Junior Subordinated Debentures due 2003 (the "7% Bealls Holding Junior
Subordinated Debentures") which were issued to the former holders of Bealls
common stock in connection with the Company's acquisition of Bealls.
The 9% Bealls Holding Subordinated Debentures originally earned interest at
the per annum rate of 9%. However, the per annum interest rate for the 9% Bealls
Holding Subordinated Debentures increased to 10% on January 1, 1994, 11% on
January 1, 1995 and increases to 12% on January 1, 1996. The 9% Bealls Holding
Subordinated Debentures are prepayable at the Company's option in whole or in
part at their face amount, plus accrued but unpaid interest. The Company is
required to redeem the 9% Bealls Holding Subordinated Debentures beginning not
later than the December 31, 1997 in not more than six equal annual installments.
The 7% Bealls Holding Junior Subordinated Debentures earn interest at the per
annum rate of 7%. The Company is entitled to prepay the 7% Bealls Holding Junior
Subordinated Debentures in whole or in part at any time prior to, and is
required to redeem the 7% Bealls Holding Junior Subordinated Debentures in whole
not later than December 31, 2003 at a price of 100% of the principal amount
thereof plus accrued but unpaid interest.
In connection with FB Holdings' acquisition of Fashion Bar in June, 1993,
FB Holdings issued to the former holders of the capital stock of Fashion Bar 7%
FB Holdings Subordinated Notes due 2000 (the "7% FB Holdings Subordinated
Notes") in the aggregate principal amount of $3,550,000. The Company currently
has outstanding $4,234,000 principal amount of the 7% FB Holdings Subordinated
Notes. Fifty percent of the outstanding principal amount of the 7% FB Holdings
Subordinated Notes is due on June 30, 1999, with the entire principal amount and
accrued and unpaid interest due on June 30, 2000. The Company is required to
prepay certain principal amounts of the 7% FB Holdings Subordinated Notes if
certain financial targets are achieved. The 7% FB Holdings Subordinated Notes
are prepayable at any time at the Company's option in whole or in part. The 7%
FB Holdings Subordinated Notes earn interest at the per annum rate of 7%. Prior
to June 1995, the Company could, at its option, pay interest in the form of
additional 7% FB Holdings Subordinated Notes in a principal amount equal to the
amount equal to the amount otherwise payable in cash.
The 9% Bealls Holding Subordinated Debentures, the 7% Bealls Holding Junior
Subordinated Debentures and the 7% FB Holdings Subordinated Notes are direct
obligations of the Company.
The Company has a revolving credit agreement with The First National Bank
of Boston (the "Bank") (the "Credit Agreement") under which it may draw up to
$25.0 million. Of this amount, $15.0 million may be used to support letters of
credit. As of April 29, 1995, $11.8 million of the total commitment was used to
collateralize letters of credit resulting in available funds of $13.2 million.
Effective March 31, 1995, the Company entered into a separate agreement with the
Bank under which it may borrow an additional $10.0 million for seasonal working
capital needs (the "Seasonal Credit
45
Agreement" and together with the Credit Agreement, the "Revolving Credit
Agreement"). Funds are available under the Seasonal Credit Agreement from August
15 through January 15 of each calendar year. The Revolving Credit Agreement is
available through February 3, 1998 and provides for a commitment fee of 1/2 of
1% of the average daily unused portion of the commitment amount paid on a
quarterly basis. Interest is charged on outstanding loans at a base rate plus a
specified margin. The base rate is higher of the Bank's prime rate or 1/2 of 1%
above the Federal Funds Effective Rate (as defined in the Revolving Credit
Agreement). The specified margin range is 1.25% to 2.75% based on calculated
debt service ratios as defined in the Revolving Credit Agreement. The Revolving
Credit Agreement contains covenants which, among other things, restricts the (i)
incurrance of additional debt, (ii) purchase of certain investments, (iii)
payment of dividends, (iv) formation of certain business combinations, (v)
disposition of certain assets, (vi) acquisition of subordinated debt, (vii) use
of proceeds received under the agreement and (viii) transactions with related
parties. The Revolving Credit Agreement also requires that SRI maintain a debt
service ratio above a predetermined level. The Revolving Credit Agreement is
secured by the Company's distribution center located in Jacksonville, Texas,
including equipment located therein, and a pledge of SRPC stock. The net book
value of the distribution center was approximately $11.0 million at January 28,
1995.
46
DESCRIPTION OF NEW SECURITIES
THE NEW SECURITIES. The New Securities are to be issued as a separate
series of notes pursuant to the same Indenture under which the Old Securities
have been issued, between the Company and The First National Bank of Boston, as
trustee (the "Trustee"). The terms of the New Securities include those stated in
the Indenture. Capitalized terms not defined in the text shall have the meaning
set forth in "Certain Definitions."
PRINCIPAL, MATURITY AND INTEREST
The New Securities are limited in aggregate principal amount to $18,250,000
million and will mature on August 15, 2003. Interest on the New Securities will
accrue at the rates per annum set forth on the cover page of this Prospectus and
will be payable semi-annually on February 15 and August 15 of each year,
commencing on February 15, 1996, to Holders of record on the immediately
preceding February 1 and August 1. Interest on the New Securities will accrue
from the most recent date to which interest has been paid or, if no interest has
been paid, from the date of original issuance. Interest will be computed on the
basis of a 360-day year comprised of twelve 30-day months. The New Securities
will be payable both as to principal and interest at the office or agency of the
Company maintained for such purpose within the City and State of New York or, at
the option of the Company, payment of interest may be made by check mailed to
the holders of the New Securities at their respective addresses set forth in the
register of holders of New Securities. Until otherwise designated by the
Company, the Company's office or agency in New York will be the office of the
Trustee maintained for such purpose. The New Securities will be issued in
registered form, without coupons, and in denominations of $1,000 and integral
multiples thereof.
SUBORDINATION
The New Securities will be general unsecured obligations of the Company,
will rank junior to all existing and future Senior Debt, pari passu with the
existing 11% Notes and senior to all existing and future subordinated
Indebtedness of the Company, including the 7% FB Holdings Subordinated Notes,
the 9% Bealls Holdings Subordinated Debentures and the 7% Bealls Holdings Junior
Subordinated Debentures. The existing 11% Notes, however, are guaranteed on a
senior subordinated basis by Palais Royal.
The Company may not make any payment or distribution to the Trustee or any
Holder upon or in respect of Obligations with respect to the Securities and may
not acquire from the Trustee or any Holder any Securities for cash, securities
or other property (other than securities that are subordinated to at least the
same extent as the Securities to (a) Senior Debt and (b) any securities issued
in exchange for Senior Debt), until all principal and other Obligations with
respect to the Senior Debt have been paid in full, if: (i) a default in the
payment of any principal, premium, if any, interest or other Obligations with
respect to Designated Senior Debt occurs and is continuing beyond any applicable
period of grace (whether upon maturity, as a result of acceleration or
otherwise); or (ii) a default occurs and is continuing that then permits holders
of the Designated Senior Debt as to which such default relates to accelerate its
maturity, and the Trustee receives a written notice of a default (a "Payment
Blockage Notice") from the Holders, or from the Representative of the Holders,
of any such Designated Senior Debt. If the Trustee receives any such notice, a
subsequent notice received within 360 days thereafter shall not be effective. No
nonpayment default that existed or was continuing on the date of delivery of any
Payment Blockage Notice to the Trustee shall be, or be made, the basis for a
subsequent Payment Blockage Notice unless such default shall have been cured or
waived for a period of at least 180 days.
Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property in an
assignment for the benefit of creditors or any marshalling of the Company's
assets and liabilities, Holders of Senior Debt of the Company, will be entitled
to receive payment in full of all Obligations due in respect of such Senior Debt
(including interest after commencement of any such proceeding at the rate
specified in the applicable Senior Debt) before the Holders of the New
Securities will be entitled to receive any payment, until all Obligations with
respect to Senior Debt of the Company are paid in full, any distribution to
which the holders of the New Securities would be entitled shall be made to the
holders of Senior Debt (except that Holders of the New Securities may receive
securities that are subordinated at least to the same extent as the New
Securities are to the Senior Debt).
47
REDEMPTION
OPTIONAL REDEMPTION. The Company shall not have the option to redeem the
Securities prior to August 15, 1998. Thereafter, the Company shall have the
option to redeem the Securities, in whole or in part, at the redemption prices
(expressed as percentages of principal amount) set forth below, plus accrued and
unpaid interest thereon to the applicable redemption date, if redeemed during
the twelve-month period beginning on August 15 of the years indicated below:
YEAR PERCENTAGE
1998............................ 105.500%
1999............................ 104.125%
2000............................ 102.750%
2001............................ 101.375%
2002 and thereafter............. 100.000%
Notwithstanding the preceding paragraph, at any time prior to August 15,
1996, the Company may redeem the Securities with the net proceeds of an initial
public offering of common stock of ARI, to the extent that such net proceeds
thereof are contributed to the Company as common equity, at a redemption price
equal to 110% of the principal amount thereof, plus accrued and unpaid interest
thereon to the applicable redemption date; PROVIDED that at least $11,929,000 in
aggregate principal amount of Securities remain outstanding immediately after
the occurrence of such redemption and that such redemption occurs within 30 days
of the date of the closing of such initial public offering.
MANDATORY REDEMPTION. The Securities are subject to redemption on September
15, 2002 through the operation of the mandatory sinking fund. The Company will
make a mandatory sinking fund payment sufficient to retire by redemption on such
mandatory redemption date Securities equal to 40% of the aggregate principal
amount of the Securities authenticated and delivered under the Indenture
(regardless of the principal amount of Securities then outstanding) at a
redemption price equal to 100% of the aggregate principal amount thereof, plus
accrued and unpaid interest thereon to the redemption date.
The sinking fund payment shall be made by depositing immediately
available funds sufficient therefor with the Paying Agent (as defined in
Section 2.03 of the Indenture) one Business Day prior to September 15, 2002.
Selection of the Securities to be redeemed shall be made by the Trustee.
SELECTION AND NOTICE
If less than all of the Securities are to be redeemed at any time,
selection of the securities for redemption will be made by the Trustee in
compliance with the requirement of the principal national securities exchange,
if any, on which such securities are listed, or, if such securities are not so
listed, on a PRO RATA basis, by lot or by such method as the Trustee shall deem
fair and appropriate; PROVIDED that no Security of $1,000 or less shall be
redeemed in part. Notices of redemption shall be mailed by first class mail at
least 30 but not more than 60 days before the redemption date to each Holder of
Securities to be redeemed at its registered address. If any Security is to be
redeemed in part only, the notice of redemption that relates to such security
shall state the portion of the principal amount thereof will be issued in the
name of the Holder thereof upon cancellation of the original security. On and
after the redemption date, interest ceases to accrue on the securities or
portions of them called for redemption.
CERTAIN COVENANTS
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES. The
Indenture provides that the Company shall not, and shall not permit any of its
Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any encumbrance or restriction on the ability of any
Subsidiary to (a) pay dividends or make any other distributions to the Company
or any of its Subsidiaries on its Capital Stock or with respect to any other
interest or participation in, or measured by, its profits or pay any
Indebtedness owed to the Company or any of its Subsidiaries, (b)
48
make loans or advances to the Company or any of its Subsidiaries or (c) transfer
any of its properties or assets to the Company or any of its Subsidiaries, in
each case, except for such encumbrances or restrictions existing under or by
reasons of (i) Existing Indebtedness as in effect on the date hereof, (ii)
Indebtedness permitted to be incurred pursuant to clause (a) of the second
paragraph of Section 4.09 of the Indenture, (iii) the Indenture, (iv) applicable
law, (v) any instrument governing Indebtedness or Capital Stock of a Person
acquired by the Company or any of its Subsidiaries as in effect at the time of
such acquisition (except to the extent such Indebtedness was incurred in
connection with or in anticipation of such acquisition), which encumbrance or
restriction is not applicable to any Person, or the properties or assets of any
Person, other than the Person, or the property or assets of the Person, so
acquired, (vi) by reason of non-assignment provisions in leases entered into in
the ordinary course of business and consistent with past practices, (vii) with
respect to clause (c) above, purchase money obligations for property acquired in
the ordinary course of business or (viii) permitted Refinancing Indebtedness (as
defined below), PROVIDED that the restrictions contained in the agreements
governing such Refinancing Indebtedness are no more restrictive than those
contained in the agreements governing the Indebtedness being refinanced.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK. The Indenture
provides that the Company shall not, and shall not permit any of its
Subsidiaries to, directly or indirectly, create, incur, issue, assume, guaranty
or otherwise become directly or indirectly liable with respect to (collectively,
"incur") any Indebtedness (including Acquired Debt), and the Company shall not
issue any Disqualified Stock and shall not permit any of its Subsidiaries to
issue any shares of preferred stock; PROVIDED, HOWEVER, that the Company may
incur Indebtedness if (i) the Fixed Charge Coverage Ratio for the Company's most
recently ended four full fiscal quarters for which internal financial statements
are available immediately preceding the date on which such additional
Indebtedness is incurred would have been at least (a) 2.25 to 1, if such date is
prior to August 15, 1995 and (b) 2.50 to 1 thereafter, in each case determined
on a pro forma basis (including a pro forma application of the net proceeds
therefrom) as if the additional Indebtedness had been incurred at the beginning
of such four-quarter period and (ii) such Indebtedness is pari passu with or
subordinated in right of payment to the Securities and has a Weighted Average
Life to Maturity that is greater than the remaining Weighted Average Life to
Maturity of the Securities.
The foregoing limitations will not apply to (a) the incurrence by the
Company or any of its Subsidiaries of revolving credit Indebtedness and letters
of credit, and any extension, refinancing, renewal, replacement or refunding
thereof, in an aggregate principal amount at any one time outstanding not to
exceed $25 million, less the amount of Net Proceeds of Asset Sales that have
been applied to permanently reduce borrowings and commitments under any such
facility, PROVIDED that the proceeds of such Indebtedness are not used for
acquisitions or other expenditures not in the ordinary course of business, (b)
the incurrence by the Company or any of its Subsidiaries of the Existing
Indebtedness, (c) the incurrence by the Company and its Subsidiaries of
Indebtedness represented by the Securities and the Senior Securities, (d) the
incurrence by the Company or any of its Subsidiaries of Indebtedness issued in
exchange for, or the proceeds of which are used to extend, refinance, renew,
replace, refund or defease, Indebtedness incurred pursuant to the immediately
preceding paragraph or pursuant to clause (b), (c) or (g) of this paragraph
("Refinancing Indebtedness"); PROVIDED, HOWEVER, that (1) the principal amount
of such Refinancing Indebtedness shall not exceed the principal amount of
Indebtedness so extended, refinanced, renewed, replaced, substituted, refunded
or defeased, (2) the Refinancing Indebtedness shall have a Weighted Average Life
to Maturity equal to or greater than either (x) the remaining Weighted Average
Life to Maturity of the Indebtedness being extended, refinanced, renewed,
replaced, refunded or defeased or (y) the remaining Weighted Average Life to
Maturity of the Securities and (3) if applicable, the Refinancing Indebtedness
shall be subordinated in right of payment to the Securities on terms at least as
favorable to the Holders of Securities as those contained in the documentation
governing the Indebtedness being extended, refinanced, renewed, replaced,
refunded or defeased (a "Permitted Refinancing"), (e) intercompany Indebtedness
between or among the Company and any of its Wholly Owned Subsidiaries that are
Subsidiary Guarantors, (f) the incurrence by the Company of Hedging Obligations
to protect the Company against interest rate risk with respect to variable rate
Indebtedness permitted to be incurred by the Indenture, (g) additional
Indebtedness in an aggregate principal amount not to exceed $10 million at any
one time outstanding, (h) Capital Lease Obligations in an aggregate principal
amount not to exceed $2 million at any one time outstanding, (i) purchase money
Indebtedness in an aggregate principal amount not to exceed $2 million at any
one time outstanding, (j) the incurrence of Indebtedness pursuant to the
Registration Rights Agreement as in effect on the date of the Indenture and (k)
the incurrence by the Company and its Subsidiaries of Hedging Obligations with
respect to long-term Indebtedness of an Accounts Receivable Subsidiary.
49
ASSET SALES. The Indenture provides that the Company shall not, and shall
not permit any of its Subsidiaries to:
(i) sell, lease, convey or otherwise dispose of any assets
(including by way of a sale-and-leaseback) other than (A) in
the ordinary course of business, (B) contributions,
dispositions or other transfers of accounts receivable to an
Accounts Receivable Subsidiary that is wholly owned,
directly or indirectly, by the Company in exchange for
Equity Interests in such Accounts Receivable Subsidiary or
sales of accounts receivable to an Accounts Receivable
Subsidiary for cash and promissory Securities, in each case
for consideration having a value at least equal to 95% of
the book value thereof as determined in accordance with GAAP
and (C) sales of assets securing Indebtedness permitted to
be incurred pursuant to clause (a) of the second paragraph
of Section 4.09 of the Indenture if the Lien on such assets
is permitted by clause (a) of the definition of Permitted
Liens and the net proceeds from the sale of such assets are
applied to permanently reduce commitments and borrowings
under such Indebtedness, or
(ii) issue or sell equity securities of any of its Subsidiaries,
in each case, whether in a single transaction or a series of related
transactions, (a) that have a fair market value in excess of $3 million or (b)
for net proceeds in excess of $3 million (each of the foregoing, an "Asset
Sale"), unless (x) the Company (or the Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the fair market
value (evidenced by a resolution of the Board of Directors set forth in an
Officers' Certificate delivered to the Trustee) of the assets sold or otherwise
disposed of and (y) at least 80% of the consideration received therefor by the
Company or such Subsidiary is in the form of cash; PROVIDED, HOWEVER, that, for
purposes of this clause (y), the amount of (A) any liabilities (as shown on the
Company's or such Subsidiary's most recent balance sheet or in the Securities
thereto), of the Company or any Subsidiary (other than liabilities that are by
their terms subordinated to the Securities) that are assumed by the transferee
of any such assets and (B) any Securities or other obligations received by the
Company or any such Subsidiary from such transferee that are immediately
converted by the Company or such Subsidiary into cash (to the extent of the cash
received), shall be deemed to be cash for purposes of this provision.
Within 180 days after any Asset Sale, the Company (or such Subsidiary) may
(a) irrevocably commit to apply the Net Proceeds from such Asset Sale to an
Investment in another business, capital expenditures or other long-term assets,
in each case, in accordance with Section 4.16 of the Indenture, (b) permanently
reduce long-term Senior Debt (including by way of an Asset Sale Offer of Senior
Securities), (c) permanently reduce borrowings and commitments under
Indebtedness permitted to be incurred pursuant to clause (a) of the second
paragraph of Section 4.09 of the Indenture, PROVIDED that any Net Proceeds that
are committed to be used pursuant to this sentence are so used within 360 days
after such Asset Sale or (d) offer to redeem and redeem 11% Notes in accordance
with the 11% Notes Indenture. Pending the final application of any such Net
Proceeds, the Company (or such Subsidiary) may temporarily reduce Senior Debt or
otherwise invest such Net Proceeds in any manner that is not prohibited by the
Indenture. Any Net Proceeds from such Asset Sale that are not finally applied or
invested as provided in the first sentence of this paragraph or that remain
following consummation of the offer to redeem contemplated by the 11% Notes
Indenture will be deemed to constitute "Excess Proceeds." Within five days of
each date on which the aggregate amount of Excess Proceeds exceeds $5 million,
the Company shall commence an Asset Sale Offer pursuant to purchase the maximum
principal amount of Securities that may be purchased out of the Excess Proceeds
at an offer price in cash in an amount equal to 100% of the principal amount
thereof plus accrued and unpaid interest, if any, to the date fixed for the
closing of such offer in accordance with the procedures set forth in the
Indenture. To the extent that the aggregate amount of Securities tendered
pursuant to an Asset Sale Offer is less than the Excess Proceeds, the Company
(or such Subsidiary) may use such deficiency for general corporate purposes.
Upon completion of such offer to purchase, the amount of Excess Proceeds will be
deemed to be reset at zero.
LIENS. The Indenture provides that the Company shall not, and shall not
permit any of its Subsidiaries to, directly or indirectly create, incur, assume
or suffer to exist any Lien on any asset now owned or hereafter acquired, or any
income or profits therefrom or assign or convey any right to receive income
therefrom, except Permitted Liens, unless the Securities are equally and ratably
secured thereby.
50
LINE OF BUSINESS. The Indenture provides that the Company shall not, and
shall not permit any of its Subsidiaries to, engage in any business other than
those businesses in which the Company and its Subsidiaries are engaged on the
date hereof and other businesses directly related thereto (it being understood
that the Company and its Subsidiaries may engage in retailing activities).
TRANSACTIONS WITH AFFILIATES. The Indenture provides that the Company shall
not, and shall not permit any of its Subsidiaries to, sell, lease, transfer or
otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into any contract, agreement, understanding,
loan, advance or Guarantee with, or for the benefit of, any Affiliate (including
any Accounts Receivable Subsidiary) (each of the foregoing, an "Affiliate
Transaction"), unless (a) such Affiliate Transaction is on terms that are no
less favorable to the Company or the relevant Subsidiary than those that would
have been obtained in a comparable transaction by the Company or such Subsidiary
with an unrelated Person and (b) the Company delivers to the Trustee (i) with
respect to any Affiliate Transaction involving aggregate consideration in excess
of $1 million, a resolution of the Board of Directors set forth in an Officers'
Certificate certifying that such Affiliate Transaction complies with clause (a)
above and such Affiliate Transaction is approved by a majority of the Board of
Directors and (ii) with respect to any Affiliate Transaction involving aggregate
consideration in excess of $2 million (other than a contribution, disposition or
other transfer of accounts receivable to an Accounts Receivable Subsidiary in
accordance with Section 4.10 of the Indenture), an opinion as to the fairness to
the Company or such Subsidiary from a financial point of view issued by an
investment banking firm of national standing; PROVIDED, HOWEVER, that (i) any
employment agreement entered into by the Company or any of its Subsidiaries in
the ordinary course of business of the Company or such Subsidiary, (ii)
transactions between or among the Company and/or its Wholly Owned Subsidiaries,
(iii) transactions permitted under Section 4.07 of the 11% Securities Indenture
and (iv) payments to Bain for services rendered in an aggregate amount not to
exceed $1 million in any fiscal year, plus reasonable out-of-pocket expenses,
shall not be deemed Affiliate Transactions.
SENIOR SUBORDINATED DEBT. The Indenture provides that the Company shall not
incur, create, issue, assume, guarantee or otherwise become directly or
indirectly liable with respect to any Indebtedness that is subordinated or
junior in right of payment to any Senior Debt of the Company and senior in any
respect in right of payment to the Securities.
MERGER, CONSOLIDATION, OR SALE OF ASSETS. The Indenture provides that the
Company shall not consolidate or merge with or into (whether or not the Company
is the surviving corporation) or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of its properties or assets in one
or more related transactions to, another corporation or Person unless (i) the
Company is the surviving corporation or the Person formed by or surviving any
such consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United States,
any state thereof or the District of Columbia, (ii) the Person formed by or
surviving any such consolidation or merger (if other than the Company) or the
Person to which such sale, assignment, transfer, lease, conveyance or other
disposition shall have been made assumes all the obligations of the Company
pursuant to a supplemental indenture, in a form reasonably satisfactory to the
Trustee, under the Securities and the Indenture, (iii) immediately after such
transaction, no Default or Event of Default exists and (iv) the Company or any
Person formed by or surviving any such consolidation or merger, or to which such
sale, assignment, transfer, lease, conveyance or other disposition shall have
been made (A) shall have Consolidated Net Worth (immediately after the
transaction) equal to or greater than the Consolidated Net Worth of the Company
immediately preceding the transaction and (B) shall, at the time of such
transaction after giving pro forma effect thereto as if such transaction had
occurred at the beginning of the applicable four-quarter period, be permitted to
incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge
Coverage Ratio test set forth in clause (a) of the first paragraph of Section
4.09 of the Indenture.
Notwithstanding anything else contained in the Indenture to the contrary,
the Company is entitled to merge with a Wholly Owned Subsidiary of the Company,
PROVIDED that if the Company is not the surviving entity of such transaction,
the surviving entity shall comply with clause (ii) of the immediately preceding
paragraph.
ACCOUNTS RECEIVABLE SUBSIDIARIES. The Company (a) shall not permit any
Accounts Receivable Subsidiary to sell any accounts receivable purchased from
the Company or any of its Subsidiaries or participation interests therein to any
other Person except on an arms-length basis and solely for consideration in the
form of cash, Cash Equivalents or
51
Indebtedness of or other interests in a Master Trust, PROVIDED that such
Accounts Receivable Subsidiary may not sell such Indebtedness or other interests
to any other Person except on an arms-length basis and solely for consideration
in the form of cash or Cash Equivalents, (b) shall not permit any Accounts
Receivable Subsidiary to incur Indebtedness in an amount in excess of the book
value of such Accounts Receivable Subsidiary's total assets, as determined in
accordance with GAAP, and (c) shall not, and shall not permit any of its
Subsidiaries to, sell accounts receivable to an Accounts Receivable Subsidiary
if (i) such Accounts Receivable Subsidiary, pursuant to or within the meaning of
Bankruptcy Law, (A) commences a voluntary case, (B) consents to the entry of an
order for relief against it in an involuntary case, (C) consents to the
appointment of a Custodian of it or for all or substantially all of its property
or (D) makes a general assignment for the benefit of its creditors or (ii) a
court of competent jurisdiction enters an order or decree under any Bankruptcy
Law that (A) is for relief against such Accounts Receivable Subsidiary, (B)
appoints a Custodian of such Accounts Receivable Subsidiary or for all or
substantially all of the property of such Accounts Receivable Subsidiary or (C)
orders the liquidation of such Accounts Receivable Subsidiary.
REPORTS. (a) Whether or not required by the rules and regulations of the
Commission, so long as any Securities are outstanding, the Company shall furnish
to all Holders all quarterly and annual financial information that would be
required to be contained in a filing with the Commission on Forms 10-Q and 10-K
if the Company were required to file such forms, including a "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and,
with respect to the annual information only, a report thereon by the Company's
certified independent accountants. Whether or not required by the rules and
regulations of the Commission, the Company shall file a copy of all such
information with the Commission for public availability and shall promptly make
such information available to all investors who request it in writing.
EVENTS OF DEFAULTS AND REMEDIES
Events of Default include: (i) default for 30 days in the payment when due
of interest on the Securities; (ii) default in the payment when due of principal
of or premium, if any, on the Securities when the same becomes due and payable
at maturity, upon redemption (including in connection with an offer to purchase)
or otherwise, (iii) failure by the Company to comply with Section 4.09, 4.10 or
5.01 of the Indenture, which failure remains uncured for 30 days; (iv) failure
by the Company for 60 days after notice to the Company by the Trustee or the
Holders of at least 25% in aggregate principal amount of the Securities then
outstanding to comply with certain other agreements in the Indenture or the
Securities; (v) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Company or any of its Subsidiaries (or
the payment of which is guaranteed by the Company or any of its Subsidiaries),
whether such Indebtedness or Guarantee now exists or is created after the date
of the Indenture, which default (a) is caused by a Payment Default or (b) has
resulted in the acceleration of such Indebtedness prior to its express maturity
and, in each case, the principal amount of such Indebtedness, together with the
principal amount of any other such Indebtedness under which there has been a
Payment Default or the maturity of which has been so accelerated, aggregates $5
million or more; (vi) a final judgment or final judgments for the payment of
money are entered by a court or courts of competent jurisdiction against the
Company or any of its Material Subsidiaries and such judgment or judgments
remain undischarged for a period (during which execution shall not be
effectively stayed) of 60 days, PROVIDED that the aggregate of all such
undischarged judgments exceeds $5 million; (vii) certain events of bankruptcy or
insolvency with respect to the Company pursuant to Section 6.01 of the
Indenture. If any Event of Default occurs and is continuing, the Trustee or the
Holders of least 25% in principal amount of the then outstanding Securities may
declare all the Securities to be due and payable immediately; PROVIDED, that so
long as any Indebtedness permitted to be incurred pursuant to clause (a) of the
second paragraph of Section 4.09 of the Indenture shall be outstanding, such
acceleration shall not be effective until the earlier of (i) an acceleration
under any such Indebtedness or (ii) five business days after receipt by the
Company of written notice of such acceleration of the Securities.
Notwithstanding the foregoing, in the case of an Event of Default arising from
certain events of bankruptcy or insolvency with respect to the Company, any
Significant Subsidiary or any group of Material Subsidiaries that, taken as a
whole, would constitute a Significant Subsidiary, all outstanding Securities
will become due and payable without further action or notice. In the case of any
Event of Default occurring by reason of any willful action (or inaction) taken
(or not taken) by or on behalf of the Company with the intention of avoiding
payment of the premium that the Company would have had to pay if the Company
then had elected to redeem the Securities pursuant to the optional redemption
provisions of the Indenture, an equivalent premium shall also become and
52
immediately due and payable to the extent permitted by law. If an Event of
Default occurs prior to August 15, 1998 by reason of any wilful action (or
inaction) taken (or not taken) by or on behalf of the Company with the intention
of avoiding the prohibition on redemption of the Securities prior to such date,
then the premium specified in Section 6.02 of the Indenture shall also become
immediately due and payable to the extent permitted by law. Holders may not
enforce the Indenture or the Securities except as provided in the Indenture.
Subject to certain limitations, Holders of a majority in principal amount of the
then outstanding Securities may direct the Trustee in its exercise of any trust
or power. The Trustee may withhold from Holders of the Securities notice of any
continuing Default or Event of Default (except a Default or Event of Default
relating to the payment of principal or interest) if it determines that
withholding notice is in their interest. The Holders of a majority in aggregate
principal amount of the Securities then outstanding by notice to the Trustee may
on behalf of the Holders of all of the Securities waive any existing Default or
Event of Default and its consequences under the Indenture except a continuing
Default or Event of Default in the payment of the principal of, premium, if any,
or interest on, the Securities; PROVIDED, HOWEVER, that the Holders of a
majority in aggregate principal amount of the then outstanding Securities may
rescind an acceleration and its consequences, including any related payment
default that resulted from such acceleration. The Company is required to deliver
to the Trustee annually a statement regarding compliance with the Indenture, and
the Company is required upon becoming aware of any Default or Event of Default,
to deliver to the Trustee a statement specifying such Default or Event of
Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS.
No director, officer, employee, incorporator or stockholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Securities or the Indenture or for any claim based on, in respect of, or by
reason of, such obligations or their creation. Each Holder by accepting a
Security waives and releases all such liability. The waiver and release are part
of the consideration for issuance of the Securities.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have its
obligations discharged with respect to the outstanding Securities ("Legal
Defeasance"). Such Legal Defeasance means that the Company shall be deemed to
have paid and discharged the entire Indebtedness represented by the outstanding
Securities, except for (i) the rights of Holders of such Securities to receive
payments in respect of the principal of, premium, if any, and interest on such
Securities when such payment are due, (ii) the Company's obligations with
respect to such Securities concerning issuing temporary Securities, registration
of Securities, mutilated, destroyed, lost or stolen Securities and the
maintenance of an office or agency for payment and money for security payments
held in trust, (iii) the rights, powers, trust, duties and immunities of the
applicable Trustee, and the Company's obligations in connection therewith and
(iv) the Legal Defeasance provisions of the Indenture. In addition, the Company
may, at its option and at any time, elect to have the obligations of the Company
released with respect to certain covenants that are described in the Indenture
("Covenant Defeasance") and thereafter any omission to comply with such
obligation shall not constitute a Default or Event of Default with respect to
the Securities. In the event Covenant Defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership, rehabilitation and insolvency
events) described under "Events of Default" will no longer constitute and Event
of Default with respect to the Securities.
In order to exercise either Legal Defeasance of Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Securities, cash in U.S. dollars, non-callable Government
Securities, 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 Securities on the
stated date for payment thereof or on the applicable redemption date, as the
case may be, of such principal or installment of principal, or premium, if any,
or interest on such Securities; (ii) in the case of Legal Defeasance, the
Company shall have delivered to the Trustee an opinion of counsel in the United
States reasonably acceptable to the Trustee confirming that (A) the Company has
received from, or there has been published, by the Internal Revenue Service a
ruling or (B) since the date of the Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that, and based
thereon such opinion of counsel shall confirm that, the Holders of such
Securities will not recognize income, gain or loss for federal income tax
purposes as a result of such Legal 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 Legal
53
Defeasance had not occurred; (iii) in the case of the Covenant Defeasance, the
Company shall have delivered to the applicable Trustee an opinion of counsel in
the United States reasonably acceptable to such Trustee confirming that the
Holders of such Securities will not recognize income, gain or loss for federal
income tax purposes as a result of such Covenant Defeasance and will be subject
to federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Covenant Defeasance had not occurred;
(iv) no Default or Event of Default shall have occurred and be continuing on the
date of such deposit (other than a Default or Event of Default with respect to
the Indenture resulting from the incurrence of Indebtedness, all or a portion of
which will be used to defease the Securities concurrently with such incurrence)
or insofar as Events of Default from bankruptcy or insolvency events are
concerned, at any time in the period ending on the 91st day after the date of
deposit; (v) such Legal Defeasance of Covenant Defeasance shall not result in a
breach or violation of, or constitute a default under the Indenture or any other
material agreement or instrument to which the Company or any of its Subsidiaries
is a party or by which the Company or any of its Subsidiaries is bound; (vi) the
Company shall have delivered to the Trustee an Officer's Certificate stating
that the deposit was not made by the Company with the intent of preferring the
Holders of such Securities over other creditors of the Company or with the
intent of defeating, hindering, delaying or defrauding any other creditors of
the Company or other; and (vii) the Company shall have delivered to the
applicable Trustee an Officers' Certificate and an opinion of counsel, each
stating that all conditions precedent provided for or relating to the Legal
Defeasance or the Covenant Defeasance have been complied with.
AMENDMENT, SUPPLEMENT AND WAIVER
Subject to certain exceptions, the Indenture or the Securities may be
amended or supplemented with the consent of the Holders of at least a majority
in principal amount of the then outstanding Securities, and any existing default
or compliance with any provision of the Indenture or the Securities may be
waived with the consent of the Holders of a majority in principal amount of the
then outstanding Securities. Without the consent of any Holder of a Security,
the Indenture or the Securities may be amended or supplemented to cure any
ambiguity, defect or inconsistency, to provide for uncertificated Securities in
addition to or in place of certificated Securities, to provide for the
assumption of the Company's obligations to Holders of the Securities in case of
a merger or consolidation, to make any change that would provide any additional
rights or benefits to the Holders of the Securities or that does not adversely
affect the legal rights under the Indenture of any such Holder, or to comply
with the requirements of the Commission in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act. In addition,
pursuant to Section 9.07 of the Indenture, certain amendments, supplements and
waivers will take effect automatically if the required percentage of the
Company's 11% Notes consent to such amendment, supplement or waiver.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Securities in accordance with the
Indenture. The Registrar and the Trustee may require a Holder, among other
things, to furnish appropriate endorsements and transfer documents and the
Company may require a Holder to pay any taxes and fees required by law or
permitted by the Indenture. The Company is not required to transfer or exchange
any Security selected for redemption. Furthermore, the Company is not required
to transfer or exchange any Security for a period of 15 days before a selection
of such Securities to be redeemed.
BOOK-ENTRY, DELIVERY AND FORM
The New Securities offered pursuant to the Exchange Offer will initially be
issued in the form of one global security for the New Securities (the "Global
Securities"). The Global Securities will be deposited on the date of the Closing
of the sale of the New Securities offered hereby (the "Closing Date") with, or
on behalf of, the Depositary and registered in the name of Cede & Co., as
nominee of the Depositary (such nominee being referred to herein as the "Global
Securities Holder").
The Depositary is limited-purpose trust company that was created to hold
securities for its participating organization (collectively, the "Participants"
or the "Depositary's Participant's") and to facilitate the clearance and
settlement of transactions in such securities between Participants through
electronic book-entry changes in the accounts of its Participants. The
Depositary's Participants include securities brokers and dealers (including the
Initial Purchaser), banks
54
and trust companies, clearing corporations and certain other organizations.
Access to the Depositary's system is also available to other entities such as
banks, brokers, dealers and trust companies (collectively, the "Indirect
Participants" or the "Depositary's Indirect Participants") that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly. Persons who are not Participants may beneficially own securities
held by or on behalf of the Depositary only through the Depositary's
Participants or the Depositary's Indirect Participants.
The Company expects that pursuant to procedures established by the
Depositary (i) upon deposit of the Global Securities, the Depositary will credit
the accounts of Participants designated by the Initial Purchaser with portions
of the principal amount of the Global Securities and (ii) ownership of the New
Securities will be shown on, and the transfer ownership thereof will be effected
only through, records maintained by the Depositary (with respect to the
interests of the Depositary's Participants), the Depositary's Participants and
the Depositary's Indirect Participants.
The laws of some states require that certain persons take physical delivery
in definitive form of securities that they own. Consequently, the ability to
transfer New Securities will be limited to such extent.
So long as the Global Securities Holder is the registered owner of any New
Securities, the Global Securities Holder will be considered the sole owner of
such New Securities under the Indenture. Except as provided below, owners of New
Securities will not be entitled to have New Securities registered in their
names, will not receive or be entitled to receive physical delivery of New
Securities in definitive form, and will not be considered the owners or Holders
thereof under the Indenture for any purpose, including with respect to the
giving of any directions, instructions or approvals to the Trustee thereunder.
As a result, the ability of a person having a beneficial interest in New
Securities represented by the Global Securities to pledge such interest to
persons or entities that do not participate in the Depositary's system or to
otherwise take actions in respect of such interest, may be affected by the lack
of a physical certificate evidencing such interest.
Neither the Company nor the Trustee will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of any New Securities by the Depositary, or for mailing, supervising or
reviewing any records of the Depositary relating to such New Securities.
Payments in respect of the principal of, premium, if any, and interest on
any New Security registered in the name of a Global Securities Holder on the
applicable record date will be payable by the Trustee to or at the direction of
such Global Securities Holder in its capacity as the registered holder under the
Indenture. Under the terms of the Indenture, the Company and the Trustee may
treat the persons in whose names the New Securities, including the Global
Securities, are registered as the owners thereof for the purpose of receiving
such payments and for any and all other purposes whatsoever. Consequently,
neither the Company nor the Trustee have or will have any responsibility or
liability for the payment of such amounts to beneficial owners of New Securities
(including principal, premium, if any, and interest), although the Company
understands that it is the Depositary's practice to immediately credit the
accounts of the relevant Participants with such payment, in accounts
proportionate to their respective holdings in principal amount of beneficial
interests in the relevant security as shown on the records of the Depositary.
Payments by the Depositary's Participants and the Depositary's Indirect
Participants to the beneficial owners of Securities will be governed by standing
instructions and customary practice and will be the responsibility of the
Depositary's Participants or the Depositary's Indirect Participants.
CERTIFICATE SECURITIES
If (i) the Company notifies the Trustee in writing that the Depositary is
no longer willing or able to act as a depositary and the Company is unable to
locate a qualified successor within 90 days or (ii) the Company, at its option,
notifies the Trustee in writing that it elects to cause the issuance of New
Securities in definitive form under the Indenture, then, upon surrender by the
relevant Global Securities, New Securities in such form will be issued to each
person that such Global Securities Holder and the Depositary identifies as the
beneficial owner of the related Securities. In addition, subject to certain
conditions, any person having a beneficial interest in the Global Securities
may, upon request to the Trustee, exchange such beneficial interest for New
Securities in definitive form. Upon any such issuance, such Trustee
55
is required to register such New Securities in the name of, and cause the same
to be delivered to, such person or persons (or the nominee of any thereof). Such
New Securities would be issued in fully registered form.
Neither the Company nor the Trustee shall be liable for any delay by the
related Global Securities Holder or the Depositary in identifying the beneficial
owners or the related New Securities and each such person may conclusively rely
on, and shall be protected in relying on, instructions from such Global
Securities Holder or of the Depositary for all purposes (including with respect
to the registration and delivery, and the respective principal amounts, of the
Securities to be issued).
SAME-DAY SETTLEMENT AND PAYMENT
The Indenture requires that payments in respect of the New Securities
(including principal, premium, if any, and interest) be made in immediately
available funds. Secondary trading in long-term notes and debentures of
corporate issuers is generally settled in clearing-house or next-day funds. In
contrast, the New Securities are expected to be eligible to trade in the PORTAL
Market and to trade in the Depositary's Same-Day Funds Settlement System, and
any permitted secondary market trading activity in the New Securities will
therefore be required by the Depositary to be settled in immediately available
funds. No assurance can be given as to the effect, if any, of such settlement
arrangement on trading activity in the New Securities.
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
Pursuant to the Registration Rights Agreement, the Company agreed to file
with the Commission promptly after the Closing Date the Registration Statement
of which this Prospectus is a part under the Securities Act with respect to the
New Securities. Upon the effectiveness of the Registration Statement, the
Company will offer to the Holders of Transfer Restricted Securities who are able
to make certain representations the opportunity to exchange their Transfer
Restricted Securities for New Securities. If any Holder of Transfer Restricted
Securities (other than an "affiliate" of the Company, as defined in Rule 144
under the Securities Act) notifies the Company that it is prohibited by law or
commission policy from participating in the Exchange Offer, it may not resell
the New Securities acquired by it in the Exchange Offer to the public without
delivering a Prospectus and the prospectus contained in the Registration
Statement is not appropriate or available for such resales by such holder, or it
is a broker-dealer and holds Securities acquired directly from the Company or
one of its affiliates, the Company will file with the Commission a shelf
registration statement (the "Shelf Registration Statement") to cover resales of
Transfer Restricted Securities by Holders thereof who satisfy certain conditions
relating to the provision of information in connection with the Shelf
Registration Statement. The Company will use its best efforts to cause the
Registration Statement to be declared effective by the Commission as promptly as
practicable after the date of filing. For purposes of the foregoing, "Transfer
Restricted Securities" means each Old Security until (i) the date on which such
Old Security has been exchanged for a New Security in the Exchange Offer and is
entitled to be resold to the public by the holder thereof without complying with
the prospectus delivery requirement of the Securities Act, (ii) the date on
which such Old Security has been effectively registered under the Securities Act
and disposed of in accordance with the Shelf Registration Statement or (iii) the
date on which such Old Security is distributed to the public pursuant to Rule
144 under the Securities Act or by a broker-dealer pursuant to the plan of
distribution contemplated by the Registration Statement (including delivery of
the Prospectus contained therein).
The Registration Rights Agreement provides that (i) the Company and will
file a Registration Statement with the Commission on or prior to 30 days after
the Closing Date, (ii) the Company will use its best efforts to have such
Registration Statement declared effective by the Commission on or prior to 90
days after the Closing Date, and (iii) unless the Exchange Offer would not then
be permitted by a policy of the commission, the Company shall have commenced the
Exchange Offer and shall 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 (the "Effectiveness Date"), New Securities in
exchange for all Old Securities tendered prior thereto in the Exchange Offer. If
(i) the Registration Statement is not filed with the Commission on or prior to
30 days after the Closing Date, (ii) the Registration Statement has not been
declared effective by the Commission within 90 days after the Closing Date or
the Shelf Registration Statement (if required) is not declared effective within
30 business days after consummation of the Exchange Offer, (iii) the Exchange
Offer has not been consummated within 30 business days after the Effectiveness
Date (unless the Exchange Offer is
56
contrary to established Commission policy) or (iv) the Shelf Registration
Statement is filed and declared effective but shall thereafter cease to be
effective without being succeeded within eight business days thereafter by any
additional Registration Statement filed and declared effective (each such event
referred to in clauses (i) through (iv), a "Registration Default"), the Company
will pay liquidated damages to each Holder of Transfer Restricted Securities,
during the first 90-day period immediately following the occurrence of such
Registration Default in an amount equal to $.05 per week per $1,000 principal
amount of Old Securities constituting Transfer Restricted Securities held by
such Holder. The amount of the liquidated damages will increase by an additional
$.05 per week per $1,000 principal amount of Transfer Restricted Securities for
each subsequent 90-day period until the Registration Statement is declared
effective, the Exchange Offer is consummated or the Shelf Registration Statement
again becomes effective, as the case may be, up to a maximum amount of
liquidated damages of $.30 per week per $1,000 principal amount of Old
Securities constituting Transfer Restricted Securities. All accrued liquidated
damages shall be paid to Holder by wire transfer immediately available funds or
by federal funds check by the Company on each Damages Payment Date (as defined
in the Registration Rights Agreement). Following the cure of a Registration
Defaults, the payment of liquidated damages will cease.
Holders of Old Securities will be required to make certain representations
to the Company (as described in the Registration Rights Agreement) in order to
participate in the Exchange Offer and will be required to deliver information to
be used in connection with the Shelf Registration Statement in order to have
their Securities included in the Shelf Registration Statement and benefit from
the provisions regarding liquidated damages set forth in the preceding sentence.
In addition, for so long as the Old Securities are outstanding, the Company will
continue to provide to holders of Old Securities and to prospective purchasers
of the Old Securities the information required by Rule 144A(d)(4). The Company
will provide a copy of the Registration Rights Agreement to prospective
investors upon request.
CONCERNING THE TRUSTEE
The Indenture contains limitations on the rights of the Trustee, should the
Trustee become a creditor of the Company, to obtain payment of claims in certain
cases, or to realize on certain property received in respect of any such claim
as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if the Trustee acquires any conflicting interest it must
eliminate such conflict within 90 days, apply to the Commission for permission
to continue or resign.
The Holders of a majority in principal amount of the then outstanding
Securities will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Trustee,
subject to certain exceptions. The Indenture provide that in case an Event of
Default shall occur (which shall not be cured), the Trustee will be required, in
the exercise of its power, to use the degree of care of a prudent man in the
conduct of his affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request of any Holder of Securities, unless such Holder shall have offered to
the Trustee security and indemnity satisfactory to it against any loss,
liability or expense.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture
without charge by writing to the Company at 10201 Main Street, Houston, Texas
77025, Attention: Corporate Secretary.
CERTAIN DEFINITIONS.
"ACCOUNTS RECEIVABLE SUBSIDIARY" means a Wholly Owned Subsidiary of the
Company or a Subsidiary of such Wholly Owned Subsidiary, in each case which
engages in no activities other than in connection with the financing of accounts
receivable and which is designated by the Board of Directors of the Company as
an Accounts Receivable Subsidiary pursuant to a board resolution set forth in an
Officers' Certificate and delivered to the Trustee, (a) no portion of the
Indebtedness or any other obligations (contingent or otherwise) of which (i) is
guaranteed by the Company or any other Subsidiary of the Company, (ii) is
recourse to or obligates the Company or any other Subsidiary of the Company in
any way, other than pursuant to representations and covenants entered into in
the ordinary course of business in connection with sales of accounts receivable
or (iii) subjects any property or asset of the Company or any other
57
Subsidiary of the Company, directly or indirectly, contingently or otherwise, to
the satisfaction thereof, other than pursuant to representations and covenants
entered into in the ordinary course of business in connection with sales of
accounts receivable, (b) with which neither the Company nor any other Subsidiary
of the Company has any contract, agreement, arrangement or understanding other
than on terms no less favorable to the Company or such other Subsidiary than
those that might be obtained at the time from Persons who are not Affiliates of
the Company, other than sales of accounts receivable in accordance with Section
4.10 of the Indenture and fees payable in the ordinary course of business in
connection with servicing accounts receivable and (c) with which neither the
Company nor any other Subsidiary of the Company has any obligation (i) to
subscribe for additional shares of Capital Stock or other Equity Interests
therein or (ii) to maintain or preserve such Subsidiary's financial condition or
to cause such Subsidiary to achieve certain levels of operating results.
"ACQUIRED DEBT" means, with respect to any specified Person, Indebtedness
of any other Person existing at the time such other Person merged with or into
or became a Subsidiary of such specified Person, including Indebtedness incurred
in connection with, or in contemplation of, such other Person merging with or
into or becoming a Subsidiary of such specified Person.
"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; PROVIDED, HOWEVER,
that beneficial ownership of 10% or more of the voting securities of a Person
shall be deemed to be control.
"AGENT" means any Registrar, Paying Agent or co-Registrar.
"BAIN" means Bain Capital, a California limited partnership, and/or Bain
Capital, Inc., a Delaware corporation.
"BANKRUPTCY LAW" means title 11, U.S. Code or any similar federal or state
law for the relief of debtors.
"BOARD OF DIRECTORS" means the Board of Directors of the Company, or any
authorized committee of such Board of Directors.
"BUSINESS DAY" means any day other than a Legal Holiday.
"CAPITAL LEASE OBLIGATION" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on the balance sheet in accordance
with GAAP.
"CAPITAL STOCK" means any and all shares, interests, participations, rights
or other equivalents (however designated) of corporate stock, including, without
limitation, partnership interests.
"CASH EQUIVALENTS" means (i) cash, (ii) securities issued or directly and
fully guaranteed or insured by the United States Government or any agency or
instrumentality thereof having maturities of not more than six months from the
date of acquisition, (iii) certificates of deposit and Eurodollar time deposits
with maturities of six months or less from the date of acquisition, bankers'
acceptances with maturities not exceeding six months and overnight bank
deposits, in each case with any domestic commercial bank having capital and
surplus in excess of $500,000,000, (iv) repurchase obligations with a term of
not more than seven days for underlying securities of the types described in
clauses (ii) and (iii) entered into with any financial institution meeting the
qualifications specified in clause (iii) above and (v) commercial paper rated
P-1 or the equivalent thereof by Moody's Investors Service, Inc. or A-1 or the
equivalent thereof by Standard & Poor's Corporation and, in each case, maturing
within six months after the date of acquisition.
58
"CONSOLIDATED CASH FLOW" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus, to the extent
deducted in computing Consolidated Net Income, (a) an amount equal to any
extraordinary loss plus any net loss realized in connection with an Asset Sale,
(b) provision for taxes based on income or profits, (c) consolidated interest
expense of such Person for such period, whether paid or accrued (including
amortization of original issue discount, non-cash interest payments and the
interest component of Capital Lease Obligations), (d) the amount of depreciation
and amortization (including amortization of goodwill and other intangibles) of
such Person for such period and (e) the amount of other non-cash charges not in
the ordinary course of business with respect to which there is no corresponding
future cash payment prior to August 15, 2003.
"CONSOLIDATED NET INCOME" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Subsidiaries for such
period, on a consolidated basis, determined in accordance with GAAP; PROVIDED,
that (i) the Net Income of any Person that is not a Subsidiary or that is
accounted for by the equity method of accounting shall be included only to the
extent of the amount of dividends or distributions paid to the referent Person
or a Wholly Owned Subsidiary that is a Subsidiary Guarantor, (ii) the Net Income
of any Person that is a Subsidiary shall be included only to the extent (a) of
the amount of dividends or distributions paid to the referent Person or a Wholly
Owned Subsidiary that is a Subsidiary Guarantor or (b) that the declaration or
payment of dividends or similar distributions by such Subsidiary of such Net
Income is at the date of determination permitted without any prior governmental
approval (which has not been obtained) or, directly or indirectly, by operation
of the terms of its charter or any agreement, instrument, judgment, decree,
order, statute, rule or governmental regulation applicable to such Subsidiary or
its stockholders, (iii) the Net Income of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition shall
be excluded and (iv) the cumulative effect (net of taxes) of a change in
accounting principles shall be excluded.
"CONSOLIDATED NET WORTH" means, with respect to any Person, the sum of (i)
the consolidated equity of the common stockholders of such Person and its
consolidated Subsidiaries plus (ii) the respective amounts reported on such
Person's most recent balance sheet with respect to any series of preferred stock
(other than Disqualified Stock) that by its terms is not entitled to the payment
of dividends unless such dividends may be declared and paid only out of net
earnings in respect of the year of such declaration and payment, but only to the
extent of any cash received by such Person upon issuance of such preferred
stock, less (x) all write-ups (other than write-ups resulting from foreign
currency translations and write-ups of tangible assets of a going concern
business made within 12 months after the acquisition of such business)
subsequent to the date hereof in the book value of any asset owned by such
Person or a consolidated Subsidiary of such Person, (y) all Investments in
unconsolidated Subsidiaries and in Persons that are not Subsidiaries (except, in
each case, Permitted Investments), and (z) all unamortized debt discount and
expense and unamortized deferred charges, all of the foregoing determined in
accordance with GAAP.
"CONTINUING DIRECTORS" means, as of any date of determination, any member
of the Board of Directors of ARI who (i) was a member of such Board of Directors
on the date of the Indenture or (ii) was nominated for election or elected to
such Board of Directors with the affirmative vote of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election.
"CORPORATE TRUST OFFICE OF THE TRUSTEE" shall be at the address of the
Trustee specified in Section 11.02 of the Indenture or such other address as to
which the Trustee may give notice to the Company.
"CUSTODIAN" means any receiver, trustee, assignee, liquidator or similar
official under any Bankruptcy Law.
"DEFAULT" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"DEPOSITORY" means, with respect to the Securities issuable or issued in
whole or in part in global form, the Person specified in Section 2.03 of the
Indenture as the Depository with respect to the Securities, until a successor
shall have been appointed and become such pursuant to the applicable provision
of the Indenture, and, thereafter, "Depository" shall mean or include such
successor.
59
"DESIGNATED SENIOR DEBT" means (i) obligations of the Company under the
Senior Notes and the Senior Note Indenture and (ii) any other Senior Debt
permitted hereunder the principle amount of which is $25 million or more that
has been designated by the Company as Designated Senior Debt.
"DISQUALIFIED STOCK" means any Capital Stock which, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at
the option of the holder thereof, in whole or in part, on or prior to August 15,
2003.
"11% NOTES" means the Company's 11% Series A Senior Subordinated Notes due
2003 and 11% Series B Senior Subordinated Notes due 2003, issued pursuant to the
11% Notes Indenture.
"11% NOTES INDENTURE" means that certain indenture, dated as of August 2,
1993, among the Company, Palais Royal, Inc., a Texas Corporation, and The First
National Bank of Boston, a national banking association, as trustee, as amended
or supplemented from time to time, relating to the 11% Notes.
"EQUITY INTERESTS" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXISTING INDEBTEDNESS" means Indebtedness of the Company and its
Subsidiaries in existence on the date of the Indenture, until such amounts are
repaid.
"FIXED CHARGE COVERAGE RATIO" means, with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such period
to the Fixed Charges of such Person for such period. In the event that the
Company or any of its Subsidiaries incurs or redeems any Indebtedness (other
than revolving credit borrowings) or issues or redeems preferred stock or
consummates an Asset Sale or acquires any assets subsequent to the commencement
of the period for which the Fixed Charge Coverage Ratio is being calculated but
prior to the event for which the calculation of the Fixed Charge Coverage Ratio
is made, then the Fixed Charge Coverage Ratio shall be calculated giving pro
forma effect to such incurrence, guarantee or redemption of Indebtedness, or
such issuance or redemption of preferred stock, or the consummation of such
Asset Sale or the acquisition of such assets, as if the same had occurred at the
beginning of the applicable four-quarter period (including, in each case, any
Consolidated Cash Flow related thereto).
"FIXED CHARGES" means, with respect to any Person for any period, the sum
of (a) consolidated interest expense (net of interest income generated from cash
and Cash Equivalents) of such Person for such period, whether paid or accrued,
to the extent such expense was deducted in computing Consolidated Net Income
(including amortization of original issue discount, non-cash interest payments
and the interest component of Capital Lease Obligations but excluding
amortization of deferred financing fees), (b) the interest expense of any other
Person for such period with respect to Indebtedness that is guaranteed by the
referent Person or any of its Subsidiaries and (c) the product of (i) all cash
dividend payments (and non-cash dividend payments in the case of a Person that
is a Subsidiary) (other than dividend payments to the Company or any Wholly
Owned Subsidiary of the Company that is a Subsidiary Guarantor on any series of
preferred stock of such Person, times (ii) a fraction, the numerator of which is
one and the denominator of which is one minus the then current combined federal,
state and local statutory tax rate of such Person, expressed as a decimal, in
each case, determined on a consolidated basis in accordance with GAAP.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the Indenture.
"GOVERNMENT SECURITIES" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States is pledged.
60
"GUARANTEE" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"HEDGING OBLIGATIONS" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates.
"HOLDER" means a Person in whose name a Security is registered.
"INDEBTEDNESS" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, Securities, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or representing the balance
deferred and unpaid of the purchase price of any property (including pursuant to
capital leases) or representing any Hedging Obligations, except any such balance
that constitutes an accrued expense or trade payable, if and to the extent any
of the foregoing indebtedness (other than letters of credit and Hedging
Obligations) would appear as a liability upon a balance sheet of such Person
prepared in accordance with GAAP, and also includes, to the extent not otherwise
included, the Guarantee of items that would be included within this definition.
"INVESTMENTS" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of loans (including
Guarantees), advances or capital contributions (excluding commission, travel and
similar advances to officers and employees made in the ordinary course of
business), purchases or other acquisitions for consideration of Indebtedness,
Equity Interests or other securities and all other items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
"LEGAL HOLIDAY" means a Saturday, a Sunday or a day on which banking
institutions in the City of New York or at a place of payment are authorized by
law, regulation or executive order to remain closed. If a payment date is a
Legal Holiday at a place of payment, payment may be made at that place on the
next succeeding day that is not a Legal Holiday, and no interest shall accrue
for the intervening period.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction);
PROVIDED, HOWEVER, that Liens shall not include any interest that the Company or
its Subsidiaries may retain in accounts receivable sold in accordance with
Section 4.10 of the Indenture.
"LIQUIDATED DAMAGES" means all liquidated damages then owing pursuant to
the Registration Rights Agreement.
"MASTER TRUST" means a trust organized for the purpose of securitizing the
accounts receivable held by an Accounts Receivable Subsidiary that does not
engage in any business other than (a) the purchase of accounts receivable or
participation interests therein, (b) the issuance and distribution of
indebtedness and other interests in such trust to (i) the Accounts Receivable
Subsidiary or (ii) to other parties for cash or Cash Equivalents on an
arms-length basis, (c) the servicing of accounts receivable and any indebtedness
or interests in such trust and (d) activities ancillary to the actions described
in clauses (a), (b) and (c).
"MATERIAL SUBSIDIARY" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such Regulation is in effect on the date of
the Indenture, substituting "5%" for all references in such definition to "10%."
"NET INCOME" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, any gain (but not
loss),
61
together with any related provision for taxes on such gain (but not
loss), realized in connection with any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions), and
excluding any extraordinary gain (but not loss), together with any related
provision for taxes on such extraordinary gain (but not loss).
"NET PROCEEDS" means the aggregate cash proceeds received by the Company or
any of its Subsidiaries in respect of any Asset Sale, net of the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, and sales commissions) and any relocation expenses
incurred as a result thereof, taxes paid or payable as a result thereof (after
taking into account any available tax credits or deductions and any tax sharing
arrangements), amounts required to be applied to the repayment of Indebtedness
secured by a Lien on the asset or assets the subject of such Asset Sale and any
reserve for adjustment in respect of the sale price of such asset or assets.
"NOTE CUSTODIAN" means the Trustee, as custodian with respect to the
Securities in global form, or any successor entity thereto.
"OBLIGATIONS" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"OFFERING CIRCULAR" means the offering circular dated July 19, 1995 and the
final offering circular dated July 20, 1995 relating to the offering of the
Securities.
"OFFICER" means, with respect to any Person, the Chairman of the Board, the
Chief Executive Officer, the President, the Chief Operating Officer, the Chief
Financial Officer, the Treasurer, any Assistant Treasurer, the Controller, the
Secretary or any Vice-President of such Person.
"PERMITTED INVESTMENTS" means (a) any Investments in the Company or in a
Wholly Owned Subsidiary of the Company; (b) any Investments in Cash Equivalents;
(c) Investments by the Company or any Subsidiary of the Company in a Person if,
as a result of such Investment (i) such Person becomes a Wholly Owned Subsidiary
of the Company or (ii) such Person is merged, consolidated or amalgamated with
or into, or transfers or conveys substantially all of its assets to, or is
liquidated into, the Company or a Wholly Owned Subsidiary of the Company; (d)
Investments in an Accounts Receivable Subsidiary received in consideration of
contributions or sales of accounts receivable permitted under Section 4.10 of
the Indenture, (e) other Investments made after the date of the Indenture in an
aggregate amount (measured at the time each such Investment is made) not
exceeding $7.5 million and (f) Investments existing on the date of the
Indenture.
"PERMITTED LIENS" means (a) Liens securing Indebtedness permitted to be
incurred pursuant to clause (a) of the second paragraph of Section 4.09 of the
Indenture; (b) Liens in favor of the Company; (c) Liens on property of a Person
existing at the time such Person is merged into or consolidated with the Company
or any Subsidiary of the Company; PROVIDED, that such Liens were in existence
prior to the contemplation of such merger or consolidation; (d) Liens on
property existing at the time of acquisition thereof by the Company or any
Subsidiary of the Company; PROVIDED, that such Liens were in existence prior to
the contemplation of such acquisition; (e) Liens to secure the performance of
statutory obligations, surety or appeal bonds, performance bonds or other
obligations of a like nature incurred in the ordinary course of business; (f)
Liens existing on the date hereof; (g) Liens for taxes, assessments or
governmental charges or claims that are not yet delinquent or that are being
contested in good faith by appropriate proceedings promptly instituted and
diligently concluded; PROVIDED, that any reserve or other appropriate provision
as shall be required in conformity with GAAP shall have been made therefor; (h)
Liens incurred in the ordinary course of business of the Company or any
Subsidiary of the Company with respect to obligations that do not, in the
aggregate, exceed $5 million at any one time outstanding and that are not
incurred in connection with the borrowing of money or the obtaining of advances
or credit (other than trade credit); (i) Liens securing Indebtedness permitted
to be incurred pursuant to clause (i) of the second paragraph of Section 4.09 of
the Indenture; (j) Liens securing Senior Debt and (k) Liens in connection with
Hedging Obligations.
62
"PERSON" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust or unincorporated organization
(including any subdivision or ongoing business of any such entity or
substantially all of the assets of any such entity, subdivision or business).
"PRINCIPALS" means Bain, the Tyler Entities (as defined in the 11%
Securities Offering Circular), Acadia Partners, L.P., FWHY-Coinvestment I
Partners, L.P., Rosecliff-Specialty Retailing 1989 Partners, L.P. and Court
Square Capital Limited.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights Agreement,
dated as of the date of the Indenture, by and among the Company and the other
parties named on the signature pages thereof, relating to the Securities, as
such agreement may be amended, modified or supplemented from time to time.
"RELATED PARTY" with respect to any Principal means (a) any stockholder or
partner of such Principal on the date of the Indenture or (b) any trust,
corporation, partnership or other entity, the beneficiaries, stockholders,
partners, owners or Persons beneficially holding an 80% or more controlling
interest of which consist of such Principal and/or such other Persons referred
to in the immediately preceding clause (a).
"REPRESENTATIVE" means the indenture trustee or other trustee, agent or
representative for any Senior Debt.
"RESPONSIBLE OFFICER," when used with respect to the Trustee, means any
officer within the Corporate Trust Division of the Trustee (or any successor
group of the Trustee) or any other officer of the Trustee customarily performing
functions similar to those performed by any of the above designated officers and
also means, with respect to a particular corporate trust matter, any other
officer to whom such matter is referred because of his knowledge of and
familiarity with the particular subject.
"RESTRICTED INVESTMENT" means an Investment other than a Permitted
Investment.
"SEC" means the Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SENIOR DEBT" means (i) all Obligations of the Company under the Senior
Notes and the Senior Note Indenture and (ii) any other Indebtedness that is
permitted to be incurred by the Company pursuant to this Indenture unless the
instrument under which such Indebtedness is incurred expressly provides that it
is PARI PASSU with or subordinated in right of payment to the Securities.
Notwithstanding anything to the contrary in the foregoing, Senior Debt shall not
include (a) any trade payables, (b) any liability for federal, state, or local
or other taxes owed or owing by the Company, (c) any Indebtedness of the Company
to any of its Subsidiaries or other Affiliates or (d) any Indebtedness that is
incurred in violation of this Indenture.
"SENIOR NOTE INDENTURE" means that certain indenture, dated August 2, 1993,
among the Company, Palais Royal, Inc., a Texas corporation, and The First
National Bank of Boston, as trustee, as amended or supplemented from time to
time, relating to the Senior Securities.
"SENIOR SECURITIES" means the Company's 10% Series A Senior Securities due
2000 and 10% Series B Senior Securities due 2000, if any, issued pursuant to
Senior Note Indenture.
"SIGNIFICANT SUBSIDIARY" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such Regulation is in effect on the date of
the Indenture.
"SUBSIDIARY" means, with respect to any Person, any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly
63
or indirectly, by such Person or one or more of the other Subsidiaries of such
Person or a combination thereof other than Unrestricted Subsidiaries (except as
used in the definition thereof).
"SUBSIDIARY GUARANTOR" means any Subsidiary of the Company that executes a
Guarantee of the obligations of the Company under the 11% Notes and the 11%
Notes Indenture, and its successors and assigns.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. ss.ss. 77aaa-77bbbb)
as in effect on the date on which the Indenture is qualified under the TIA.
"TRUSTEE" means the party named as such above until a successor replaces it
in accordance with the applicable provisions of the Indenture and thereafter
means the successor serving hereunder.
"UNRESTRICTED SUBSIDIARY" means (a) any Wholly Owned Subsidiary of the
Company designated by the Board of Directors of the Company as an Unrestricted
Subsidiary pursuant to a Board Resolution set forth in an Officers' Certificate
and delivered to the Trustee (i) that, at the time of designation, has total
assets not exceeding $1,000, (ii) no portion of the Indebtedness or any other
obligations (contingent or otherwise) of which (A) is guaranteed by the Company
or any other Subsidiary (other than another Unrestricted Subsidiary) of the
Company, (B) is recourse to or obligates the Company or any other Subsidiary
(other than another Unrestricted Subsidiary) of the Company in any way or (C)
subjects any property or asset of the Company or any other Subsidiary (other
than another Unrestricted Subsidiary) of the Company, directly or indirectly,
contingently or otherwise, to the satisfaction thereof, (iii) with which neither
the Company nor any other Subsidiary (other than another Unrestricted
Subsidiary) of the Company has any contract, agreement, arrangement or
understanding other than on terms no less favorable to the Company or such other
Subsidiary than those that might be obtained at the time from Persons who are
not Affiliates of the Company and (iv) with which neither the Company nor any
other Subsidiary (other than another Unrestricted Subsidiary) of the Company has
any obligation (A) to subscribe for additional shares of Capital Stock or other
Equity Interests therein or (B) to maintain or preserve such Subsidiary's
financial condition or to cause such Subsidiary to achieve certain levels of
operating results or (b) any Accounts Receivable Subsidiary.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding
principal amount of such Indebtedness into (b) the sum of the products obtained
by multiplying (x) the amount of each then remaining installment, sinking fund,
serial maturity or other required payments of principal, including payment at
final maturity, in respect thereof, by (y) the number of years (calculated to
the nearest one-twelfth) that will elapse between such date and the making of
such payment.
"WHOLLY OWNED SUBSIDIARY" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person or by such
Person and one or more Wholly Owned Subsidiaries of such Person, other than an
Unrestricted Subsidiary (except as used in the definition thereof).
64
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Old Securities were sold by the Company on July 27, 1995 to the Initial
Purchaser pursuant to the Purchase Agreement. The Initial Purchaser subsequently
placed the Old Securities with qualified institutional buyers in reliance on
Rule 144A under the Securities Act. As a condition to the Purchase Agreement,
the Company and the Initial Purchaser entered into Registration Rights
Agreement, which requires, among other things, that promptly following the sale
of the Old Securities to the Initial Purchaser, the Company will file with the
Commission a Registration Statement under the Securities Act with respect to an
issue of new notes of the Company identical in all material respects to the Old
Securities, will use its best efforts to cause such Registration Statement to
become effective under the Securities Act and, upon the effectiveness of that
Registration Statement, will offer to the Holders of the Old Securities the
opportunity to exchange their Old Securities for a like principal amount of New
Securities, which will be issued without a restrictive legend and may be
reoffered and resold by the Holder without restrictions or limitation under the
Securities Act (other than any such Holder which is an "affiliate" of the
Company within the meaning of Rule 405 under the Securities Act). A copy of the
Registration Rights Agreement has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
Based on an interpretation by the staff of the Commission set forth in
no-action letters issued to third parties, the Company believes that New
Securities issued pursuant to the Exchange Offer in exchange for Old Securities
may be offered for resale, resold and otherwise transferred by any Holder of
such New Securities (other than 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 New Securities are acquired in the ordinary
course of such Holder's business and such Holder does not intend to participate
and has not arrangement or understanding with any person to participate in the
distribution of such New Securities. Any Holder who tenders in the Exchange
Offer with the intention to participate, or for the purpose of participating, in
a distribution of the New Securities could not rely on the position of the staff
of the Commission enumerated in EXXON CAPITAL HOLDINGS CORPORATION (available
April 13, 1989) or similar no-action letters and, in the exemption therefrom,
must comply with the registration and prospectus deliver requirement of the
Securities Act in connection with any resale transaction. In addition, any such
resale transaction should be covered by an effective registration statement
containing the selling security Holders information required by Item 507 of
Regulation S-K. See "Description of the New Securities-Registration Rights."
Each broker-dealer that receives New Securities for its own account in exchange
for Old Securities, where such Old Securities were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a Prospectus in connection
with any resale of such New Securities. See "Plan of Distribution."
By tendering in the Exchange Offer, each Holder will represent to the
Company that, among other things, (i) the New Securities acquired pursuant to
the Exchange Offer are being obtained in the ordinary course of business of the
person receiving such New Securities, 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 the distribution of such New
Securities, (iii) neither the Holder nor any such other person is an
"affiliate," as defined under Rule 405 of the Securities Act, of the Company,
and (iv) the Holder and such other person acknowledge that (a) any person
participating in the Exchange Offer for the purpose of distributing the New
Securities must, in the absence of an exemption therefrom, comply with the
registration and prospectus deliver requirements of the Securities Act in
connection with any resale of the New Securities and cannot rely on the
no-action letter referenced above and (b) failure to comply with such
requirements in such instance could result such Holder incurring liability under
the Securities Act for which such Holder is not indemnified by the Company.
Following the consummation of the Exchange Offer, Holders of the Old
Securities who were eligible to participate in the Exchange Offer but who did
not tender their Old Securities will not have any further registration rights
and such Older Securities will continue to be subject to certain restriction on
transfer. Accordingly, the liquidity of the market for such Old Securities could
be adversely affected.
65
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 Old
Securities validly tendered and not withdrawn prior to 5:00 p.m., New York City
time on the Expiration Date. The Company will issue $1,000 principal amount of
New Securities in exchange for each $1,000 principal amount of outstanding Old
Securities. Holders may tender some or all of their Old Securities pursuant to
the Exchange Offer. However, Old Securities may be tendered only in integral
multiples of $1,000.
The form and terms of the New Securities are the same as the form and terms
of the Old Securities except (i) that the New Securities have been registered
under the Securities Act and hence will not bear legends restricting the
transfer thereof and (ii) the Holders of the New Securities will not be entitled
to certain rights under the Registration Rights Agreement, which rights will
terminate when the Exchange Offer is terminated. The New Securities will
evidence the same debt as the Old Securities and will be entitled to the
benefits of the Indenture.
As of the date of this Prospectus, $18,250,000 in aggregate principal
amount of Old Securities were outstanding and registered in the name of Cede &
Co. as nominee for the Depositary. The Company has fixed the close of business
on August __, 1995 as the record date for the Exchange Offer for purposes of
determining the person to whom this Prospectus and the Letter of Transmittal
will be mailed initially.
Holders or Old Securities do not have any appraisal or dissenters' rights
under the General Corporation Law of Delaware or the Indenture in connection
with the Exchange Offer. The Company intends to conduct the Exchange Offer in
accordance with the applicable requirements of the Exchange Act and the rules
and regulations of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Old
Securities when, as and if the Company has given oral or written notice thereof
to the Exchange Agent. The Exchange Agent will act as agent for the tendering
Holders for the purpose of receiving the New Securities from the Company.
If any tendered Old Securities are not accepted for exchange because of any
invalid tender, the occurrence of certain other events set forth herein or
otherwise, the certificates for any such unaccepted Old Securities will be
returned, without expense, to the tendering Holder thereof as promptly as
practicable after the Expiration Date.
Holders who tendered Old Securities 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 Old
Securities 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 "The Exchange Offer-Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time,
October __, 1995, unless the Company, in its sold 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.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will mail to the registered
Holders and announcement thereof, each prior to 9:00 a.m., New York City time,
on the next business day after the previously scheduled expiration date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Securities, 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 oral 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,
termination or amendment will be followed as promptly as practicable by oral or
written notice thereof to the registered Holders. If the Exchange Offer is
amended in a manner determined by the Company to constitute a material change,
the Company
66
will promptly disclose such amendment by means of a prospectus supplement that
will be distributed to the registered Holders, and the Company will extend the
Exchange Offer for a period of five to 10 business days, depending upon the
significance of the amendment and the manner of disclosure to the registered
Holders, if the Exchange Offer would otherwise expire during the five to 10
business day period.
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.
INTEREST ON THE NEW SECURITIES
The New Securities will bear interest from their date of issuance. Holders
of Old Securities that are accepted for exchange will receive, in cash, accrued
interest thereon to, but not including, the date of issuance of the New
Securities. Such interest will be paid with the first interest payment of the
New Securities. Interest on the Old Securities accepted for exchange will cease
to accrue upon issuance of the New Securities.
Interest on the New Securities is payable semi-annually on each February 15
and August 15, commencing on the first such date following their date of
issuance.
PROCEDURES FOR TENDERING
Only a Holder of Old Securities may tender such Old Securities in the
Exchange Offer. To tender in the Exchange Offer, a Holder 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 such Letter of Transmittal or such facsimile, together with
the Old Securities and any other required documents, to The First National Bank
of Boston (the "Exchange Agent") prior to 5:00 p.m., New York City time, on the
Expiration Date. To be tendered effectively, the Old Securities, Letter of
Transmittal and other required documents must be received by the Exchange Agent
at the address set froth below under "Exchange Agent" prior to 5:00 p.m., New
York City time, on the Expiration Date. Deliver of the Old Securities 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.
By executing the Letter of Transmittal, each Holder will make to the
Company the representations set forth above in the third paragraph under the
heading "-Purpose and Effect of the Exchange Offer."
The tender by a Holder and acceptance thereof by the Company will
constitute agreement between such Holder and the Company in accordance with the
terms and subject to the conditions set forth herein and in the Letter of
Transmittal.
THE METHOD OF DELIVERY OF OLD SECURITIES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE 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 OLD SECURITIES 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 Old Securities are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered Holder promptly and instruct such
registered Holder to tender on such beneficial owner's behalf. See "Instruction
to Registered Holder and/or Book-Entry Transfer Facility Participant from Owner"
included with the Letter of Transmittal.
Signatures on a 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 Old Securities tendered pursuant thereto are tendered (i) by a
registered
67
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
a Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantee must be a member firm of a registered
national securities exchange or of the National Association of Securities
Dealers, Inc., 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 Old Securities listed therein, such Old Securities must
be endorsed or accompanied by a properly completed bond power, signed by such
registered Holder as such registered Holder's name appears on such Old
Securities with the signature thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Old Securities or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officer 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.
The Company understands that the Exchange Agent will make a request
promptly after the date of this Prospectus to establish accounts with respect to
the Old Securities at the book-entry transfer facility, The Depository Trust
Company (the "Book-Entry Transfer Facility"), for the purpose of facilitating
the Exchange Offer, and subject to the establishment thereof, any financial
institution that is a participant in the Book-Entry Transfer Facility's system
may make book-entry delivery of Old Securities by causing such book-entry
transfer facility to transfer such Old Securities into the Exchange Agent's
account with respect to the Old Securities in accordance with the Book-Entry
Transfer Facility's procedures for such transfer. Although delivery of the Old
Securities may be effected through book-entry transfer into the Exchange Agent's
account at the Book-Entry Transfer Facility, 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 the Book-Entry Transfer Facility does not
constitute delivery to the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Old Securities and withdrawal of tendered Old
Securities will be determined by the Company in it sole discretion, which
determination will be final and binding. The Company reserves the absolute right
to reject any and all Old Securities not properly tendered or any Old Securities
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 any defects,
irregularities or conditions of tender as to particular Old Securities. 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 Old Securities must be cured within such time as the
Company shall determine. Although the Company intends to notify Holders of
defects or irregularities with respect to tenders of Old Securities, neither the
Company, the Exchange Agent nor any other person shall incur any liability for
failure to give such notification. Tenders of Old Securities will not be deemed
to have been made until such defects or irregularities have been cured or
waived. Any Old Securities 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, unless
otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
68
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Securities and (i) whose Old
Securities are not immediately available, (ii) who cannot deliver their Old
Securities, the Letter of Transmittal or any other required documents to the
Exchange agent or (iii) who cannot complete the procedures for book-entry
transfer, 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, the certificate number(s)
of such Old Securities and the principal amount of Old Securities tendered,
stating that the tender is being made thereby and guaranteeing that, within
five New York Stock Exchange trading days after the Expiration Date, the
Letter of Transmittal (or facsimile thereof) together with the
certificate(s) representing the Old Securities (or a confirmation of
book-entry transfer of such Old Securities into the Exchange Agent's
account at the Book-Entry Transfer Facility), 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
Old Securities in proper form for transfer (or a confirmation of book-entry
transfer of such Old Securities into the Exchange Agent's account at the
Book-Entry Transfer Facility), and all other documents required by the
Letter of Transmittal are received by the Exchange Agent within five New
York Stock Exchange trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent Holders who which to tender their Old Securities according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Securities may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration
Date.
To withdraw a tender of Old Securities in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to 5:00 p.m., New York City time, on
the Expiration Date. Any such notice of withdrawal must (i) specify the name of
the person having deposited the Old Securities to be withdrawn (the
"Depositor"), (ii) identify the Old Securities to be withdrawn (including the
certificate number(s) and principal amount of such Old Securities, or, in the
case of Old Securities transferred by book-entry transfer, the name and number
of the account at the Book-Entry Transfer Facility to be credited, (iii) be
signed by the Holder in the same manner as the original signature on the Letter
of Transmittal by which such Old Securities were tendered (including any
required signature guarantees) or be accompanied by documents of transfer
sufficient to have the Trustee with respect to the Old Securities registered the
transfer of such Old Securities into the name of the person withdrawing the
tender and (iv) specify the name in which any such Old Securities 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 Old Securities so withdrawn will be deemed not to have been
validly tendered for purposes of the Exchange Offer and no New Securities will
be issued with respect thereto unless the Old Securities so withdrawn are
validly retendered. Any Old Securities 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 Old Securities may be
retendered by the following one of the procedures described above under
"-Procedures for Tendering" at any time prior to the Expiration Date.
69
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange New Securities for, any Old
Securities, and may terminate or amend the Exchange Offer as provided herein
before the acceptance of such Old Securities, if:
(a) any action or proceeding is instituted or threatened in any court
or by or before any governmental agency with respect to the Exchange Offer
which, in the sole judgement of Company, might materially impair the
ability of the Company to proceed with Exchange Offer or any material
adverse development has occurred in any existing action or proceeding with
respect to the Company or any of its subsidiaries; or
(b) any change, or any development involving a prospective change, in
the business or financial affairs of the Company or any of its subsidiaries
has occurred which, in the sole judgment of the Company, might materially
impair the ability of the Company to proceed with the Exchange Offer; or
(c) any law, statute, rule, regulation or interpretation by the staff
of the Commission is proposed, adopted or enacted, which, in the sole
judgment of the Company, might materially impair the ability of the Company
to proceed with Exchange Offer or materially impair the contemplated
benefits of the Exchange Offer to the Company; or
(d) any governmental approval has not been obtained, which approval
the Company shall, in its sole discretion, deem necessary for the
consummation of the Exchange Offer as contemplated hereby.
If the Company determines in its sole discretion that any of the conditions
are not satisfied, the Company may (i) refuse to accept any Old Securities and
return all tendered Old Securities to the tendering Holders, (ii) extend the
Exchange Offer and retain all Old Securities tendered prior to the expiration of
the Exchange Offer, subject, however, to the rights of Holder to withdraw such
Old Securities (see "--Withdrawal of Tenders") or (iii) waive such unsatisfied
conditions with respect to the Exchange Offer and accept all properly tendered
Old Securities 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, and the Company will extend the Exchange Offer for a period
of five to 10 business days, depending upon the significance of the waiver and
the manner of disclosure to the registered Holders, if the Exchange Offer would
otherwise expire during such five to 10 day period.
EXCHANGE AGENT
The First National Bank of Boston has been appointed as Exchange Agent for
the Exchange Offer. Questions and request for assistance, requests for
additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notice of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
The First National Bank of Boston
Blue Hills Office Park
Attn: Corporate Trust Division
Mail Stop 45-02-15
150 Royall Street
Canton, MA 02021
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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 the telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers or other soliciting
acceptances 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 will reimburse
the Holders of the Old Securities for reasonable fees and expenses of not more
than one firm acting as counsel for the Holders of Old Securities should such
Holders deem it advisable to appoint such counsel or more than one firm as
counsel for such Holders, if in the reasonable judgment of counsel to the
Holders and counsel to the Company, a conflict exists among such Holders.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company. Such expenses include fees and expenses of the Exchange
Agent and Trustee, accounting and legal fees and printing costs, among others.
The Company will pay all transfer taxes, if any, applicable to the exchange
of the Old Securities pursuant to the Exchange Offer. If, however, certificates
representing the New Securities or the Old Securities 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 Old Securities
tendered, or if tendered Old Securities 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 Old Securities 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. If satisfactory evidence of payment of such taxes or exemption therefrom
is not submitted with the Letter of Transmittal, the amount of such transfer
taxes will be billed directly to such tendering Holder.
ACCOUNTING TREATMENT
The New Securities will be recorded at the same carrying values as the Old
Securities, which is face value, as reflected in the Company's accounting
records on the date of exchange. Accordingly, no gain or loss for accounting
purposes will be recognized. The expenses of the Exchange Offer will be expended
over the term of the New Securities.
SHELF REGISTRATION
In addition, pursuant to the Registration Rights Agreement, if the Exchange
Offer is not permissible under applicable federal law, or if any Holder of Old
Securities (other than any Holder who may be deemed to be an "affiliate" of the
Company under Rule 405 of the Securities Act) notifies the Company that its not
permitted by law or any policy of the Commission to participate in the Exchange
Offer, the Company is required to file with the Commission the Shelf
Registration Statement to cover resales of Old Securities by the Holders thereof
who provide certain information to the Company in connection with the Shelf
Registration Statement. In the event that the Company is required to file the
Shelf Registration Statement, it is required to use its best efforts to cause it
to become effective. Unlike resales of New Securities by Holders who comply with
the terms of the Exchange Offer, Holders of Old Securities must make their
offers or sales by a prospectus relating to a registration statement in order
not to be subject to the significant restrictions on transfer applicable to the
Old Securities. See "The Exchange Offer-Resales of the New Securities; and
-Consequences of Failure to Exchange."
CONSEQUENCES OF FAILURE TO EXCHANGE
The Old Securities that are not exchanged for New Securities pursuant to
the Exchange Offer will remain restricted securities. Accordingly, such Old
Securities may be resold only (i) to the Company (upon redemption thereof or
otherwise), (ii) so long as the Old Securities are eligible for resale pursuant
to Rule 144A, to a person inside the United
71
States whom the seller reasonably believes is a qualified institutional buyer
within the meaning of Rule 144A under the Securities Act in the transaction
meeting the requirements of Rule 144A, or in accordance with Rule 144 under the
Securities Act, or pursuant to another exemption from the registration
requirement of the Securities Act (and based upon an opinion of counsel if the
Company so requests), (iii) outside the United States to a foreign person in a
transaction meeting the requirements of Rule 904 under the Securities Act, or
(iv) pursuant to an effective registration statement under the Securities Act,
in each case in accordance with any applicable securities laws of any state of
the United States.
RESALE OF THE NEW SECURITIES
With respect to resales of New Securities, based on an interpretation by
the staff of the Commission set forth in no-action letter issued to third
parties, the Company believes that a Holder or other person who receives New
Securities, whether or not such person is the Holder (other than a person that
is an "affiliate" of the Company with the meaning of Rule 405 under the
Securities Act) who receives New Securities in exchange for Old Securities in
the ordinary course of business and who is not participating, does not intend to
participate, and has not established an arrangement or understanding with any
person to participate, in the distribution of the New Securities, will be
allowed to resell the New Securities to the public without further registration
under the Securities Act and without delivering to the purchasers of the New
Securities a prospectus that satisfies the requirements of Section 10 thereof.
However, if any Holder acquires New Securities in the Exchange Offer for the
purpose of distributing or participating in a distribution of the New
Securities, such Holder cannot rely on the position of the staff of the
Commission enunciated in EXXON CAPITAL HOLDINGS CORPORATION (April 13, 1988) and
MORGAN STANLEY & CO., INCORPORATED (June 5, 1991), or similar no-action letters
or any similar interpretive letters, and must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction, unless and exemption from registration is otherwise
available. Furthermore, each broker-dealer that receives New Securities for its
own account in exchange for Old Securities, where such Old Securities were
acquired by such broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a Prospectus in
connection with any resale of such New Securities.
As contemplated by these no-action letters and the Registration Rights
Agreement, each Holder accepting the Exchange Offer is required to represent to
the Company in the Letter of Transmittal that (i) the New Securities are to be
acquired by the Holder or the person receiving such New Securities, whether or
not such person is the Holder, in the ordinary course of business, (ii) the
Holder or any such other person (other than a broker-dealer referred to in the
next sentence) is not engaging and does not intend to engage, in the
distribution of the New Securities, (iii) the Holder or any such other person
has no arrangement or understanding with any person to participate in the
distribution of the New Securities, (iv) neither the Holder nor any such other
person is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act and (v) the Holder or any such other person acknowledges that if
such Holder or other person participates in the Exchange Offer for the purpose
of distributing the New Securities it must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale of the New Securities and cannot rely on those no-action letters. As
indicated above, each broker-dealer that receives New Securities for its own
account in exchange for Old Securities, must acknowledge that it will deliver a
Prospectus in connection with any resale of such New Securities. For description
of the procedures for such resales by broker-dealers, see "Plan of
Distribution."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is based upon current provisions of the Internal
Revenue Code of 1986, as amended, applicable Department of Treasury regulations,
judicial authority and administrative rulings and practice. There can be no
assurance that the Internal Revenue Service (the "Service") will not take a
contrary view, and no ruling from the Service has been or will be sought.
Legislative, judicial or administrative changes or interpretations may be
forthcoming that could alter or modify the statements and conditions set forth
herein. Any such changes or interpretations may or may not be retroactive and
could affect the tax consequences to Holders. Certain Holders (including
insurance companies, tax-exempt organizations, financial institutions,
broker-dealers, foreign corporations and persons who are not citizens or
residents of the United States) may be subject to special rules not discussed
below. The Company recommends that
72
each Holder consult such Holder's own tax advisor as to the particular tax
consequences of exchanging such Holder's Old Securities for New Securities,
including the applicability and effect of any state, local or foreign tax laws.
The exchange of Old Securities for New Securities pursuant to the Exchange
Offer will not be treated as an "exchange" for federal income tax purposes
because the New Securities should not be considered to differ materially in kind
or extent from the Old Securities. Rather, the New Securities received by a
Holder will be treated as a continuation of the Old Securities in the hands of
such Holder. As a result, there will be no federal income tax consequences to
Holders exchanging Old Securities for New Securities pursuant to the Exchange
Offer. If, however, the exchange of Old Securities for New Securities were
treated as an "exchange" for federal income tax purposes, such exchange should
constitute a recapitalization for federal income tax purposes. Holders
exchanging Old Securities for New Securities pursuant to such recapitalization
should not recognize any gain or loss upon the exchange.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Securities for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
Prospectus in connection with any resale of such New Securities. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of New Securities received in
exchange for Old Securities where such Old Securities were acquired as a result
of market-making activities or other trading activities. The Company has agreed
that for a period of 90 days after the Expiration Date, it will make this
Prospectus, as amended or supplement, available to any broker-dealer for use in
connection with any such resale. In addition, until January __, 1996 (90 days
after the Expiration Date), all dealers effecting transactions in the New
Securities may be required to deliver a Prospectus.
The Company will not receive any proceeds from any sales of New Securities
by broker-dealers. New Securities 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 New Securities 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 the purchaser 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 New Securities. Any
broker-dealer that resells the New Securities 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 New Securities may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of New Securities and 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.
For a period a 90 days after Expiration Date the Company will promptly send
additional copies of this Prospectus and any amendment or supplement to this
Prospectus to any broker-dealer that requests such documents in the Letter of
Transmittal. The Company has agreed to pay all expenses incident to the Exchange
Offer (including the expenses of one counsel for the Holders of the Securities)
other than commissions or concessions of any brokers or dealers and will
indemnify the Holders of the Securities (including any broker-dealers) against
certain liabilities, including liabilities under the Securities Act.
73
LEGAL MATTERS
The validity of the issuance of the New Securities will be passed upon for
the Company by Kirkland & Ellis, 153 East 53rd Street, New York, New York 10022.
Partners of Kirkland & Ellis own 29,372 shares of Common Stock and 8,116 shares
of Class B Common Stock.
EXPERTS
The consolidated financial statements as of January 29, 1994 and January
28, 1995 and for each of the three years in the period ended January 28, 1995
included in this Prospectus and the Registration Statement of which is a part,
have been so included in reliance on the report of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as an expert in
auditing and accounting.
74
INDEX TO FINANCIAL STATEMENTS
PAGE
NUMBER
------
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Consolidated Condensed Balance Sheet at January 28, 1995 and
April 29, 1995 ....................................................... F-2
Consolidated Condensed Statement of Income for the three
months ended April 30, 1994 and April 29, 1995 ....................... F-3
Consolidated Condensed Statement of Cash Flows for the three
months ended April 30, 1994 and April 29, 1995 ....................... F-4
Consolidated Condensed Statement of Stockholder's Equity for the
three months ended April 29, 1995 .................................... F-5
Notes to Unaudited Consolidated Condensed Financial Statements ......... F-6
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants ...................................... F-7
Consolidated Balance Sheet at January 29, 1994 and
January 28, 1995 ..................................................... F-8
Consolidated Statement of Operations for the fiscal years
1992, 1993 and 1994 .................................................. F-9
Consolidated Statement of Cash Flows for the fiscal years
1992, 1993 and 1994 .................................................. F-10
Consolidated Statement of Stockholder's Equity for the
fiscal years 1992, 1993 and 1994 ..................................... F-12
Notes to Consolidated Financial Statements ............................. F-13
F-1
<PAGE>
SPECIALTY RETAILERS, INC.
(A wholly-owned subsidiary of Apparel Retailers, Inc.)
CONSOLIDATED CONDENSED BALANCE SHEET
(in thousands, except par value and number of shares)
<TABLE>
<CAPTION>
JANUARY 28, 1995 APRIL 29, 1995
---------------- --------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents ................................................. $ 27,797 $ 8,697
Accounts receivable ....................................................... 70,356 48,533
Merchandise inventories ................................................... 118,039 145,621
Prepaid expenses and other current assets ................................. 18,162 17,902
--------- ---------
Total current assets ................................................ 234,354 220,753
Property, equipment and leasehold improvements, net ....................... 75,602 85,828
Goodwill, net ............................................................. 31,865 32,292
Other assets .............................................................. 20,700 20,947
--------- ---------
$ 362,521 $ 359,820
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable .......................................................... $ 38,330 $ 41,162
Accrued interest .......................................................... 11,372 6,115
Accrued expenses and other accrued liabilities ............................ 34,415 28,406
Accrued taxes, other than income taxes .................................... 2,642 4,256
--------- ---------
Total current liabilities ........................................... 86,759 79,939
Long-term debt ............................................................ 213,827 208,884
Related party debt ........................................................ 39,200 44,200
Other long-term liabilities ............................................... 17,909 17,402
--------- ---------
Total liabilities ................................................... 357,695 350,425
--------- ---------
Common stock, par value $0.01, 5,000 shares
authorized, issued and outstanding
Additional paid-in capital ................................................ 3,317 3,317
Retained earnings ......................................................... 1,509 6,078
--------- ---------
Stockholder's equity ...................................................... 4,826 9,395
--------- ---------
Commitments and contingencies ............................................. -- --
--------- ---------
$ 362,521 $ 359,820
========= =========
</TABLE>
The accompanying notes are an integral part of this statement.
F-2
<PAGE>
SPECIALTY RETAILERS, INC.
(A wholly-owned subsidiary of Apparel Retailers, Inc.)
CONSOLIDATED CONDENSED STATEMENT OF INCOME
(in thousands)
(unaudited)
FOR THE THREE MONTHS ENDED,
------------------------------
APRIL 30, 1994 APRIL 29, 1995
-------------- --------------
Net sales .................................... $ 128,073 $ 142,353
Cost of sales and related buying,
occupancy and distribution expenses ........ (88,217) (96,070)
--------- ---------
Gross profit ................................. 39,856 46,283
Selling, general and
administrative expenses .................... (30,045) (34,127)
Service charge income ........................ 2,133 2,683
--------- ---------
Operating income ............................. 11,944 14,839
--------- ---------
Interest income .............................. 395 150
--------- ---------
Interest expense:
Related party .............................. (471) (1,037)
Other ...................................... (6,726) (6,121)
Amortization of debt issue costs ........... (330) (343)
--------- ---------
(7,527) (7,501)
--------- ---------
Income before income tax and
extraordinary item ........................ 4,812 7,488
Income tax expense ........................... (1,731) (2,919)
--------- ---------
Income before extraordinary item ............. 3,081 4,569
Extraordinary item - early
extinguishment of debt ..................... (326) --
--------- ---------
Net income ................................... $ 2,755 $ 4,569
========= =========
The accompanying notes are an integral part of this statement.
F-3
<PAGE>
SPECIALTY RETAILERS, INC.
(A wholly-owned subsidiary of Apparel Retailers, Inc.)
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED,
--------------------------------
APRIL 30, 1994 APRIL 29, 1995
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income ........................................................ $ 2,755 $ 4,569
---------- ----------
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization ..................................... 2,378 2,700
Deferred federal income taxes ..................................... (7) (13)
Accretion of discount ............................................. 178 187
Amortization of debt issue costs .................................. 330 343
Loss on early extinguishment of debt .............................. 535 --
Changes in operating assets and liabilities:
Decrease in accounts receivable ................................. 4,712 11,523
Increase in merchandise inventories ............................. (16,168) (27,582)
Decrease (increase) in other assets ............................. 2,611 (965)
Increase in accounts receivable sold ............................ -- 10,300
Decrease in accounts payable and accrued liabilities ............ (839) (7,342)
---------- ----------
Total adjustments ............................................. (6,270) (10,849)
---------- ----------
Net cash used in operating activities .......................... (3,515) (6,280)
---------- ----------
Cash flows from investing activities:
Decrease in restricted investments .................................. 11,000 --
Additions to property, equipment and leasehold improvements ......... (2,070) (12,495)
---------- ----------
Net cash provided by (used in) investing activities ............. 8,930 (12,495)
---------- ----------
Cash flows from financing activities:
Payments on:
Long-term debt .................................................... (10,326) (115)
Additions to debt issue costs ..................................... (432) (210)
---------- ----------
Net cash used in financing activities ........................... (10,758) (325)
---------- ----------
Net decrease in cash and cash equivalents ..................... (5,343) (19,100)
Cash and cash equivalents:
Beginning of period ............................................... 58,521 27,797
---------- ----------
End of period ................................................... $ 53,178 $ 8,697
========== ==========
Supplemental disclosure of cash flow information:
Interest paid ..................................................... $ 13,707 $ 12,205
========== ==========
Income taxes paid ................................................. $ -- $ 1,800
========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-4
<PAGE>
SPECIALTY RETAILERS, INC.
(A wholly-owned subsidiary of Apparel Retailers, Inc.)
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDER'S EQUITY
(in thousands, except numbers of shares)
(unaudited)
COMMON STOCK
------------------- ADDITIONAL
SHARES PAID-IN RETAINED
OUTSTANDING AMOUNT CAPITAL EARNINGS TOTAL
----------- ------ ---------- -------- -------
Balance, January 28, 1995 5,000 $ -- $3,317 $ 1,509 $ 4,826
Net income .............. -- -- -- 4,569 4,569
----- ----- ------ -------- -------
Balance, April 29, 1995 . 5,000 $ -- $3,317 $ 6,078 $ 9,395
===== ===== ====== ======== =======
The accompanying notes are an integral part of this statement.
F-5
SPECIALTY RETAILERS, INC.
(A wholly-owned subsidiary of Apparel Retailers, Inc.)
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. The accompanying unaudited consolidated condensed financial
statements of Specialty Retailers, Inc. (the "Company") have been prepared in
accordance with Rule 10-01 of Regulation S-X and do not include all the
information and footnotes required by generally accepted accounting principles
for complete financial statements. Those adjustments, which include only normal
recurring adjustments, that are, in the opinion of management, necessary for a
fair presentation of the results of the interim periods have been made. The
results of operations for such interim periods are not necessarily indicative of
results of operations for a full year. The unaudited consolidated condensed
financial statements should be read in conjunction with the audited consolidated
financial statements and notes thereto for the year ended January 28, 1995 filed
with the Company's Annual Report on Form 10-K. Certain reclassifications have
been made to prior year amounts to conform with the current year presentation.
The fiscal years discussed herein end on the Saturday nearest to January 31 in
the following calendar year. For example, references to "1995" mean the fiscal
year ended February 3, 1996.
2. Under the accounts receivable securitization program implemented in
1993 (the "Accounts Receivable Program"), a subsidiary of the Company, SRI
Receivables Purchase Co., Inc. ("SRPC") purchases the accounts receivable
generated under the Company's private label credit card program. Such accounts
receivable are in turn transferred to a trust which has issued certain
certificates representing undivided interests in the trust. SRPC owns an
undivided interest in the accounts receivable not supporting the certificates
issued by the trust. SRPC is a separate corporate entity from the Company and
SRPC's creditors have a claim on its assets prior to those assets becoming
available to any creditor of the Company.
3. The Company has a revolving credit agreement with a bank (the
"Credit Agreement") under which it may draw up to $25.0 million. On March 31,
1995, the Company extended the Credit Agreement to February 3, 1998 and entered
into a separate agreement with the bank under which it may borrow an additional
$10.0 million for seasonal working capital needs (the "Seasonal Credit
Agreement"). Funds are available under the Seasonal Credit Agreement from August
15 through January 15 of each calendar year (the "Seasonal Period"). The
Seasonal Credit Agreement is available through February 3, 1998 and provides for
a commitment fee during each Seasonal Period of 1/2 of 1% of the average daily
unused portion of the commitment amount. Commitment fees are paid on an annual
basis on the first business day following the Seasonal Period then concluded.
Interest is charged on outstanding loans at a base rate plus a specified margin.
The base rate is the higher of the bank's prime rate or 1/2 of 1% above the
Federal Funds Effective Rate. The specified margin range is 1.25% to 2.75% based
on calculated debt service ratios as defined in the agreement.
4. During the fourth quarter of 1994, the Company approved a store
closure plan (the "Store Closure Plan") for the closure of forty Fashion Bar
stores and accrued $5.2 million for the expected costs associated with the plan.
As of April 29, 1995, thirty-nine of such stores had been closed and $3.6
million was charged to the accrual primarily related to lease termination
payments associated with these stores. The Company expects to complete the Store
Closure Plan during 1995.
F-6
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
Specialty Retailers, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of cash flows and of
stockholder's equity present fairly, in all material respects, the financial
position of Specialty Retailers, Inc. (a wholly-owned subsidiary of Apparel
Retailers, Inc.) and its subsidiaries at January 29, 1994 and January 28, 1995,
and the results of their operations and their cash flows for each of the three
years in the period ended January 28, 1995, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Houston, Texas
April 14, 1995
F-7
<PAGE>
SPECIALTY RETAILERS, INC.
(A wholly-owned subsidiary of Apparel Retailers, Inc.)
CONSOLIDATED BALANCE SHEET
(in thousands, except par value and number of shares)
<TABLE>
<CAPTION>
JANUARY 29, 1994 JANUARY 28, 1995
---------------- ----------------
<S> <C> <C>
ASSETS
Cash and cash equivalents ............................................................ $ 58,521 $ 27,797
Accounts receivable .................................................................. 42,174 70,356
Merchandise inventories .............................................................. 103,962 118,039
Restricted investments ............................................................... 11,150 338
Prepaid expenses and other current assets ............................................ 13,439 17,824
--------- --------
Total current assets ........................................................... 229,246 234,354
Property, equipment and leasehold improvements, net .................................. 61,508 75,602
Goodwill, net ........................................................................ 26,435 31,865
Other assets ......................................................................... 24,432 20,700
--------- --------
$ 341,621 $362,521
========= ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable ..................................................................... $ 31,248 $ 38,330
Accrued interest ..................................................................... 12,705 11,372
Accrued employee compensation costs .................................................. 8,145 8,696
Accrued expenses and other accrued liabilities ....................................... 15,832 25,719
Accrued taxes, other than income taxes ............................................... 4,902 2,642
--------- --------
Total current liabilities ...................................................... 72,832 86,759
Long-term debt ....................................................................... 247,235 213,827
Related party debt ................................................................... 15,000 39,200
Deferred income taxes ................................................................ 3,020 4,244
Other long-term liabilities .......................................................... 12,797 13,665
--------- --------
Total liabilities .............................................................. 350,884 357,695
--------- --------
Common stock, par value $0.01, 5,000 shares
authorized, issued and outstanding ................................................. -- --
Additional paid-in capital ........................................................... 3,317 3,317
Accumulated equity (deficit) ......................................................... (12,580) 1,509
--------- --------
Stockholder's equity (deficit) ....................................................... (9,263) 4,826
--------- --------
Commitments and contingencies ........................................................ -- --
--------- --------
$ 341,621 $362,521
========= ========
</TABLE>
The accompanying notes are an integral part of this statement.
F-8
<PAGE>
SPECIALTY RETAILERS, INC.
(A wholly-owned subsidiary of Apparel Retailers, Inc.)
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
FISCAL YEAR
-----------------------------------------------------
1992 1993 1994
--------- --------- ---------
<S> <C> <C> <C>
Net sales ........................................................ $ 504,401 $ 557,422 $ 581,463
Cost of sales and related buying,
occupancy and distribution expenses ............................ (350,136) (384,843) (398,659)
--------- --------- ---------
Gross profit ..................................................... 154,265 172,579 182,804
Selling, general and
administrative expenses ........................................ (129,313) (135,209) (135,127)
Service charge income ............................................ 29,670 20,003 8,515
Store closure costs .............................................. -- -- (5,232)
--------- --------- ---------
Operating income ................................................. 54,622 57,373 50,960
--------- --------- ---------
Interest income .................................................. 613 1,212 1,654
--------- --------- ---------
Interest expense:
Related party .................................................. (9,434) (5,908) (2,902)
Other .......................................................... (21,324) (24,852) (25,604)
Amortization of debt issue costs ............................... (1,626) (1,377) (1,237)
--------- --------- ---------
(32,384) (32,137) (29,743)
--------- --------- ---------
Other non-operating expense ..................................... (2,276) -- --
--------- --------- ---------
Income before income tax and
extraordinary item ............................................ 20,575 26,448 22,871
Income tax expense ............................................... (8,340) (9,330) (8,339)
--------- --------- ---------
Income before extraordinary item ................................. 12,235 17,118 14,532
Extraordinary item - early
extinguishment of debt ......................................... -- (16,208) (308)
--------- --------- ---------
Net income ....................................................... $ 12,235 $ 910 $ 14,224
========= ========= =========
</TABLE>
The accompanying notes are an integral part of this statement.
F-9
<PAGE>
SPECIALTY RETAILERS, INC.
(A wholly-owned subsidiary of Apparel Retailers, Inc.)
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------------------
1992 1993 1994
-------- --------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ........................................................................... $ 12,235 $ 910 $ 14,224
-------- --------- --------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ...................................................... 9,065 9,259 9,997
Deferred federal income taxes ...................................................... 2,624 (1,022) 271
Accretion of discount .............................................................. 868 563 772
Amortization of debt issue costs ................................................... 1,626 1,377 1,237
Issuance of long-term debt in lieu of interest payment ............................. 958 1,214 282
Loss (gain) on early extinguishment of debt ........................................ (136) 25,032 474
Changes in operating assets and liabilities:
Increase in accounts receivable .................................................. (6,778) (18,822) (5,378)
Increase in merchandise inventories .............................................. (4,201) (10,862) (14,077)
Increase in other assets ......................................................... (2,136) (6,292) (2,347)
Increase (decrease) in accounts receivable sold .................................. -- 147,100 (7,100)
Increase in accounts payable and accrued liabilities ............................. 8,256 6,087 11,545
-------- --------- --------
Total adjustments .............................................................. 10,146 153,634 (4,324)
-------- --------- --------
Net cash provided by operating activities ....................................... 22,381 154,544 9,900
-------- --------- --------
Cash flows from investing activities:
Decrease (increase) in restricted investments ........................................ -- (2,150) 10,812
Acquisitions, net of cash acquired ................................................... (5,819) -- (20,840)
Payments to former Bealls and Palais Royal shareholders .............................. (1,378) (252) --
Additions to property, equipment and leasehold improvements .......................... (7,631) (8,503) (19,706)
-------- --------- --------
Net cash used in investing activities ............................................ (14,828) (10,905) (29,734)
-------- --------- --------
Cash flows from financing activities:
Proceeds from:
Working capital facility ........................................................... 8,000 -- --
Short-term debt .................................................................... 33,422 19,135 --
Long-term debt ..................................................................... 23,319 272,041 --
Senior redeemable preferred stock .................................................. 1 -- --
Common stock ....................................................................... 74 293 --
Payments on:
Working capital facility ........................................................... (22,000) (1,000) --
Short-term debt .................................................................... (31,540) (24,992) --
Long-term debt ..................................................................... (10,921) (337,254) (10,442)
Redemption of redeemable preferred stock ........................................... (52) (19,797) --
Redemption of common stock ......................................................... (63) (33) --
Additions to debt issue costs ........................................................ (1,330) (8,928) (448)
-------- --------- --------
Net cash used in financing activities ............................................ (1,090) (100,535) (10,890)
-------- --------- --------
Net increase (decrease) in cash .................................................. 6,463 43,104 (30,724)
Cash and cash equivalents:
Beginning of year .................................................................. 8,954 15,417 58,521
-------- --------- --------
End of year ........................................................................ $ 15,417 $ 58,521 $ 27,797
======== ========= ========
F-10
Supplemental disclosure of cash flow information:
Interest paid ........................................................................ $ 29,621 $ 30,142 $ 28,784
======== ========= ========
Income taxes paid .................................................................... $ 3,369 $ 3,857 $ 5,198
======== ========= ========
Supplemental schedule of noncash investing and financing activities:
The Company purchased all of the capital stock of Fashion Bar, Inc.
for $6,262 in cash during 1992. In addition, the Company purchased
a significant portion of the assets of Beall-Ladymon, Inc. for $20,840
in cash during 1994. In conjuction with these acquisitions, liabilities
were assumed as follows:
Fair value allocated to assets acquired ............................................ $ 22,864 $ -- $ 24,043
Cash paid for assets acquired, including acquisition expenses ...................... (6,262) -- (20,840)
Notes issued to former Fashion Bar, Inc. shareholders .............................. (3,143) -- --
-------- --------- --------
Liabilities assumed ................................................................ $ 13,459 $ -- $ 3,203
======== ========= ========
</TABLE>
The accompanying notes are an integral part of this statement.
F-11
<PAGE>
SPECIALTY RETAILERS, INC.
(A wholly-owned subsidiary of Apparel Retailers, Inc.)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
(in thousands, except numbers of shares)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------------------------------
CLASS B
----------------------- ADDITIONAL ACCUMULATED
SHARES SHARES PAID-IN EQUITY
OUTSTANDING AMOUNT OUTSTANDING AMOUNT CAPITAL (DEFICIT) TOTAL
----------- ------ ----------- -------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, February 1, 1992 ............ 10,381,266 $ 104 1,468,750 $ 15 $ 890 $(20,509) $(19,500)
---------- ----- --------- -------- -------- -------- --------
Net income ........................... -- -- -- -- -- 12,235 12,235
Dividends on preferred stock ......... -- -- -- -- -- (2,334) (2,334)
Accretion on preferred stock ......... -- -- -- -- -- (17) (17)
Issuance of stock .................... 194,915 2 -- -- 72 -- 74
Retirement of stock .................. (17,014) -- -- -- (63) -- (63)
---------- ----- --------- -------- -------- -------- --------
Balance, January 30, 1993 ............ 10,559,167 $ 106 1,468,750 $ 15 $ 899 $(10,625) $ (9,605)
---------- ----- --------- -------- -------- -------- --------
Net income ........................... -- -- -- -- -- 910 910
Dividends on preferred stock ......... -- -- -- -- -- (1,596) (1,596)
Accretion on preferred stock ......... -- -- -- -- -- (701) (701)
Tax benefits from stock
option activity .................... -- -- -- -- 2,037 -- 2,037
Adjustment for minimum
pension liability .................. -- -- -- -- -- (568) (568)
Issuance of stock .................... 773,924 7 -- -- 286 -- 293
Retirement of stock .................. (11,328,091) (113) (1,468,750) (15) 95 -- (33)
---------- ----- --------- -------- -------- -------- --------
Balance, January 29, 1994 ............ 5,000 $-- -- $ -- $ 3,317 $(12,580) $ (9,263)
---------- ----- --------- -------- -------- -------- --------
Net income ........................... -- -- -- -- -- 14,224 14,224
Adjustment for minimum
pension liability .................. -- -- -- -- -- (135) (135)
---------- ----- --------- -------- -------- -------- --------
Balance, January 28, 1995 ............ 5,000 $-- -- $ -- $ 3,317 $ 1,509 $ 4,826
========== ===== ========= ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
F-12
<PAGE>
SPECIALTY RETAILERS, INC.
(A wholly-owned subsidiary of Apparel Retailers, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF BUSINESS: Specialty Retailers, Inc. ("SRI" or the
"Company") operates family apparel stores primarily under the
names "Bealls", "Palais Royal" and "Fashion Bar." SRI is a
wholly-owned subsidiary of Apparel Retailers, Inc. ("ARI"). ARI
conducts its business exclusively through SRI and its primary
asset is the common stock of SRI.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements
include the accounts of the Company and its wholly-owned
subsidiaries. All significant intercompany transactions have been
eliminated in consolidation.
On October 31, 1994, Palais Royal, Inc., a wholly-owned subsidiary
of the Company, purchased a significant portion of the assets of
the Beall-Ladymon Corporation ("Beall-Ladymon") for $20.8 million
in cash. The assets acquired consisted primarily of customer
accounts receivable and fixed assets. In addition, the Company
assumed leases for 49 store locations. Beall-Ladymon was a
regional apparel retailer which operated stores primarily in
Louisiana, Arkansas and Mississippi. In accordance with the terms
of the purchase agreement, Beall-Ladymon was required to close all
of the store locations during the fourth quarter of 1994. The
Company will operate 45 of the acquired locations as apparel
retail stores following a brief conversion period.
The following unaudited pro forma information gives effect to the
Beall-Ladymon acquisition as if it had occurred at the beginning
of the periods presented and includes operating activity of
Beall-Ladymon prior to the beginning of the closure period (in
thousands):
FISCAL YEAR
---------------------
1993 1994
-------- --------
Net sales ............................. $609,857 $613,994
======== ========
Income before extraordinary item ...... $ 17,051 $ 12,144
======== ========
Net income ............................ $ 843 $ 11,836
======== ========
The above amounts are based on certain estimates and assumptions
which the Company believes are reasonable. The pro forma results
do not purport to be indicative of the results which would have
occurred if the acquisition had actually taken place at the
beginning of the periods presented; nor are they necessarily
indicative of the results of any future periods.
The Beall-Ladymon acquisition was accounted for under the purchase
method of accounting. Accordingly, the total acquisition cost was
allocated to the assets acquired and liabilities assumed based
upon their estimated fair values. The $4.8 million excess of the
purchase price over the estimated fair value of such assets and
liabilities was recognized as goodwill and will be amortized on a
straight-line basis over fifteen years.
Effective May 30, 1992, SRI acquired all of the outstanding common
and preferred stock of Fashion Bar, Inc. ("Fashion Bar").
Unaudited pro forma net sales and net income for 1992, giving
F-13
effect to the transaction as if it occurred at the beginning of
1992, were $523.6 million and $12.8 million, respectively.
FISCAL YEAR: The fiscal years discussed herein end on the Saturday
nearest to January 31 in the following calendar year. For example,
references to "1994" mean the fiscal year ended January 28, 1995.
RECLASSIFICATIONS: The accompanying consolidated financial statements
include reclassifications from financial statements issued in
previous years. Non-interest credit expenses have been
reclassified to selling, general and administrative expenses on
the Statement of Operations.
MERCHANDISE INVENTORIES: The Company states its merchandise inventories
at the lower of cost or market, cost being determined using the
retail last-in, first-out ("LIFO") method.
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS: Property, equipment and
leasehold improvements are stated at cost and depreciated over
their estimated useful lives using the straight line method. The
estimated useful lives of leasehold improvements do not exceed the
term, including renewal options, of the related lease. The
estimated useful lives in years are as follows:
Buildings............................................ 20-25
Store and office fixtures and equipment.............. 7-12
Warehouse equipment.................................. 5-15
Favorable leases and leasehold improvements.......... 15-50
INCOME TAXES: The provision for income taxes is computed based on the
pretax income included in the consolidated statement of
operations. The asset and liability approach is used to recognize
deferred tax liabilities and assets for the expected future tax
consequences of temporary differences between the carrying amounts
and the tax basis of assets and liabilities. Beginning in 1993,
the Company is included in the consolidated federal tax return of
its parent. As a result, federal tax amounts for 1993 and 1994
have been determined for the entities in the consolidated group,
including the Company, based upon the impact of each entity's tax
attributes on the consolidated federal tax provision.
POST EMPLOYMENT BENEFITS: The Company adopted Statement of Financial
Accounting Standards No. 112, Employers' Accounting for
Postemployment Benefits ("SFAS 112") during the first quarter of
1994. Due to the Company's limited Postemployment benefits, the
adoption of SFAS 112 did not have a material impact on its
consolidated financial statements.
DEBT ISSUE COSTS: Debt issue costs are accounted for as a deferred
charge and amortized on a straight-line basis over the term of the
related issue.
GOODWILL AND OTHER INTANGIBLES: The Company amortizes goodwill and
intangible assets on a straight-line basis over the estimated
future periods benefited, not to exceed forty years. Amortization
periods for goodwill and other intangibles associated with
acquisitions are currently five to forty years. Each year, the
Company evaluates the remaining useful life associated with
goodwill based upon, among other things, historical and expected
long-term results of operations. Accumulated amortization of
goodwill was $3.2 million and $3.7 million at January 29, 1994 and
January 28, 1995, respectively.
F-14
STORE PRE-OPENING AND ADVERTISING EXPENSES: Pre-opening expenses of new
stores are deferred and charged to operations in the year the
store opens. During 1994, the Company incurred $0.5 million of
pre-opening expenses related to stores which will open in 1995.
Historically, pre-opening costs have been insignificant.
Advertising costs are charged to operations when the related
advertising first takes place. Advertising costs were $19.4
million, $22.3 million, and $22.3 million for 1992, 1993 and 1994,
respectively. Prepaid advertising costs were $0.5 million and $0.9
million at January 29, 1994 and January 28, 1995, respectively.
STATEMENT OF CASH FLOWS: The Company considers highly liquid investments
with initial maturities of less than three months to be cash
equivalents in its statement of cash flows.
FINANCIAL INSTRUMENTS: The Company records all financial instruments at
cost. The fair values of accounts receivable and accounts payable
approximate cost.
NOTE 2 - STORE CLOSURES:
During the fourth quarter of 1994, the Company approved a store closure
plan (the "Store Closure Plan") for the closure of 40 Fashion Bar stores,
primarily located in major regional malls within the Denver area. Management
determined that the investment needed to upgrade these stores and the
promotional efforts required to make these stores more competitive were neither
justified nor compatible with the Company's overall merchandising philosophies.
The Company will operate 15 Fashion Bar stores after completion of the Store
Closure Plan. The Company has accrued $5.2 million for the expected costs
associated with the Store Closure Plan which include: occupancy ($4.2 million);
severance ($0.4 million); write-off of fixed assets and other intangibles ($0.9
million); and other expenses ($0.8 million), and the write-off of negative
goodwill ($1.1 million) allocated to the stores to be closed. The Company
expects to complete the Store Closure Plan during 1995.
Net sales and operating income attributable to the stores to be closed
were as follows (in thousands):
FISCAL YEAR
-------------------------------------
1992 1993 1994
------- -------- -------
Net sales .................. $18,101 $ 25,442 $23,174
======= ======== =======
Operating income (loss) .... $ 1,743 $ (213) $ 618
======= ======== =======
NOTE 3 - REFINANCING:
During 1993, the Company completed its refinancing (the "Refinancing")
which included (i) the replacement of the existing accounts receivable facility
("Accounts Receivable Facility") with a new accounts receivable securitization
program ("Accounts Receivable Program") and (ii) the issuance of 10% senior
notes due 2000 (the "Senior Notes") and 11% senior subordinated notes due 2003
(the "Senior Subordinated Notes") which replaced certain
F-15
previously outstanding debt. As a result of the Refinancing, the Company
recorded an extraordinary charge of $16.2 million net of applicable income taxes
of $8.8 million during 1993.
NOTE 4 - ACCOUNTS RECEIVABLE:
Accounts receivable balances were as follows (in thousands):
<TABLE>
<CAPTION>
JANUARY 29, 1994 JANUARY 28, 1995
---------------- ----------------
<S> <C> <C>
Gross customer accounts receivable ............. $ 189,237 $ 210,941
Accounts receivable sold ....................... (147,100) (140,000)
Other receivables .............................. 1,981 2,647
--------- ---------
44,118 73,588
Less - allowance for doubtful accounts ......... (1,944) (3,232)
--------- ---------
$ 42,174 $ 70,356
========= =========
</TABLE>
During 1993, the Company implemented the Accounts Receivable Program
which provides a source of funds from the sale of accounts receivable to a
master trust (the "Trust"). Pursuant to the Accounts Receivable Program, the
Company sells all of the accounts receivable generated by the holders of the
Company's private label credit card accounts to its wholly-owned subsidiary, SRI
Receivables Purchase Co., Inc. ("SRPC"), on a daily basis. SRPC is a separate
limited-purpose subsidiary that is operated in a fashion intended to ensure that
its assets and liabilities are distinct from those of the Company and its other
affiliates as SRPC's creditors have a claim on its assets prior to becoming
available to any creditor of the Company. SRPC sells, on a daily basis, the
accounts receivable purchased from the Company to the Trust in exchange for cash
or a certificate representing an undivided interest in the Trust. At its
inception, the Trust issued $140.0 million of term certificates and a $40.0
million revolving certificate representing undivided interests in the Trust. The
Trust did not receive any cash immediately from the issuance of the revolving
certificate. Instead, the holder of the revolving certificate agreed to purchase
interests in the Trust equal to the amount of accounts receivable in the Trust
above the level required to support the term certificates and the transferor's
retained interest (currently $170.0 million), up to a maximum of $40.0 million.
If receivable balances in the Trust fall below the level required to support the
term certificates and revolving certificates, certain principal collections may
be retained in the Trust until such time as the receivable balances exceed the
certificates then outstanding and the required transferor's interest. The
Company owns an undivided interest in the accounts receivable in the Trust not
represented by the term or revolving certificates and will continue to service
all of the accounts receivable in the Trust. The Trust may issue additional
series of certificates from time to time. Terms of any future series will be
determined at the time of issuance. The outstanding balances of the term
certificates totaled $140.0 million at January 29, 1994 and January 28, 1995.
The outstanding balance of the revolving certificate was $7.1 million and zero
at January 29, 1994 and January 28, 1995, respectively.
Total accounts receivable sold to the Trust during 1993 and 1994 were
$285.1 million and $278.6 million, respectively. In addition, the Company
transferred $10.0 million of accounts receivable purchased from Beall-Ladymon
(see Note 1) to the Trust on February 1, 1995. The cash flows generated from the
accounts receivable in the Trust are dedicated to (i) the purchase of new
accounts receivable generated by the Company, (ii) payment of a return on the
certificates and (iii) the payment of a servicing fee to SRI. Any remaining cash
flows are remitted to the Company. The term certificates entitle the holders to
receive a return, based upon the London Interbank Offered Rate ("LIBOR"), plus
F-16
a specified margin paid on a quarterly basis. Principal payments commence in
December 31, 1999 but can be accelerated upon occurrence of certain events. The
revolving certificates entitle the holders to receive a return based upon a
floating LIBOR rate, plus a specified margin, or prime rate, at the option of
the Company paid on a monthly basis. The Company is protected against increases
above 10% under an agreement entered into with a bank. The Company is exposed to
loss in the event of non-performance by the bank. However, the Company does not
anticipate non-performance by the bank. At January 28, 1995, the average rate of
return on the term certificates was 7.4%. The purchase commitment for the
Revolving certificate is five years, subject to renewal at the option of the
parties. The revolving certificate holders are entitled to repayment in the
event the accounts receivable decrease below that required to support such
certificates.
As a result of the implementation of the Accounts Receivable Program in
1993, the Company's financial statements no longer reflect the accounts
receivable, finance charge income, bad debt expense or servicing costs
attributable to the Trust accounts receivable supporting the outstanding term or
revolving certificates. The Company recognized gains of $3.3 million and $1.0
million on the sale of accounts receivable under the Accounts Receivable Program
for 1993 and 1994, respectively, which have been reflected as a reduction of
selling, general and administrative expenses.
The provision for doubtful accounts was $11.5 million, $6.6 million and
$2.6 million for 1992, 1993 and 1994, respectively. The provision for doubtful
accounts for 1993 and 1994 does not reflect the Company's recourse obligations
under the Accounts Receivable Program which have been included in the
calculation of the gain on the sale of accounts receivable.
NOTE 5 - MERCHANDISE INVENTORIES:
The retail LIFO method is used to value all merchandise inventory.
Management believes that the LIFO method, which charges the most recent
merchandise costs to the results of current operations, provides a better
matching of current costs with current revenues in the determination of
operating results. Some companies use the retail first-in, first-out ("FIFO")
method in valuing their inventories. If the retail FIFO method had been used,
inventories at January 29, 1994 and January 28, 1995 would have been higher by
$1.3 million and $0.4 million, respectively.
NOTE 6 - PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Property, equipment and leasehold improvements were as follows (in
thousands):
<TABLE>
<CAPTION>
JANUARY 29, 1994 JANUARY 28, 1995
---------------- ----------------
<S> <C> <C>
Land........................................................ $ 3,074 $ 3,074
Buildings................................................... 16,336 16,313
Fixtures and equipment...................................... 59,969 72,624
Leasehold improvements...................................... 27,528 37,542
--------------- ---------------
106,907 129,553
Less - accumulated depreciation............................. (45,399) (53,951)
--------------- ---------------
$ 61,508 $ 75,602
=============== ===============
</TABLE>
F-17
NOTE 7 - CENTRALIZATION AND CONSOLIDATION PROGRAMS:
At the date of the acquisition of Bealls, the Company undertook a
centralization and consolidation program which included the expected closure of
twenty-six store locations (the "Store Closure Program") and certain operating
facilities, as well as the consolidation of certain duplicate administrative and
distribution functions. At January 30, 1993, twenty-one stores remained in the
Store Closure Program, sixteen of which had been closed. During 1993, based on
the Company's ongoing assessment of scheduled store closures, the remaining five
open stores were removed from the Store Closure Program, and their operating
results for 1993 and 1994 have been included in the Company's results of
operations. As a result of the removal of the remaining five stores from the
Store Closure Program, the Company reduced its consolidation and centralization
accrual by $2.3 million. Of this amount, $1.1 million, before applicable taxes,
was credited to goodwill and the remaining $1.2 million credited to long-term
liabilities to reflect the ongoing adverse lease commitments associated with the
removed stores. At January 29, 1994 and January 28, 1995, the balance of the
consolidation and centralization accrual was $5.4 million and $4.7 million,
respectively, primarily reflecting the lease costs associated with closed
stores. During 1992, 1993 and 1994, the Company charged $2.6 million, $0.8
million and $0.7 million, respectively, to the accrual.
At the date of the acquisition of Fashion Bar, the Company undertook a
consolidation program designed to eliminate certain duplicate administrative and
distribution functions previously performed by Fashion Bar. During 1992, 1993
and 1994, the Company charged $2.1 million, $0.3 million and $0.1 million,
respectively, to the accrual.
NOTE 8 - LONG-TERM DEBT:
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
January 29, 1994 January 28, 1995
---------------- ----------------
<S> <C> <C>
HELD BY THIRD PARTIES:
Senior Notes................................................ $ 125,000 $ 90,800
Senior Subordinated Notes................................... 100,000 100,000
Revolving Credit Agreement.................................. -- --
Bealls Holding Subordinated Notes, net of discount.......... 10,037 10,686
FB Holdings Subordinated Notes, net of discount............. 3,620 3,939
Bealls Holding Junior Subordinated Debentures, net of
discount................................................ 6,009 6,095
Port Arthur IDRB............................................ 2,217 2,117
Other long term debt........................................ 634 451
--------------- ---------------
247,517 214,088
Less - current maturities................................... (282) (261)
--------------- ---------------
$ 247,235 $ 213,827
=============== ===============
HELD BY RELATED PARTY:
Senior Notes................................................ $ 15,000 $ 39,200
=============== ===============
</TABLE>
F-18
The Senior Notes were originally issued with a principal amount of
$150.0 million and bear interest at 10% payable semi-annually on February 15 and
August 15. The Company is required to make a mandatory sinking fund payment on
August 15, 1999 equal to twenty five percent of the original principal amount.
The Company has purchased $20.0 million of the Senior Notes at a cost of $20.4
million which satisfied a portion of the August 15, 1999 sinking fund
requirement. The Senior Notes are general unsecured obligations and rank senior
to all subordinated debt of the Company including the Senior Subordinated Notes.
The Senior Subordinated Notes bear interest at 11% payable
semi-annually on February 15 and August 15. The Company is required to make a
mandatory sinking fund payment on August 15, 2002 equal to forty percent of the
original principal amount. The Senior Subordinated Notes are subordinated to the
obligations under the Senior Notes.
The Senior Notes and Senior Subordinated Notes contain restrictive
covenants which, among other things (i) limit SRI's ability to sell certain
assets, pay dividends, retire its common stock or retire certain debt, (ii)
limit its ability to incur additional debt or issue stock and (iii) limit
certain related party transactions.
The Company has a revolving credit agreement with a bank (the "Credit
Agreement") under which it may draw up to $25.0 million. Of this amount, $15.0
million may be used to support letters of credit. As of January 28, 1995, $10.8
million of the total commitment was used to collateralize letters of credit
resulting in available funds of $14.2 million. Effective March 31, 1995, Company
entered into a separate agreement with the bank under which it may borrow an
additional $10.0 million for seasonal working capital needs (the "Seasonal
Credit Agreement" and together with the Credit Agreement, the "Revolving Credit
Agreement"). Funds are available under the Seasonal Credit Agreement from August
15 through January 15 of each calendar year. The Revolving Credit Agreement is
available through February 3, 1998 and provides for a commitment fee of 1/2 of
1% of the average daily unused portion of the commitment amount paid on a
quarterly basis. Interest is charged on outstanding loans at a base rate plus a
specified margin. The base rate is the higher of the bank's prime rate or 1/2 of
1% above the Federal Funds Effective Rate. The specified margin range is 1.25%
to 2.75% based on calculated debt service ratios as defined in the agreement.
The Revolving Credit Agreement contains covenants which, among other things,
restricts the (i) incurrance of additional debt, (ii) purchase of certain
investments, (iii) payment of dividends, (iv) formation of certain business
combinations, (v) disposition of certain assets, (vi) acquisition of
subordinated debt, (vii) use of proceeds received under the agreement and (viii)
transactions with related parties. The Revolving Credit Agreement also requires
that SRI maintain a debt service ratio above a predetermined level. The
Revolving Credit Agreement is secured by the Company's distribution center
located in Jacksonville, Texas, including equipment located therein, and a
pledge of SRPC stock. The net book value of the distribution center was
approximately $11.0 million at January 28, 1995.
The increasing rate 3 Bealls Holding, Inc. ("Bealls Holding")
subordinated debentures due 2002 (the "Bealls Holding Subordinated Debentures")
in aggregate principal amount of approximately $15.0 million bear interest at
10% through 1994, 11% in 1995 and 12% thereafter until maturity. Interest is
payable semiannually on June 30 and December 31. Original issue discount of $7.3
million is being charged to interest expense over the term to maturity using the
effective interest method. The combination of coupon interest payments and
original issue discount results in an effective interest rate of 20.9%. The
Bealls Holding Subordinated Debentures may be prepaid, at the Company's option,
at their face value. The Company is required to redeem the Bealls Holding
Subordinated Debentures beginning no later than December 31, 1997, in no more
than six equal annual installments. The Bealls Holding Subordinated Debentures
are subordinated to all debt except the ARI Senior Discount Debentures. Due to
the merger of Bealls Holding into SRI in 1993, SRI is the primary obligor under
these debentures.
F-19
In connection with the acquisition of Fashion Bar, FB Holdings issued
approximately $3.6 million aggregate principal amount of 7% FB Holdings
subordinated notes due 2000 ("FB Holdings Subordinated Notes") to former
stockholders of Fashion Bar. The FB Holdings Subordinated Notes were recorded at
their estimated fair value at issuance date of $3.1 million. The difference
between the estimated fair value and principal amount of $0.5 million is being
charged to interest expense over the term to maturity using the effective
interest method. The FB Holdings Subordinated Notes are due in two equal
installments on June 30, 1999 and 2000. SRI is required to prepay certain
principal amounts of the FB Holdings Subordinated Notes in certain
circumstances. The FB Holdings Subordinated Notes may be prepaid at any time in
whole or in part at SRI's option. The FB Holdings Subordinated Notes bear
interest at 7% per annum, payable quarterly. The combination of coupon interest
payments and original issue discount results in an effective interest rate of
9.0%. Prior to and including June 1995, SRI may at its option, pay interest in
the form of additional FB Holdings Subordinated Notes in a principal amount
equal to the amount otherwise payable in cash. The principal amount of FB
Holdings Subordinated Notes at January 28, 1995 was $4.2 million. The FB
Holdings Subordinated Notes are subordinated to all debt except the ARI Senior
Discount Debentures. Due to the merger of FB Holdings into SRI in 1993, SRI is
the primary obligor under these debentures.
In connection with the acquisition of Bealls, Bealls Holding issued the
7% Bealls Holding junior subordinated debentures due 2003 ("Bealls Holding
Junior Subordinated Debentures") at a face value of approximately $12.5 million,
net of discount of approximately $8.4 million. Such discount is being charged to
interest expense over the term to maturity using the effective interest method.
The Bealls Holding Junior Subordinated Debentures are limited to an aggregate
principal amount of approximately $18.3 million. Interest is payable
semiannually on June 30 and December 31. The combination of coupon interest
payments and original issue discount results in an effective interest rate of
39.4%. The principal amount of Bealls Holding Junior Subordinated Debentures
outstanding at January 28, 1995 was $14.3 million. The Bealls Holding Junior
Subordinated Debentures are subordinated to all debt except the ARI Senior
Discount Debentures. Due to the merger of Bealls Holding into SRI in 1993, SRI
is the primary obligor under these debentures.
The Port Arthur industrial development revenue bond (the "Port Arthur
IDRB") bears interest at 75% of the prime rate payable monthly. The interest
rate applied to the Port Arthur IDRB at January 28, 1995 was 6.6%. The Port
Arthur IDRB is collateralized by a building with a net book value of
approximately $1.0 million. Under a separate agreement, the Company is required
to make scheduled annual sinking fund payments ranging from $0.1 million to $0.2
million.
Aggregate maturities of long-term debt for the next five years are:
1995 - $0.3 million; 1996 - $0.3 million; 1997 - $2.7 million; 1998 - $2.7
million and 1999 - $22.2 million.
Management estimates the fair value of its long-term debt to be $279.4
million and $246.0 million at January 29, 1994 and January 28, 1995,
respectively. In developing its estimates, management considered: quoted market
prices for each instrument, if available; current market interest rates in
relation to the coupon interest rates of each instrument; the relative
subordination of each instrument and relative liquidity of the instrument as
indicated by the presence or lack of an active market.
Concurrently with its formation, ARI issued $149.1 million aggregate
principal amount of its 12 3/4% senior discount debentures due 2005 ( the "ARI
Senior Discount Debentures"), net of a $69.1 million discount. The discount
accretes though August 15, 1998 after which cash interest is payable at 12 3/4%
semi-annually through maturity. The ARI Senior Discount Debentures are secured
by a first priority lien and security interest in all of the issued and
F-20
outstanding stock and intercompany debt, if any, of the Company. However, since
the operations of ARI are conducted through the Company, ARI is dependent on the
cash flow of the Company to meet its obligations under the ARI Senior Discount
Debentures. As a result, the ARI Senior Discount Debentures are effectively
subordinated to all debt and all obligations of the Company, which would include
trade accounts payable.
NOTE 9 - MANDATORILY REDEEMABLE PREFERRED STOCK:
On August 2, 1993, the Company, in connection with the Refinancing (see
Note 3), redeemed all of the outstanding shares of its 15% cumulative senior
redeemable preferred stock and 14% cumulative junior redeemable preferred stock
(8,080 and 2,000 shares, respectively) at the aggregate of their liquidation
value plus accrued and unpaid dividends amounting to $16.0 million and $3.8
million, respectively.
NOTE 10 - STOCK OPTION PLAN:
During 1993, the Company adopted the Third Amended and Restated Stock
Option Plan (the "Stock Option Plan") which was designed to provide incentives
to present and future key employees and advisors to the Company (the
"Participants") as selected by the compensation committee of the Board of
Directors (the "Board"). Options to purchase shares of the Company's common
stock may be granted to any Participant at any time, at such price and on such
terms as established by the Board. Options granted under the Stock Option Plan
may be either non-qualified or incentive stock options ("ISOs") within the
meaning of Section 422A of the Internal Revenue Code or in a form consistent
with the Stock Option Plan as the Board may determine.
The number of shares of common stock which may be granted under the
Stock Option Plan shall not exceed 2,000,000 shares. All Options issued as ISOs
under the Stock Option Plan are required to (i) have an exercise price not less
than 100% of the fair value of the common stock at the date of grant, (ii) not
be exercisable more than 10 years after grant date, (iii) be nontransferable and
(iv) be exercisable only during the holder's employment by the Company or a
period not exceeding three months following termination thereof. Options which
are not ISOs may provide that the holder receive cash equal to the excess of the
fair market value per share of common stock at the exercise date over the
exercise price per share, in lieu of issuance of common stock upon exercise of
the option. Upon termination of the Participant's employment with the Company,
the Company may, at its option, repurchase any vested common stock obtained
under the Stock Option Plan at the fair market value of the common stock. Any
unvested common stock obtained under the Stock Option Plan may be repurchased at
the Company's option, at the original issuance cost of the common stock. The
Stock Option Plan also provides that the Company may sell to any Participant
shares of common stock or preferred stock consistent with the Plan and at the
discretion of the Board.
The Company records compensation expense for the difference between the
exercise price of options granted and the fair market value of the underlying
stock as of the date of the grant. Such compensation expense is recognized over
the vesting period of the related options.
During 1993, all of SRI's options with an exercise price of $0.10 were
exercised. Additionally, the Board granted active Participants who exercised
such options one ARI option with an exercise price of $2.15 for every ten SRI
options exercised. All of SRI's options with an exercise price of $5.00 remained
outstanding and were exchanged for ARI options with an exercise price of $0.10
and the right to receive a distribution of $0.95 per option which will be paid
as the options vest. This distribution is being recognized as compensation
expense over the vesting period.
F-21
<PAGE>
All options exercised during 1992 and 1993 were at an exercise price of
$0.10 per share. Prices of options outstanding at the end of 1992 were $0.10 or
$5.00.
A summary of the activity in the Stock Option Plan follows:
<TABLE>
<CAPTION>
FISCAL YEAR
------------------------------------------
1992 1993 1994
----------- ----------- -----------
<S> <C> <C> <C>
Options outstanding at beginning of year................... 931,775 863,625 --
Granted............................................... 122,200 363,100 --
Surrendered........................................... (9,400) (10,400) --
Exercised............................................. (180,950) (736,725) --
Exchanged............................................. -- (479,600) --
----------- ----------- -----------
Options outstanding and exercisable at end of year......... 863,625 -- --
=========== =========== ===========
Options vested at end of year 556,480 -- --
=========== =========== ===========
</TABLE>
NOTE 11 - OPERATING LEASES:
The Company leases stores, service center facilities, the corporate
headquarters and equipment under operating leases. A number of store leases
provide for escalating minimum rent. Rental expense is recognized on a
straight-line basis over the life of such leases. The majority of the Company's
store leases provide for contingent rentals, generally based upon a percentage
of gross sales. The Company has renewal options for most of its store leases;
such leases generally require that the Company pay for utilities, taxes and
maintenance expense. A summary of rental expense associated with operating
leases follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
--------------------------------------------
1992 1993 1994
------------- ------------- --------------
<S> <C> <C> <C>
Minimum rentals............................................ $ 21,560 $ 22,319 $ 22,979
Contingent rentals......................................... 2,445 2,818 2,874
Equipment rentals.......................................... 1,133 1,273 784
------------- ------------- --------------
$ 25,138 $ 26,410 $ 26,637
============= ============= ==============
</TABLE>
F-22
<PAGE>
Minimum rental commitments on long-term operating leases at January 28,
1995, net of sub-leases, are as follows (in thousands):
<TABLE>
<S> <C>
Fiscal Year:
1995................................................................ $ 26,388
1996................................................................ 25,610
1997................................................................ 24,010
1998................................................................ 22,637
1999................................................................ 20,539
Thereafter........................................................... 105,903
-------------
$ 225,087
=============
</TABLE>
The Company's corporate headquarters and six Palais Royal stores are
leased from a partnership in which a Company director is a general partner. The
lease relating to the corporate headquarters is for a term of fifty years
expiring in 2032 and includes an established minimum annual rate adjusted every
three years for changes in the Consumer Price Index. Three of the Palais Royal
store leases are for terms of twenty years expiring between 1999 and 2000. The
remaining three store leases are for terms of twenty-five years expiring between
2005 and 2010. All of the store leases provide options to extend the term of the
lease and for contingent rentals based on a percentage of gross sales. The
Company recognized rental expense of approximately $2.0 million in each of 1992,
1993 and 1994 for all such leases. Future minimum lease payments total $45.8
million, $9.4 million of which is payable over the next five fiscal years for
all such leases. The Company believes that the terms of all such leases are
comparable to leases with unaffiliated third parties covering similar
properties.
F-23
<PAGE>
NOTE 12 - EMPLOYEE BENEFIT PLANS:
Pension benefits for employees are provided under the SRI Retirement
Plan (the "Plan"), a qualified benefit plan. Benefits are administered through a
Trust arrangement which provides monthly payments or lump sum distributions. The
Plan covers substantially all employees who have completed one year of service
with one thousand hours of service. Benefits under the plan are based upon a
percentage of the participant's earnings during each year of credited service.
The following sets forth the funded status of the Plan and the amounts
recognized in the consolidated financial statements (in thousands):
<TABLE>
<CAPTION>
JANUARY 29, 1994 JANUARY 28, 1995
----------------- -----------------
<S> <C> <C>
Actuarial present value of benefits:
Vested benefit obligations.............................. $ (20,190) $ (18,590)
=============== ===============
Accumulated benefit obligations......................... $ (21,250) $ (19,630)
=============== ===============
Projected benefit obligations............................... $ (26,730) $ (24,530)
Market value of Plan assets, primarily fixed income and
equity securities....................................... 18,950 16,320
--------------- ---------------
Pension obligations in excess of assets..................... (7,780) (8,210)
Unrecognized prior service cost (income).................... 218 (34)
Unrecognized net loss....................................... 6,389 6,078
Adjustment required to recognize minimum liability.......... (1,127) (1,144)
--------------- ---------------
Accrued pension cost........................................ $ (2,300) $ (3,310)
=============== ===============
Assumptions utilized in determining projected obligations
and funding amounts:
Discount rate............................................... 7.5% 8.75%
Rate of increase in compensation levels..................... 4.0% 4.0%
Expected long-term rate of return on Plan assets............ 9.0% 9.0%
</TABLE>
The Company's funding policy for the Plan is to contribute the minimum
amount required by applicable regulations. During 1993 and 1994, in accordance
with Statement of Financial Accounting Standards No. 87, the Company recorded a
$1.1 million and $0.2 million adjustment to recognize the excess of the
accumulated benefit obligation over the market value of the Plan assets,
respectively. Accordingly, the Company recorded a charge to retained earnings of
$0.6 million and $0.1 million, net of applicable tax and unrecognized prior
service cost, for 1993 and 1994, respectively.
F-24
<PAGE>
The components of pension cost for the Plan were as follows (in
thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
--------------------------------------------
1992 1993 1994
------------- ------------- --------------
<S> <C> <C> <C>
Service cost............................................... $ 681 $ 743 $ 887
Interest cost.............................................. 1,746 1,861 1,995
Actual loss (return) on Plan assets........................ (1,449) (1,955) 940
Net amortization and deferral.............................. (203) 409 (2,174)
------------- ------------- --------------
$ 775 $ 1,058 $ 1,648
============= ============= ==============
</TABLE>
Prior to its acquisition, 3 Beall Brothers 3, Inc. sponsored an
unfunded, nonqualified Benefit Restoration Plan which provided certain key
executives defined pension benefits in excess of limits imposed by federal tax
law. In February 1989, this plan was terminated. The recorded liability for this
plan was $1.3 million at January 28, 1995.
NOTE 13 - RELATED PARTY TRANSACTIONS:
The Company had a consulting agreement with a principal shareholder of
the Company. Pursuant to the consulting agreement, the Company paid the
shareholder $0.6 million and $0.3 million during 1992 and 1993, respectively. In
addition, the Company accrued $0.3 million during 1993 for professional services
rendered by the shareholder in connection with the Refinancing.
The Company's corporate headquarters and six Palais Royal stores are
leased from a partnership in which a Company officer is a general partner (see
Note 11).
An affiliate of a principal shareholder of the Company received fees
for professional services rendered and expense reimbursements in the amounts of
$0.6 million, $1.5 million and $0.6 million for 1992, 1993 and 1994,
respectively.
During 1993, the Company entered into an employment agreement with an
officer of the Company. As part of this agreement, the Company agreed to
purchase the officer's former residence for subsequent resale for $1.2 million
and loaned $0.3 million to him. Such loan is due October 2, 1996 and bears a
market rate of interest.
F-25
<PAGE>
NOTE 14 - INCOME TAXES:
All Company operations are domestic. Income tax expense charged to
continuing operations consisted of the following (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
--------------------------------------------
1992 1993 1994
------------- ------------- --------------
<S> <C> <C> <C>
Federal income tax expense (benefit):
Current............................................... $ 4,839 $ 9,989 $ 7,297
Deferred.............................................. 1,857 (601) 85
------------- ------------- --------------
6,696 9,388 7,382
------------- ------------- --------------
State income tax expense (benefit):
Current............................................... 877 1,250 771
Deferred.............................................. 767 (1,308) 186
------------- ------------- --------------
1,644 (58) 957
------------- ------------- --------------
$ 8,340 $ 9,330 $ 8,339
============= ============= ==============
</TABLE>
A reconciliation between the federal income tax expense charged to
continuing operations computed at statutory tax rates and the actual income tax
expense recorded follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
--------------------------------------------
1992 1993 1994
----------- ----------- ----------
<S> <C> <C> <C>
Federal income tax expense at the statutory rate........... $ 6,995 $ 9,256 $ 8,004
State income taxes, net.................................... 1,085 125 797
Permanent difference, net.................................. 181 (12) (462)
Other, net................................................. 79 (39) --
------------- ------------- --------------
$ 8,340 $ 9,330 $ 8,339
============= ============= ==============
</TABLE>
The 1993 income tax benefit relating to the extraordinary item of $8.8
million (see Note 3) is comprised of current federal tax benefit ($7.4 million),
deferred federal tax benefit ($1.3 million) and state tax benefit ($0.1
million). The 1994 income tax benefit relating to the extraordinary item
associated with the retirement of the SRI Senior Notes (see Note 8) is comprised
of $0.2 million current federal tax benefit.
F-26
<PAGE>
Deferred tax liabilities (assets) consist of the following (in
thousands):
<TABLE>
<CAPTION>
JANUARY 29, 1994 JANUARY 28, 1995
---------------- ----------------
<S> <C> <C>
Gross deferred tax liabilities:
Depreciation and amortization.......................... $ 7,333 $ 8,303
Inventory reserves..................................... 2,678 3,175
Gain on sale of accounts receivable.................... 1,130 822
Other.................................................. 770 1,310
--------------- ---------------
11,911 13,610
--------------- ---------------
Gross deferred tax assets:
Allowance for doubtful accounts........................ (3,087) (3,174)
Accrued consolidation costs............................ (2,022) (1,968)
Net operating loss carryforwards....................... (650) --
Accrued expenses....................................... (1,449) (1,518)
Prepaid expenses....................................... (1,405) --
Pensions............................................... (1,364) (1,404)
Escalating leases...................................... (944) (962)
Charitable contribution carryforward................... (917) (620)
Accrued payroll costs.................................. (863) (1,196)
Accrued store closure costs............................ -- (2,085)
Other.................................................. (237) (975)
--------------- ---------------
(12,938) (13,902)
--------------- ---------------
Deferred tax assets valuation allowance..................... 650 --
--------------- ---------------
$ (377) $ (292)
=============== ===============
</TABLE>
The utilization of any carryforwards which originated prior to the
Company's acquisition of Bealls or Fashion Bar are recorded as an adjustment to
goodwill or other intangibles associated with the respective acquisition.
NOTE 15 - SUPPLEMENTAL OPERATING INFORMATION:
Other non-operating expense consisted of the following (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
------------------------------------------
1992 1993 1994
------------- ----------- ------------
<S> <C> <C> <C>
Gain on extinguishment of debt............................. $ 136 $ -- $ --
Cost of proposed financing transactions.................... (1,669) -- --
Litigation settlement...................................... (743) -- --
------------- ----------- ------------
$ (2,276) $ -- $ --
============= =========== ============
</TABLE>
F-27
<PAGE>
NOTE 16 - SUBSIDIARY FINANCIAL INFORMATION:
Palais Royal guarantees the Senior Notes and the Senior Subordinated
Notes. Summarized financial information for Palais Royal and its wholly owned
subsidiary, SRPC, follows (amounts stated in thousands and exclude intercompany
transactions):
<TABLE>
<CAPTION>
JANUARY 29, 1994 JANUARY 28, 1995
----------------- -----------------
<S> <C> <C>
BALANCE SHEET INFORMATION:
Current assets............................................. $ 156,508 $ 200,347
Noncurrent assets.......................................... 106,878 122,998
Current liabilities........................................ 62,186 73,273
Noncurrent liabilities, including SRI debt allocated to
Palais Royal.......................................... 278,556 265,299
<CAPTION>
FISCAL YEAR
---------------------------------------------
1992 1993 1994
------------- ------------- ---------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS INFORMATION:
Net sales.................................................. $ 504,401 $ 557,422 $ 581,463
Gross margin............................................... 154,265 172,579 182,804
Operating income........................................... 53,242 58,392 51,172
Income before income tax................................... 22,374 28,266 23,371
Net income................................................. 14,227 3,977 14,581
STATEMENT OF CASH FLOW DATA:
Cash provided by operating activities ..................... $ 26,302 $ 151,832 $ 45
Cash used in investing activities.......................... (12,809) (8,064) (38,563)
Cash used in financing activities including SRI debt
allocated to Palais Royal............................. (683) (80,660) (11,189)
</TABLE>
NOTE 17 - COMMITMENTS AND CONTINGENCIES:
LITIGATION: The Company is subject to claims and litigation arising in
the normal course of its business. The Company does not
believe that any of these proceedings will have a material
adverse effect on its financial position or its results of
operations.
LETTERS OF CREDIT: The Company issues letters of credit to support
certain merchandise purchases which are required to be
collateralized. The Company had outstanding letters of credit
totaling $10.8 million at January 28, 1995, all of which were
collateralized by the Revolving Credit Agreement (see Note 8).
These letters of credit expire within twelve months of
issuance.
F-28
CONCENTRATION OF CREDIT RISK: Financial instruments which potentially
subject the Company to concentrations of credit risk are
primarily cash, short-term investments and accounts
receivable. The Company's cash management and investment
policies restrict investments to low risk, highly-liquid
securities and the Company performs periodic evaluations of
the relative credit standing of the financial institutions
with which it deals. The credit risk associated with the
Company's accounts receivable is limited by the large number
of customers in the Company's customer base. Substantially all
of the Company's customers reside in the Southwest and Rocky
Mountain States, principally Texas and Colorado.
F-29
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company is incorporated under the laws of the State of Delaware.
Section 145 of the General Corporation Law of the State of Delaware, INTER ALIA,
("Section 145") provides that a Delaware corporation may indemnify any persons
who were, or are threatened to be made, parties to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of such corporation), by
reason of the fact that such person is or was an officer, director, employee or
agent of such corporation, or is or was serving at the request of such
corporation as a director, officer employee or agent of another corporation or
enterprise. The indemnity may include expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with such action, suit or proceeding, provided such
person acted in good faith and in a manner he reasonably believed to be in or
not opposed to the corporation's best interests and, with respect to any
criminal action or proceeding, had no reasonable cause to believe that his
conduct was illegal. A Delaware corporation may indemnify any persons who are,
were or are threatened to be made, a party to any threatened, pending or
completed action or suit by or in the right of the corporation by reason of the
fact that such person was a director, officer, employee or agent of such
corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection with the defense or settlement
of such action or suit, provided such person acted in good faith and in a manner
he reasonably believed to be in or not opposed to the corporation's best
interests, provided that no indemnification is permitted without judicial
approval if the officer, director, employee or agent is adjudged to be liable to
the corporation. Where an officer, director, employee or agent is successful on
the merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against the expenses which such officer or
director has actually and reasonably incurred.
The Company's Certificate of Incorporation provides for the indemnification
of directors and officers of the Company to the fullest extent permitted by the
General Corporation Law of the State of Delaware, as it currently exists or may
hereafter be amended.
Section 145 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation or enterprise,
against any liability asserted against him and incurred by him in any such
capacity, arising out of his status as such, whether or not the corporation
would otherwise have the power to indemnify him under Section 145.
II-1
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following documents are the exhibits to this Registration Statement on
Form S-4. The page number, if any, listed opposite each exhibit indicates the
page number in the sequential numbers system in the manually signed original of
this Registration Statement on Form S-4 where such exhibit can be found.
(a) EXHIBIT SEQUENTIAL PAGE
NUMBER EXHIBIT NUMBER
------- ------- ----------------
*3.1 Certificate of Incorporation of Specialty
Retailers, Inc. (Incorporated by Reference to
Exhibit 3.1 of Registration No. 33-54504 of Form
S-1). --
*3.2 By-Laws of Specialty Retailers, Inc.,
(Incorporated by Reference to Exhibit 3.2 of
Registration No. 33-27714 of Form S-1). --
*4.1 Indenture by and between Specialty Retailers,
Inc. and The First National Bank of Boston, as
Trustee, relating to the 11% Series C and Series
D Senior Subordinated Notes due 2003 of
Specialty Retailers, Inc. dated July 27, 1995
(including form of note). --
*4.2 Indenture among Specialty Retailers, Inc., The
First National Bank of Boston, as Trustee, and
Palais Royal, Inc., as Guarantor, relating to
the 10% Senior Notes due 2000 of Specialty
Retailers, Inc., (including form of note) dated
August 2, 1993 (Incorporated by Reference to
Exhibit 4.1 of Registration No. 33-68256 on Form
S-4) --
*4.3 Indenture among Specialty Retailers, Inc., The
First National Bank of Boston, as Trustee, and
Palais Royal, Inc., as Guarantor, relating to
the 11% Senior Subordinated Notes due 2003 of
Specialty Retailers, Inc., (including form of
note) dated August 2, 1993 (Incorporated by
Reference to Exhibit 4.2 of Registration No.
33-68256 of Form S-4). --
*4.4 Indenture between 3 Bealls Holding Corporation
and Bankers Trust Company, as Trustee, relating
to 3 Bealls Holding Corporation's 9%
Subordinated Debentures due 2002 (Incorporated
by Reference to Exhibit 4.2 of Registration No.
33-24571 on Form S-4) and First Supplemental
Indenture dated August 2, 1993 (Incorporated by
Reference to Exhibit 4.3 of Registration No.
33-68256 on Form S-4). --
*4.5 Indenture between 3 Bealls Holding Corporation
and IBJ Schroder Bank and Trust Company, as
Trustee, relating to 3 Bealls Holding
Corporation's 7% Junior Subordinated Debentures
Due 2002 (Incorporated by Reference to Exhibit
4.3 of Registration No. 33-24571 of Form S-4)
and First Supplemental Indenture dated August 2,
1993 (Incorporated by reference to Exhibit 4.4
of Registration No. 3368256 on Form S-4). --
*4.6 Pooling and Servicing Agreement among SRI
Receivables Purchase Co., Inc., Specialty
Retailers, Inc., and Bankers Trust (Delaware)
(Incorporated by Reference to Exhibit 4.5 of
Registration No. 33-68256 on Form S-4). --
*4.7 Series 1993-1 Supplement among SRI Receivables
Purchase Co., Inc., Specialty Retailers, Inc.,
and Bankers Trust (Delaware) (Incorporated by
Reference to Exhibit 4.7 of Registration No.
33-68256 on Form S-4). --
II-2
*4.8 Series 1993-2 Supplement among SRI Receivables
Purchase Co., Inc., Specialty Retailers, Inc.,
and Bankers Trust (Delaware) (Incorporated by
Reference to Exhibit 4.8 of Registration No.
33-68256 on Form S-4). --
*4.9 Receivables Purchase Agreement among SRI
Receivables Purchase Co., Inc., and Originators
(Incorporated by Reference to Exhibit 4.8 of
Registration No. 33-68256 on Form S-4). --
*4.10 Certificate Purchase Agreement between SRI
Receivables Purchase Co., Inc. and the
Purchasers of the Series 1992-1 Offered
Certificates (Incorporated by Reference to
Exhibit 4.9 of Registration No. 33-68256 on Form
S-4). --
*4.11 Revolving Certificate Purchase Agreement between
SRI Receivables Purchase Co., Inc., the Facility
Agent and the Revolving Purchasers with respect
to the Class A-R Certificates (Incorporated by
Reference to Exhibit 4.10 of Registration No.
33-68256 on Form S-4). --
*4.12 Revolving Credit Agreement by and among
Specialty Retailers, Inc., Palais Royal, Inc.,
and the First National of Boston, as agent for
itself and other financial institutions
(Incorporated by Reference to Exhibit A of
current report on Form 8-K of Specialty
Retailers, Inc., dated February 9, 1994). --
*4.13 First Amendment dated July 14, 1994 to
Revolving Credit Agreement by and among
Specialty Retailers, Inc., Palais Royal, Inc.,
and the First National Bank of Boston, as agent
of itself and other financial institutions dated
as of January 28, 1994 (Incorporated by Reference
to Exhibit 4.12 on Form 10-K of Specialty
Retailers, Inc., dated January 28, 1995). --
*4.14 Second Amendment dated October 31, 1994 to
Revolving Credit Agreement by and among
Specialty Retailers, Inc., Palais Royal, Inc.,
and the First National Bank of Boston, as agent
of itself and other financial institutions dated
as of January 28, 1994 (Incorporated by Reference
to Exhibit 4.13 on Form 10-K of Specialty
Retailers, Inc., dated January 28, 1995). --
*4.15 Third Amendment dated July 5, 1995 to
Revolving Credit Agreement by and among
Specialty Retailers, Inc., Palais Royal, Inc.,
and the First National Bank of Boston, as agent
of itself and other financial institutions dated
as of January 28, 1994 (Incorporated by Reference
to Exhibit 4.14 on Form 10-K of Specialty
Retailers, Inc., dated January 28, 1995). --
*4.16 Fourth Amendment dated March 31, 1995 to
Revolving Credit Agreement by and among
Specialty Retailers, Inc., Palais Royal, Inc.,
and the First National Bank of Boston, as agent
of itself and other financial institutions dated
as of January 28, 1994 (Incorporated by Reference
to Exhibit 4.14 on Form 10-K of Specialty
Retailers, Inc., dated January 28, 1995). --
*4.17 Fifth Amendment dated July 7, 1995 to
Revolving Credit Agreement by and among
Specialty Retailers, Inc., Palais Royal, Inc.,
and the First National Bank of Boston, as agent
of itself and other financial institutions dated
as of January 28, 1994. --
II-3
*4.18 Sixth Amendment dated July 27, 1995 to Revolving
Credit Agreement by and among Specialty Retailers,
Inc., Palais Royal, Inc. and the First National
Bank of Boston, as agent of itself and other
financial institutions dated as of January 28, 1995, --
*4.19 Seasonal Revolving Credit Agreement by and among
Specialty Retailers, Inc., Palais Royal, Inc.,
and the First National of Boston, as agent for
itself and other financial institutions dated
March 31, 1995 (Incorporated by Reference to
Exhibit 4.16 on Form 10-K of Specialty
Retailers, Inc., dated January 28, 1995). --
*4.20 Second Amendment dated July 7, 1995 to the seasonal
Revolving Credit Agreement by and among Specialty
Retailers, Inc., Palais Royal, Inc., and the First
National Bank of Boston, as agent for itself and
other financial institutions dated March 31, 1995. --
*4.21 Second Amendment dated July 27, 1995 to the seasonal
Revolving Credit Agreement by and among Specialty
Retailers, Inc., Palais Royal, Inc., and the First
National Bank of Boston, as agent for itself and
other financial institutions dated March 31, 1995. --
*4.22 First Amendment to the Receivables Purchase
Agreement among SRI Receivables Purchase Co.,
Inc. and Originators dated as of October 7,
1994. (Incorporated by Reference to Exhibit 4.1
on Form 10-Q of Specialty Retailers, Inc., dated
April 29, 1995). --
*4.23 First Amendment to the Pooling and Servicing
Agreement among SRI Receivables Purchase Co.,
Inc. and Originators dated as of October 7,
1994. (Incorporated by Reference to Exhibit 4.2
on Form 10-Q of Specialty Retailers, Inc., dated
April 29, 1995). --
*4.24 Second Amendment to the Receivables Purchase
Agreement among SRI Receivables Purchase Co.,
Inc. and Originators dated as of January 31,
1995. (Incorporated by Reference to Exhibit 4.3
on Form 10-Q of Specialty Retailers, Inc., dated
April 29, 1995). --
*4.25 Second Amendment to the Pooling and Servicing
Agreement among SRI Receivables Purchase Co.,
Inc. and Originators dated as of January 31,
1995. (Incorporated by Reference to Exhibit 4.4
on Form 10-Q of Specialty Retailers, Inc., dated
April 29, 1995). --
*4.26 Amended and Restated Pooling and Servicing
Agreement by and among SRI Receivables Purchase
Co., Inc., Specialty Retailers, Inc. and Bankers
Trust (Delaware) dated as of August 11, 1995. --
*4.27 Series 1995-1 Supplement by and among SRI
Receivables Purchase Co., Inc., Specialty
Retailers, Inc. and Bankers Trust (Delaware) on
behalf of the Series 1995-1 Certificateholders
dated as of August 11, 1995. --
*4.28 Amended and Restated Receivables Purchase
Agreement among SRI Receivables Purchase Co.,
Inc. and Originators dated as of August 11,
1995. --
*4.29 Certificate Purchase Agreement among SRI
Receivables Purchase Co., Inc., Specialty
Retailers, Inc. and the Certificate Purchaser
dated as of August 11, 1995. --
II-4
*4.30 First Amendment to the Series 1993-2 Supplement
and Revolving Certificate Purchase Agreement by
and among Specialty Retailers, Inc., SRI
Receivables Purchase Co., Inc., Bankers Trust
(Delaware) as Trustee for the SRI Receivables
Master Trust, the financial institutions parties
thereto and National Westminster Bank Plc, New
York branch dated as of August 11, 1995. --
*5.1 Opinion of Kirkland & Ellis. --
*10.1 Purchase Agreement dated July 20, 1995 by and
among Specialty Retailers, Inc., Donaldson,
Lufkin & Jenrette Securities Corporation,
relating to the sale of the Company's 11% Series
C Senior Subordinated Notes due 2003. --
*10.2 Purchase Agreement dated July 22, 1993 by and
among Specialty Retailers, Inc., Donaldson,
Lufkin & Jenrette Securities Corporation, Bear,
Stearns & Co. Inc., BT Securities Corporation
and Shearson Lehman Brothers, Inc., relating to
the sale of The Company's 10% Senior Notes due
2000 and 11% Senior Subordinated Note due 2003
(Incorporated by Reference to Exhibit 10.1 of
Registration No. 33-68256 on Form S-4). --
*10.3 Registration Rights Agreement dated July 27,
1995 by and between Specialty Retailers, Inc.
and Donaldson, Lufkin & Jenrette Securities
Corporation, relating to the sale of the
Company's 11% Series C Senior Subordinated Notes
due 2003. --
*10.4 Registration Rights Agreement dated August 2,
1993 by and among Specialty Retailers, Inc.,
Donaldson, Lufkin & Jenrette Securities
Corporation, Bear Stearns & Co. Inc. relating to
the sale of The Company's 10% Senior Notes due
2000 (Incorporated by Reference to Exhibit 10.2
of Registration No. 33-68256 on Form S-4). --
*10.5 Registration Rights Agreement dated August 2,
1993 by and among Specialty Retailers, Inc.,
Donaldson, Lufkin & Jenrette Securities
Corporation, Bear, Stearns & Co., Inc. relating
to the sale of The Company's 11% Senior
Subordinated Notes due 2003 (Incorporated by
Reference to Exhibit 10.3 of Registration No.
33-68256 on Form S-4). --
*10.6 Senior Management Agreement and Stock Option
Agreement between Specialty Retailers, Inc.,
Bain Venture Capital, Citicorp Venture Capital,
Ltd., and Bernard Fuchs, dated as of May 26,
1989 (Incorporated by Reference to Exhibit 10.8
of Registration No. 33-27714 on Form S-1) and
Amendment to Senior Management Agreement and
Stock Option Agreement dated February 1, 1993
(Incorporated by Reference to Exhibit*10.4 of
Registration No. 33-682256 on Form S-4). --
II-5
*10.7 Equity Stock Purchase Agreement by and among
Specialty Retailers, Inc., Tyler Capital Fund,
L.P. Tyler Massachusetts, L.P., Tyler
International, L.P.-I, Tyler International, L.P.
-II, Bain Venture Capital, Citicorp Capital
Investors, Ltd., Acadia Partners, L.P., Drexel
Burnham Lambert Incorporated, and certain other
Purchasers, dated as of December 28, 1988
(Incorporated by Reference to Exhibit 10.9 of
Registration No. 33-27714 on Form S-1) and
Amendments to Equity Stock Purchase Agreement
dated September 21, 1992 and August 2, 1993
(Incorporated by Reference to Exhibit 10.5 of
Registration No. 33-68256 on From S-4). --
*10.8 Registration Agreement by and among Specialty
Retailers, Inc., Tyler Capital Fund, L.P. Tyler
Massachusetts, L.P., Tyler International,
L.P.-I, Tyler International, L.P. -II, Bain
Venture Capital, Citicorp Capital Investors,
Ltd., Acadia Partners, L.P., Drexel Burnham
Lambert Incorporated, and certain other
Purchasers, dated as of December 29, 1988
(Incorporated by Reference to Exhibit 10.10 of
Registration No. 33-27714 on Form S-1) and
Amendment to Registration Agreement dated August
2, 1993 (Incorporated by Reference to Exhibit
10.6 of Registration No. 33-68256 on From S-4). --
*10.9 Lease Agreement between PR Investments and
Palais Royal, Inc., dated as of August 2, 1982
(Incorporated by Reference to Exhibit 10.11 of
Registration 33-27714 on Form S-1). --
*10.10 Lease Agreement between PR Investments and
Palais Royal, Inc., dated as of March 15, 1979,
(Incorporated by Reference to Exhibit 10.12 of
Registration 33-27714 on Form S-1). --
*10.11 Lease Agreement between PR Investments and
Palais Royal, Inc., dated as of November 7,
1978, as amended (Incorporated by Reference to
Exhibit 10.13 of Registration 33-27714 on Form
S-1). --
*10.12 Lease Agreement between PR Investments and
Palais Royal, Inc., dated as of October 4, 1983,
as amended (Incorporated by Reference to Exhibit
10.14 of Registration 33-27714 on Form S-1). --
*10.13 Lease Agreement between PR Investments and
Palais Royal, Inc., dated as of December 21,
1983, as amended (Incorporated by Reference to
Exhibit 10.15 of Registration 33-27714 on Form
S-1). --
*10.14 Lease Agreement between PR Investments and
Palais Royal, Inc., dated as of March 21, 1983,
as amended (Incorporated by Reference to Exhibit
10.16 of Registration 33-27714 on Form S-1). --
*10.15 Lease Agreement between PR Investments and
Palais Royal, Inc., dated as of November 22,
1985, as amended (Incorporated by Reference to
Exhibit 10.17 of Registration 33-27714 on Form
S-1). --
*10.16 Apparel Retailers, Inc., Stock Option Plan
(Incorporated By Reference to Exhibit 10.13 to
Registration No. 33-68256 on Form S-4). --
II-6
*10.17 Form of Stock Option Agreement between Apparel
Retailers, Inc., and Executive to be named
therein (Incorporated by Reference to Exhibit
10.15 to Registration No. 33-68256 on Form S-4). --
*10.18 Form of Management Agreement by and among
Specialty Retailers, Inc., the Bain Entities,
Citicorp Venture Capital, Ltd., and Executive to
be named therein (Incorporated by Reference to
Exhibit 10.22 of Registration No. 33-32045 on
Form S-1) and Form of First Amendment
(Incorporated by Reference to Exhibit 10.16 to
Registration No. 33-68258 on Form S-1). --
*10.19 Professional Services Agreement between
Specialty Retailers, Inc., and Bain Capital
Partners (Incorporated by Reference to Exhibit
10.21 of Registration No. 33-54504 on Form S-1). --
*10.20 Employment Agreement between Specialty
Retailers, Inc. and Carl E. Tooker dated June 9,
1993 (Incorporated by Reference to Exhibit 10.18
to Registration No. 33-68256 on Form S-4). --
*10.21 Stock Option Agreement between Specialty
Retailers, Inc., and Carl E. Tooker dated June
9, 1993 (Incorporated by Reference to Exhibit
10.19 to Registration No. 33-68256 on Form S-4). --
*10.22 Employment Agreement between Mark Shulman and
Specialty Retailers, Inc., dated as of January
8, 1994. (Incorporated by Reference to Exhibit
10.19 to Registration No. 33-68256 on Form S-4).
(Incorporated by Reference to Exhibit 10.1 on
Form 10-Q of Specialty Retailers, Inc., dated
April 29, 1995). --
*10.23 Stock Option Agreement between Mark Shulman and
Apparel Retailers, Inc., dated as of January 31,
1994. (Incorporated by Reference to Exhibit 10.2
on Form 10-Q of Specialty Retailers, Inc., dated
April 29, 1995) --
*10.24 Employment Agreement between James Marcum and
Specialty Retailers, Inc., dated as of May 15,
1995. (Incorporated by Reference to Exhibit 10.3
on Form 10-Q of Specialty Retailers, Inc., dated
April 29, 1995) --
*10.25 Employment Agreement between Stephen Lovell and
Specialty Retailers, Inc., dated as of May 19,
1995. (Incorporated by Reference to Exhibit 10.4
on Form 10-Q of Specialty Retailers, Inc., dated
April 29, 1995) --
*12.1 Statement Regarding Computation of Ratio of
Earnings to Fixed Charges. --
*21.1 List of Registrants' Subsidiaries --
**23.1 Consent of Price Waterhouse --
*26.1 Statement of Eligibility and Qualification on
form T-1 of The First National Bank of Boston
dated August 8, 1995, relating to the New
Securities --
*28.1 Form of Letter of Transmittal of Specialty
Retailers, Inc. --
II-7
*28.2 Form of Notice of Guaranteed Delivery --
------------
* Previously Filed
** Filed Herewith
(b) FINANCIAL STATEMENT SCHEDULES.
See index to Financial Statement Schedules at page S-1.
ITEM 22. UNDERTAKINGS.
(A) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement;
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933 (the "Securities Act");
(ii) to reflect in the prospectus any facts of events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement; Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than 20 percent change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registraton statement;
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial BONA FIDE offering thereof.
(3) To remove from registration by means of post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
(B) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described under Item 20 or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
(C) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes
II-8
information contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
(D) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-9
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to Registration Statement on Form S-4 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Houston, State of Texas, on September 8, 1995.
SPECIALTY RETAILERS, INC.
By: /s/ JERRY C. IVIE
Name: Jerry C. Ivie
Title: Senior Vice President, Secretary and Treasurer
POWER OF ATTORNEY
The undersigned hereby severally constitute and appoint Jerry C. Ivie
attorney-in-fact for the undersigned in any and all capacities, with the power
of substitution, to sign any amendment to this Registration Statement, and to
file the same with exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming all
that said attorney-in-fact, or his substitute or substitutes, may do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-4 has been signed by the following persons in
the capacities and on the dates indicated:
SIGNATURE CAPACITY DATE
--------- -------- ----
*
Bernard Fuchs Chairman September 8, 1995
*
Carl Tooker President, Chief Executive Officer
and Director September 8, 1995
*
Jim Marcum Executive Vice President, Chief
Financial Officer September 8, 1995
*
Joshua Bekenstein Vice Chairman September 8, 1995
*
Jerry Ivie Senior Vice President, Secretary
and Treasurer September 8, 1995
*
Lasker Meyer Director September 8, 1995
*
Peter Mulvihill Director September 8, 1995
*
Adam Kirsch Director September 8, 1995
/s/ JERRY C. IVIE
Jerry C. Ivie Attorney-in-Fact September 8, 1995
II-10
<PAGE>
INDEX TO FINANCIAL STATEMENT SCHEDULES
PAGE
NUMBER
------
Schedule VIII Valuation Accounts . ................................ S-2
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or the notes thereto.
S-1
<PAGE>
SPECIALTY RETAILERS, INC.
(A wholly-owned susidiary of Apparel Retailers, Inc.)
VALUATION ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
ADDITIONS
---------------------------
BALANCE AT CHARGED CHARGED BALANCE
BEGINNING TO COSTS TO OTHER AT END
OF PERIOD AND EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
---------- ------------ -------- ---------- ---------
DESCRIPTION
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
Fiscal Year:
1992 ....................................... $6,412 $10,767 $725 $10,049 $7,855
====== ======= ==== ======= ======
1993 ....................................... $7,855 $ 6,590 $ -- $12,501 $1,944
====== ======= ==== ======= ======
1994 ....................................... $1,944 $ 3,176 $486 $ 2,374 $3,232
====== ======= ==== ======= ======
Reserve for Shrinkage:
Fiscal Year:
1992 ....................................... $ 128 $ 4,763 $ -- $ 4,731 $ 160
====== ======= ==== ======= ======
1993 ....................................... $ 160 $ 4,042 $ -- $ 4,004 $ 198
====== ======= ==== ======= ======
1994 ....................................... $ 198 $ 4,459 $ -- $ 4,459 $ 198
====== ======= ==== ======= ======
</TABLE>
(1) This represents the initial allowance for doubtful accounts associated
with the accounts receivable acquired in connection with the Company's
purchase of Fashion Bar, Inc.
(2) Includes $6.1 million which has been reclassified to accrued liabilities
as a result of the implementation of the Accounts Receivable Program.
(3) This represents the initial allowance for doubtful accounts associated
with the accounts receivable acquired from Beall-Ladymon.
S-2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of Amendment
No. 2 to the Registration Statement on Form S-4 (No.33-62001) of Specialty
Retailers, Inc. of our report dated April 14, 1995 relating to the consolidated
financial statements of Specialty Retailers, Inc., which appears in such
Prospectus. We also consent to the application of such report to the Financial
Statement Schedules for the three years ended January 28, 1995 listed under Item
21 (b) of this Registration Statement when such schedules are read in
conjunction with the financial statements referred to in our report. The audits
referred to in such report also included these schedules. We also consent to the
reference to us under the heading "Experts" in such Prospectus.
PRICE WATERHOUSE LLP
Houston, Texas
September 7, 1995
