<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 16, 1998
REGISTRATION NO. 333-43129
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
BIG 5 CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C>
DELAWARE 95-1854273
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
5941
------------------------
(PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE NUMBER)
2525 EAST EL SEGUNDO BOULEVARD, EL SEGUNDO, CALIFORNIA 90245
310/536-0611
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
CHARLES P. KIRK
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
BIG 5 CORP.
2525 EL SEGUNDO BOULEVARD
EL SEGUNDO, CALIFORNIA 90245
310/536-0611
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
MILTON B. HYMAN, ESQ. EDMUND M. KAUFMAN, ESQ.
IRELL & MANELLA LLP IRELL & MANELLA LLP
1800 AVENUE OF THE STARS, SUITE 900 333 SOUTH HOPE STREET, SUITE 3300
LOS ANGELES, CALIFORNIA 90067 LOS ANGELES, CALIFORNIA 90017
(310) 277-1010 (213) 620-1555
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the 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. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
==================================================================================================
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS AMOUNT MAXIMUM OFFERING AGGREGATE AMOUNT OF
OF SECURITIES TO BE PRICE PER OFFERING REGISTRATION
TO BE REGISTERED REGISTERED UNIT(1) PRICE(1) FEE(2)
- --------------------------------------------------------------------------------------------------
Series B 10 7/8% Senior Notes
due 2007.................... $131,000,000 100% $131,000,000 $38,645
==================================================================================================
</TABLE>
(1) Estimated solely for the purpose of computing the registration fee pursuant
to Rule 457.
(2) A fee of $38,645 was previously paid on December 23, 1997.
------------------------
THIS REGISTRATION STATEMENT SHALL HEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
THE PROVISIONS OF SECTION 8(A) OF THE SECURITIES ACT OF 1933.
================================================================================
<PAGE> 2
BIG 5 CORP.
CROSS-REFERENCE SHEET PURSUANT
TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM OF FORM S-4 LOCATION IN THE PROSPECTUS
- --------------------------------------------------------- -----------------------------------
<S> <C> <C>
A. INFORMATION ABOUT THE TRANSACTION
Item 1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus...... Cover of Registration Statement;
Outside Front Cover Page of
Prospectus; Cross-Reference Sheet
Item 2. Inside Front and Outside Back Cover Pages of
Prospectus.................................. Available Information
Item 3. Risk Factors, Ratio of Earnings to Fixed
Charges and Other Information............... Prospectus Summary; Risk Factors;
Unaudited Pro Forma Condensed
Financial Data; Selected Historical
Financial Data; Index to Financial
Statements
Item 4. Terms of the Transaction...................... Prospectus Summary; Risk Factors;
The Exchange Offer; Description of
the Notes; Plan of Distribution;
Use of Proceeds
Item 5. Pro Forma Financial Information............... Prospectus Summary; Unaudited Pro
Forma Condensed Financial Data
Item 6. Material Contacts with the Company Being
Acquired.................................... Not Applicable
Item 7. Additional Information Required for Reoffering
by Persons and Parties Deemed to be
Underwriters................................ Not Applicable
Item 8. Interests of Named Experts and Counsel........ Legal Matters
Item 9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities................................. Not Applicable
B. INFORMATION ABOUT THE REGISTRANT
Item 10. Incorporation with Respect to S-3
Registrants................................. Not Applicable
Item 11. Incorporation of Certain Information by
Reference................................... Not Applicable
Item 12. Information with Respect to S-2 or S-3
Registrants................................. Not Applicable
Item 13. Incorporation of Certain Information by
Reference................................... Not Applicable
Item 14. Information with Respect to Registrants Other
Than S-2 or S-3 Registrants................. Available Information; Summary;
Business; Unaudited Pro Forma
Condensed Financial Data; Selected
Historical Financial Data;
Management's Discussion and
Analysis of Financial Condition and
Results of Operations; Index to
Financial Statements; The
Recapitalization; Capitalization;
Principal Stockholders; Certain
Relationships and Related
Transactions; Financing
Arrangements
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
Item 15. Information with Respect to S-3 Companies..... Not Applicable
Item 16. Information with Respect to S-2 or S-3
Companies................................... Not Applicable
Item 17. Information with Respect to Companies Other
Than S-3 or S-2 Companies................... Not Applicable
D. VOTING AND MANAGEMENT INFORMATION
Item 18. Information if Proxies, Consents or
Authorizations are to be Solicited.......... Not Applicable
Item 19. Information if Proxies, Consents or
Authorizations are not to be Solicited or in
an Exchange Offer........................... The Exchange Offer; Management;
Plan of Distribution
</TABLE>
<PAGE> 3
PROSPECTUS
JANUARY 16, 1998
LOGO
OFFER FOR ANY AND ALL OUTSTANDING SERIES A 10 7/8% SENIOR NOTES DUE 2007 IN
EXCHANGE FOR SERIES B 10 7/8% SENIOR NOTES DUE 2007 WHICH HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933
BIG 5 CORP.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON FEBRUARY 18, 1998, UNLESS EXTENDED.
Big 5 Corp., a Delaware corporation (the "Company" or "Big 5" or the
"registrant") hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and the accompanying Letter of Transmittal, which
together constitute the "Exchange Offer", to exchange an aggregate principal
amount at maturity of up to $131,000,000 of Series B 10 7/8% Senior Notes due
2007 of the Company (the "New Notes") which have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), for a like principal
amount of the issued and outstanding Series A 10 7/8% Senior Notes due 2007 of
the Company (the "Old Notes" and, together with the New Notes, the "Notes") from
the holders (the "Holders") of the Old Notes. The New Notes are being offered in
order to satisfy certain obligations of the Company under that certain
Registration Rights Agreement dated as of November 13, 1997 among the Company,
and the initial purchasers of the Old Notes, Donaldson, Lufkin & Jenrette
Securities Corporation and Credit Suisse First Boston Corporation (together, the
"Initial Purchasers") (the "Registration Rights Agreement"). See "The Exchange
Offer -- Purpose and Effect of the Exchange Offer." The terms of the New Notes
are identical in all material respects to the terms of the Old Notes except (i)
the offering and sale of the New Notes will have been registered under the
Securities Act and thus will not bear restrictive legends restricting their
transfer pursuant to the Securities Act, and (ii) the Holders of the New Notes
will not be entitled to certain rights of Holders of the Old Notes under the
Registration Rights Agreement. The Old Notes were issued, and the New Notes will
be issued, under the Indenture dated as of November 13, 1997 between the Company
and First Trust National Association, as trustee (the "Trustee") (the
"Indenture"). The Old Notes and the New Notes will constitute a single series of
debt securities under the Indenture. See "Description of the Notes."
The Old Notes and the New Notes will mature on November 15, 2007. Interest
on the New Notes will be payable in cash semi-annually on May 15 and November 15
of each year, commencing on May 15, 1998. The New Notes will be redeemable at
the option of the Company, in whole or in part, on or after November 15, 2002,
at the redemption prices set forth herein, plus accrued and unpaid interest to
the date of redemption. In addition, at any time on or before November 15, 2000,
the Company may redeem, on one or more occasions, up to an aggregate of 35% of
the original aggregate principal amount of the Notes with the net proceeds of
one or more Public Equity Offerings (as defined) at a redemption price equal to
110.95% of the principal amount thereof, plus accrued and unpaid interest and
Liquidated Damages (as defined), if any, to the date of redemption. Upon a
Change of Control (as defined), the Company will be required to offer to
repurchase all outstanding Notes at 101% of the aggregate principal amount
thereof, plus accrued and unpaid interest and Liquidated Damages, if any, to the
date of repurchase.
The New Notes will be general unsecured obligations of the Company and will
rank senior in right of payment to all existing and future Indebtedness (as
defined) of the Company that is subordinated to the New Notes and will rank pari
passu in right of payment with all current and future unsubordinated
Indebtedness of the Company; provided, however, that certain Indebtedness of the
Company currently is and may in the future be secured by assets held by the
Company, subject to certain restrictions described herein. The New Notes will be
guaranteed (the "Guarantees") on a senior basis by each of the future Subsidiary
Guarantors (as defined). The Guarantees will be general unsecured obligations of
the Subsidiary Guarantors and will rank senior in right of payment to all future
Indebtedness of the Subsidiary Guarantors that is subordinated to the Guarantees
and will rank pari passu in right of payment with all future unsubordinated
Indebtedness of the Subsidiary Guarantors; provided, however, that certain
Indebtedness of the Subsidiary Guarantors may in the future be secured by assets
held by Subsidiary Guarantors, subject to certain restrictions described herein.
As of December 28, 1997, the Company had $43.4 million of long-term Indebtedness
ranking pari passu with the Notes, all of which constituted secured Indebtedness
under the CIT Credit Facility (as defined). The terms of the Indenture pursuant
to which the New Notes will be issued will limit the ability of the Company and
the Subsidiary Guarantors to incur additional Indebtedness.
(Continued on next page)
THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT
INFORMATION. HOLDERS OF THE OLD NOTES ARE URGED TO READ THIS PROSPECTUS AND THE
RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING WHETHER TO TENDER THEIR
OLD NOTES PURSUANT TO THE EXCHANGE OFFER.
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NOTES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("SEC" OR THE "COMMISSION") OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SEC OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE> 4
The Old Notes were issued by the Company on November 13, 1997 in connection
with the Recapitalization (as defined) of the Company and Big 5 Holdings Corp.,
a Delaware corporation and parent of the Company ("Parent"). The Old Notes were
issued pursuant to exemptions from, or in transactions not subject to, the
registration requirements of the Securities Act and applicable state securities
laws. Based on interpretations by the staff of the SEC, as set forth in
no-action letters issued to third parties, the Company believes that New Notes
issued pursuant to the Exchange Offer may be offered for resale, resold or
otherwise transferred by Holders thereof (other than Holders which are
"affiliates" of the Company within the meaning of Rule 405 under the Securities
Act), without compliance with the registration and prospectus delivery
requirements of the Securities Act, provided that such New Notes are acquired in
the ordinary course of such Holder's business and such Holder, other than a
Holder which is a broker-dealer, has no arrangements with any person to engage
in a distribution of such New Notes. However, the SEC has not considered the
Exchange Offer in the context of a no-action letter request by the Company and
there can be no assurance that the staff of the SEC would make a similar
determination with respect to the Exchange Offer. Each Holder, other than a
broker-dealer, must acknowledge that it is not engaged in, and does not intend
to engage in, a distribution of such New Notes and has no arrangements or
understanding to participate in the distribution of the New Notes. If any Holder
is an affiliate of the Company, or is engaged in or intends to engage in or has
any arrangement with any person to participate in the distribution of the New
Notes to be acquired pursuant to the Exchange Offer, or is a broker-dealer who
purchased Old Notes from the Company, such Holder (i) could not rely on the
applicable interpretations of the staff of the SEC (ii) will not be permitted or
entitled to tender such Old Notes in the Exchange Offer, and (iii) must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale transaction. Each broker-dealer that receives New
Notes 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 Notes.
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 Notes received in exchange for Old Notes where
such Old Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Company has agreed, under certain
circumstances, that, for a period of up to 180 days after the Expiration Date
(as defined herein), it will make this Prospectus available to any broker-dealer
for use in connection with any such resale. See "Plan of Distribution."
The Company will not receive any proceeds from the Exchange Offer. The
Company will pay all the expenses incident to the Exchange Offer. Tenders of Old
Notes pursuant to the Exchange Offer may be withdrawn at any time prior to the
Expiration Date. There is no existing trading market for the New Notes, and
there can be no assurance regarding the future development of a market for the
New Notes. The Initial Purchasers have advised the Company that they currently
intend to make a market in the New Notes. The Initial Purchasers are not
obligated to do so, however, and any market-making with respect to the New Notes
may be discontinued at any time without notice. The Company does not intend to
apply for listing or quotation of the New Notes on any securities exchange or
stock market. There can be no assurance that an active market for the New Notes
will develop. To the extent that an active market for the New Notes does
develop, the market value of the New Notes will depend on market conditions
(such as yields on alternative investments), general economic conditions, the
Company's financial condition, and other factors. Such conditions might cause
the New Notes, to the extent that they are actively traded, to trade at a
significant discount from face value. See "Risk Factors -- Lack of Public Market
for the New Notes."
ANY OLD NOTES NOT TENDERED AND ACCEPTED IN THE EXCHANGE OFFER WILL REMAIN
OUTSTANDING. TO THE EXTENT ANY OLD NOTES ARE TENDERED AND ACCEPTED IN THE
EXCHANGE OFFER, A HOLDER'S ABILITY TO SELL OLD NOTES COULD BE ADVERSELY
AFFECTED. FOLLOWING CONSUMMATION OF THE EXCHANGE OFFER, THE HOLDERS OF OLD NOTES
WILL CONTINUE TO BE SUBJECT TO THE EXISTING RESTRICTIONS UPON TRANSFER THEREOF
AND THE COMPANY WILL HAVE FULFILLED CERTAIN OF ITS OBLIGATIONS UNDER THE
REGISTRATION RIGHTS AGREEMENT. HOLDERS OF OLD NOTES WHO DO NOT TENDER THEIR
NOTES GENERALLY WILL NOT HAVE ANY FURTHER REGISTRATION RIGHTS WITH RESPECT TO
THE OLD NOTES UNDER THE REGISTRATION RIGHTS AGREEMENT OR OTHERWISE. See "The
Exchange Offer -- Consequences of Failure to Exchange."
i
<PAGE> 5
The New Notes issued pursuant to this Exchange Offer generally will be
issued in the form of Global Notes (as defined), which will be deposited with,
or on behalf of, The Depository Trust Company ("DTC") and registered in its name
or in the name of Cede & Co., its nominee. Beneficial interests in the Global
Notes representing the New Notes will be shown on, and transfers thereof will be
effected through, records maintained by DTC and its participants. See "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 NOTES OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY ANY OF THE NEW NOTES 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 HEREOF.
Until April 16, 1998 (90 days after commencement of the Exchange Offer),
all dealers effecting transactions in the New Notes, whether or not
participating in the Exchange Offer, may be required to deliver a Prospectus in
connection with such transaction.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus, including the "Summary," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business"
sections, contains "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995, which can be identified by the
use of forward-looking terminology, such as "may," "intend," "will," "expect,"
"anticipate," "estimate," "seek," or "continue" or the negative thereof or other
variations thereon or comparable terminology. In particular, any statements,
express or implied, concerning future operating results or the ability to
generate revenues, income or cash flow to service the Notes are forward-looking
statements. Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable, there can be no assurance that
such expectations will prove to have been accurate. All forward-looking
statements are expressly qualified by such cautionary statements and other
information contained in this Prospectus, including "Risk Factors."
AVAILABLE INFORMATION ABOUT THE COMPANY
The Company files annual, quarterly and special reports under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and other
information with the SEC. Holders of the Old Notes may read and copy any
document the Company files at the SEC's public reference rooms in Washington,
D.C., New York, New York and Chicago, Illinois. Please call the SEC at
1-800-SEC-0300 for further information on the public reference rooms. The
Company's SEC filings are also available to the public from the SEC's web site
at http://www.sec.gov.
ii
<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto appearing
elsewhere in this Prospectus.
THE COMPANY
OVERVIEW
The Company is the leading sporting goods retailer in the Western United
States, operating 210 stores under the "Big 5 Sporting Goods" name. Its
principal executive offices are located at 2525 East El Segundo Blvd., El
Segundo, CA 90245 (telephone number (310) 536-0611). The Company's core market
is California, Washington and Nevada and it recently expanded into Arizona,
Idaho, Oregon, New Mexico, Texas and Utah. The Company provides a full-line
product offering of over 25,000 stock keeping units ("SKU's") in a traditional
sporting goods store format that averages 11,000 square feet. Specifically, the
Company's products include athletic shoes and apparel, and tennis, golf, ski,
snowboard, in-line skating, fitness, outdoor and team sports equipment for the
competitive and recreational sporting goods customer. The Company offers
customers attractive values on recognized brand-name merchandise at a wide
variety of price points. The Company augments its value image by emphasizing
branded merchandise produced exclusively for the Company and on a selective
basis, "opportunistic buys" comprising first quality items, including overstock
and close-out merchandise. These merchandise values are communicated weekly
through print advertising created by the Company in order to generate store
traffic and drive sales. For the twelve months ended September 28, 1997, the
Company generated $432.1 million of revenue, $32.9 million of pro forma EBITDA
(as defined) and a same store sales increase of 6.9% over the prior period.
Through the period ended December 28, 1997, the Company has enjoyed 22
consecutive monthly increases in same store sales over the comparable prior
period.
Management attributes the Company's success to its consistent merchandising
strategy, convenient locations, knowledgeable customer service, extensive
advertising and effective cost controls. The Company's merchandising strategy
focuses on: (i) delivering consistent value to consumers; (ii) offering a
customized product assortment that maximizes sales while managing inventory
levels; (iii) maintaining a strong market presence across product categories;
and (iv) supporting its merchandise offering through extensive promotional
advertising. The Company believes that its effective use of a combination of
in-line branded products, branded and private label merchandise produced
exclusively for the Company and opportunistic buys distinguishes its merchandise
mix from that of its competitors. Through its 42 years of operations, the
Company has developed specific expertise in selling this distinctive mix of
products, thereby building the Company's price image, anchoring its weekly print
advertisements and driving retail traffic.
The Company believes that the consistency and reach of Big 5's print
advertising programs have created high customer awareness of Big 5. Through
years of focused advertising, the Company has reinforced its reputation for
providing quality products at attractive prices. The Company attempts to
highlight a broad range of merchandise categories in every advertisement to
maintain customer awareness of its full-line product offering. The Company's
advertising message is reinforced through the distribution of over 10 million
advertisements each week, 52 weeks a year, in the form of newspaper inserts or
mailers. The Company believes that its print advertising consistently reaches
more households in its core market than does the print advertising of any of its
competitors.
The Company is a wholly-owned subsidiary of Parent. As a result of the
Recapitalization, existing management and employees of the Company (and members
of their families) beneficially own the majority of Parent. Chairman and Chief
Executive Officer Robert W. Miller, who co-founded the Company in 1955, and his
son Steven G. Miller, President and Chief Operating Officer, who has been with
the Company for 28 years, significantly increased their ownership in Parent and
control the Board of Directors of Parent. In addition, approximately 60 members
of middle and senior level management increased their stock ownership in Parent.
In total, more than 200 employees own equity in Parent, including over 100 store
managers. The Big 5 management team shares many years of experience, with senior
level management averaging 26 years with the Company and other key groups of
management employees having significant years of experience at Big 5. Management
believes the experience, commitment and longevity with the Company of its
professional staff to be a substantial competitive advantage.
1
<PAGE> 7
BUSINESS STRATEGY
The Company seeks to continuously improve current operations while
expanding into new and existing markets. Specifically, the Company's business
strategy is to operate under a traditional store format, offer outstanding value
on an attractive mix of quality merchandise, promote customer sales through
extensive advertising, control costs and pursue new store growth opportunities.
Through 42 years of operations, this strategy has been refined and enhanced. The
Company believes that continuing to implement this strategy while capitalizing
on its competitive strengths, as described below, will address the Company's
goal of continuing profitable growth.
Market Leader in Core Market Served. The Company has built a recognized
franchise by establishing a strong presence in its core market of California,
Washington and Nevada and by consistently promoting quality brand-name products
at attractive prices. The Company has over triple the number of stores as its
closest full-line sporting goods competitor in such core market. This
concentration of stores provides economies of scale in advertising and
distribution and increased customer awareness of the Big 5 name. The Company was
named the leading place to purchase sporting goods in the greater Los Angeles
area for every category of sporting goods covered by a survey commissioned by
the Company conducted in October 1996 by America's Research Group, an
independent research group. The survey showed that the Company was preferred
over specialty sporting goods stores (e.g. Foot Locker, Nevada Bob's), mass
merchandisers (e.g. K-Mart, Target) and local superstore operators (e.g.
Sportmart, Sport Chalet). This survey also indicated that over 90% of
respondents recognized the Big 5 name and 73% shopped at a Big 5 store in the
past two years.
Favorable Store Format with Superior Locations. The Company has remained
focused on its strategy of operating a traditional, full-line sporting goods
store, averaging 11,000 square feet in size, located primarily in multi-store
shopping centers or free-standing street locations. The Big 5 store size
provides the Company with a large selection of locations for new store placement
which, in turn, allows the Company to open stores conveniently located to the
customer. The Company's store format and convenient locations encourage frequent
customer visits, even for single item or relatively small purchases. This is
illustrated by the fact that the Company processed over 14 million sale
transactions in 1996 with an average customer sale of approximately $30. Due to
its relatively low start-up and overhead costs, the Big 5 store model has been
successful in trade areas with as few as 75,000 people, as well as major
metropolitan areas. These store economics differentiate the Company's sporting
goods stores from superstore concepts (averaging in excess of 35,000 square
feet) which typically require larger trade areas to support higher costs.
Overall, the Company's traditional sporting goods store has competed effectively
against superstore formats. All of the Big 5 stores are making positive
store-level contributions and over its history, the Company has never closed a
store due to poor performance.
Superior Merchandising Capabilities. The Company provides a full-line
product offering of over 25,000 SKU's at a wide variety of price points across
an extensive range of categories. Important brand names offered by the Company
include Nike, Reebok, Wilson, K2, Rollerblade, Coleman, Spalding, Adidas, Fila,
Speedo, Easton and Columbia, among others. A goal of the Company's merchandising
strategy is to offer a customized and selected assortment of products to enable
the consumer to comparison shop within the Big 5 store without being overwhelmed
by a large number of different products in any one category. In addition, the
Company's merchandising strategy is also designed to manage inventory levels.
The Company differentiates its product offerings by tailoring its assortment to
each region's specific needs and buying habits. The Company's 15 buyers, who
average 18 years of experience with the Company, work closely with senior
management to determine the product selection, promotion and pricing of the
merchandise mix. The Company utilizes a $15 million integrated merchandising,
distribution and financial information system. Management uses the information
provided to continually refine its merchandise mix, pricing strategy,
advertising effectiveness and inventory levels.
2
<PAGE> 8
Value Driven Product Offerings Supported by Extensive Advertising. The
Company offers consistent value to consumers by offering a distinctive
combination of in-line branded products, "special make-up" merchandise (produced
exclusively for the Company under a manufacturer's brand-name), private label
merchandise and opportunistic buys. The Company offers this consistent value to
its customers while maintaining strong margins as a result of its ability to
purchase in large quantities and quickly adjust this combination of merchandise
to take advantage of purchasing opportunities. The Company believes it enjoys
significant advantages in the acquisition of opportunistic buys because the
Company is able to combine rapid decision-making, strong vendor relationships,
careful inventory management, and effective advertising along with its extensive
store network. Although management believes opportunistic buys typically
represent only approximately 10% of sales, they are used in conjunction with
special make-up merchandise to enhance weekly advertising and reinforce the
Company's reputation as a retailer that offers outstanding value to its
customers. The Company's in-house advertising department designs its print
advertising, of which over 10 million newspaper inserts and mailers are
distributed each week. The Company's effectiveness in communicating the product
values it offers is evidenced by the fact that typically 40% of sales have been
products included in these weekly advertisements.
Proven Store Growth Strategy. The Company's expansion has been systematic
and designed to take advantage of Big 5's name recognition and to capitalize on
the Company's economical store format and merchandise mix. Throughout the
Company's 42 year history, management has emphasized careful site selection and
controlled growth. Over the past five years, 63 stores have been opened (13 new
stores annually on average), of which 40% were outside the Company's core
market. The Company has identified numerous expansion opportunities to further
penetrate its core market, develop recently entered markets and expand into new
market areas with similar demographic, competitive and economic profiles as its
existing markets. Continuing its controlled growth strategy, the Company plans
on opening approximately 15-20 stores annually over the next five years. The
Company's store format requires a low investment in fixtures and equipment
(approximately $250,000), working capital (approximately $500,000, of which
one-third is typically financed by vendors) and real estate (leased,
"built-to-suit" locations). This expansion plan is designed to take advantage of
the growing economies of the Company's existing markets and to capitalize on
opportunities in fast growing new markets.
RECENT DEVELOPMENTS
THE RECAPITALIZATION
The Company and Parent recently completed the Recapitalization which is
described in detail under "The Recapitalization." The issuance of the Old Notes
by the Company was one of the transactions involved in the Recapitalization.
CHANGE OF CONTROL
As reported by the Company in a Current Report on Form 8-K filed with the
SEC on November 26, 1997 under the Exchange Act, the Recapitalization
facilitated a change in control of the Company and Parent. All of the common
stock of the Company is owned by Parent.
3
<PAGE> 9
THE EXCHANGE OFFER
Securities Offered......... $131 million aggregate principal amount of Series B
10 7/8% Senior Notes due 2007.
The Exchange Offer......... $1,000 principal amount of the New Notes in
exchange for each $1,000 principal amount of Old
Notes. As of the date hereof, $131 million
aggregate principal amount of Old Notes are
outstanding. The Company will issue the New Notes
to Holders on or promptly after the Expiration
Date.
Based on an interpretation by the staff of the SEC
set forth in no-action letters issued to third
parties, the Company believes that New Notes issued
pursuant to the Exchange Offer in exchange for Old
Notes 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 Notes
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 Notes. Each broker-dealer
that receives New Notes 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 Notes. See "Plan of
Distribution."
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 Notes
could not rely on the position of the staff of the
SEC enunciated in Exxon Capital Holdings
Corporation (available May 13, 1988), Morgan
Stanley & Co., Inc. (available June 5, 1991) or
similar no-action letters and, in the absence of an
exemption therefrom, must comply with the
registration and prospectus requirements of the
Securities Act in connection with the resale of the
New Notes. 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 February 18,
1998, 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.
Interest on the New Notes
and the Old Notes.......... The New Notes will bear interest from their date of
issuance. Interest will accrue on the Old Notes
that are tendered in exchange for the New Notes
through the issue date of the New Notes. Holders of
Old Notes that are accepted for exchange will not
receive interest on the Old Notes that is accrued
but unpaid at the time of exchange, but such
interest will be payable, together with interest on
the New Notes, on the first Interest Payment Date
after the Expiration Date.
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."
4
<PAGE> 10
Procedures for Tendering
Old Notes.................. Each Holder of Old Notes 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 the Letter of Transmittal, or such
facsimile, together with the Old Notes and any
other required documentation to the Exchange Agent
at the address set forth in the Letter of
Transmittal. Persons holding Old Notes through the
Depository Trust Company ("DTC") and wishing to
accept the Exchange Offer must do so pursuant to
the DTC's Automated Tender Offer Program ("ATOP"),
by which each tendering participant will agree to
be bound by the Letter of Transmittal. By executing
or agreeing to be bound by the Letter of
Transmittal, each Holder will represent to the
Company that, among other things, the Holder or the
person receiving such New Notes, whether or nor
such person is the Holder, is acquiring the New
Notes in the ordinary course of business and that
neither the Holder nor any such other person has
any arrangement or understanding with any person to
participate in the distribution of such New Notes.
Special Procedures for
Beneficial Owners.......... Any beneficial owner whose Old Notes 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 Notes, either make appropriate
arrangements to register ownership of the Old Notes
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 Notes who wish to tender their Old
Notes and whose Old Notes are not immediately
available or who cannot deliver their Old Notes,
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 Notes 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
pursuant to the procedures described under "The
Exchange Offer -- Withdrawals of Tenders."
Acceptance of Old Notes and
Delivery of New Notes...... The Company will accept for exchange any and all
Old Notes that are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York City
time, on the Expiration Date. The New Notes issued
pursuant to the Exchange Offer will be delivered
promptly following the Expiration Date. See "The
Exchange Offer -- Terms of the Exchange Offer."
Certain Federal Income Tax
Consequences............... The exchange of the New Notes for the Old Notes
pursuant to the Exchange Offer should not be
taxable to the Holders thereof for federal income
tax purposes. See "Certain Federal Income Tax
Consequences."
5
<PAGE> 11
Effect on Holders of
Old Notes................. As a result of the making of this Exchange Offer, the
Company will have fulfilled certain of its
obligations under the Registration Rights Agreement,
and Holders of Old Notes who do not tender their Old
Notes will not have any further registration rights
under the Registration Rights Agreement or otherwise.
See "The Exchange Offer -- Purposes and Effect of
Exchange Offer." Such Holders will continue to hold
the untendered Old Notes and will be entitled to all
the rights and subject to all the limitations
applicable thereto under the Indenture, except to the
extent such rights or limitations, by their terms,
terminate or cease to have further effectiveness as a
result of the Exchange Offer. All untendered Old
Notes will continue to be subject to certain
restrictions on transfer because they have not been
registered under the Securities Act. Accordingly, if
any Old Notes are tendered and accepted in the
Exchange Offer, the trading market for the untendered
Old Notes could be adversely affected.
Exchange Agent............ First Trust National Association (the "Exchange
Agent" and the "Trustee").
6
<PAGE> 12
SUMMARY TERMS OF THE NEW NOTES
The form and terms of the New Notes are the same as the form and terms of
the Old Notes (which they replace) except that (i) the New Notes have been
registered under the Securities Act and, therefore, will not bear legends
restricting the transfer thereof and (ii) the Holders of New Notes will not be
entitled to further registration rights under the Registration Rights Agreement,
which rights will be satisfied when the Exchange Offer is consummated and will
not be entitled to any payments of liquidated damages for failure to satisfy
such rights. The New Notes will evidence the same debt as the Old Notes and will
be entitled to the benefit of the Indenture. See "Description of Notes."
Issuer..................... Big 5 Corp.
Subsidiary Guarantors...... The New Notes will be guaranteed on a senior basis
by all of the Company's future Subsidiary
Guarantors.
Maturity Date.............. November 15, 2007.
Interest Payment Dates..... Each May 15 and November 15, commencing on May 15,
1998.
Ranking.................... The New Notes will be general unsecured obligations
of the Company and will rank senior in right of
payment to all existing and future Indebtedness of
the Company that is subordinated to the New Notes
and will rank pari passu in right of payment with
all current and future unsubordinated Indebtedness
of the Company; provided, however, that certain
Indebtedness of the Company currently is and may in
the future be secured by assets held by the
Company, subject to certain restrictions described
herein. The Guarantees will be general unsecured
obligations of the Subsidiary Guarantors and will
rank senior in right of payment to all future
Indebtedness of the Subsidiary Guarantors that is
subordinated to the Guarantees and will rank pari
passu in right of payment with all future
unsubordinated Indebtedness of the Subsidiary
Guarantors; provided, however, that certain
Indebtedness of the Subsidiary Guarantors may in
the future be secured by assets held by the
Subsidiary Guarantors, subject to certain
restrictions described herein. As of December 28,
1997, the Company had $43.4 million of long-term
Indebtedness ranking pari passu with the New Notes,
all of which constituted secured Indebtedness under
the CIT Credit Facility.
Optional Redemption........ The New Notes will be redeemable, in whole or in
part, at the option of the Company, at any time on
or after November 15, 2002, at the redemption
prices set forth herein, plus accrued and unpaid
interest and Liquidated Damages, if any, to the
date of redemption. In addition, at any time on or
before November 15, 2000, the Company may redeem,
on one or more occasions, up to an aggregate of 35%
of the original aggregate principal amount of the
Notes with the net proceeds of one or more Public
Equity Offerings at a redemption price equal to
110.95% of the principal amount thereof, plus
accrued and unpaid interest and Liquidated Damages,
if any, to the date of redemption; provided, that
at least 65% of the original aggregate principal
amount of the Notes must remain outstanding
following each such redemption. See "Description of
the Notes -- Optional Redemption."
7
<PAGE> 13
Change of Control......... Upon the occurrence of a Change of Control, the
Company will be required to offer to purchase all
outstanding Notes at a price in cash equal to 101% of
the aggregate principal amount thereof plus accrued
and unpaid interest and Liquidated Damages, if any,
to the date of purchase. See "Description of the
Notes -- Certain Covenants -- Repurchase of Notes at
the Option of the Holder Upon a Change of Control."
Certain Covenants......... The Indenture will contain certain covenants that
limit the ability of the Company and its Subsidiaries
to, among other things, (i) incur additional
Indebtedness and issue preferred stock, (ii) pay
dividends or make other distributions, (iii) create
certain liens, (iv) sell certain assets, (v) enter
into certain transactions with affiliates, and (vi)
effect certain mergers and consolidations. See
"Description of the Notes -- Certain Covenants."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered in evaluating an investment in the Notes.
8
<PAGE> 14
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The summary information set forth below presents historical financial data
and unaudited pro forma condensed financial data for the periods indicated which
have been derived from audited and unaudited financial statements and the notes
thereto of United Merchandising Corp. (which was reincorporated in Delaware as
Big 5 Corp. in connection with the Recapitalization) included elsewhere in this
Prospectus. As used herein, with respect to the summary historical and pro forma
financial data, the Company means United Merchandising Corp. The results for the
interim periods are not necessarily indicative of the results for the full
fiscal year. The summary unaudited pro forma condensed operating data for the
twelve months ended September 28, 1997, the fiscal year ended December 29, 1996,
the nine months ended September 28, 1997 and the nine months ended September 29,
1996, give effect to the Recapitalization as if it had been consummated on the
first day of such period. See "Unaudited Pro Forma Condensed Financial Data" and
the notes thereto. The summary pro forma financial data set forth below may not
necessarily be indicative of the results that would have been achieved had the
Recapitalization been consummated as of the dates indicated or that may be
achieved in the future. The summary historical and pro forma financial data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Selected Historical Financial
Data" and the financial statements of the Company and the notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR(a)
-------------------------------------------------------------- NINE MONTHS(a)
PRO FORMA -------------------
1992 1993 1994 1995 1996 1996 1997
--------------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.................. $ 312,415 $321,933 $364,109 $370,126 $404,265 $296,356 $324,177
Gross profit............... 90,620(b,c) 97,839(d) 119,332 113,543 127,149 92,936 105,502
Total operating expenses... 86,393(e) 87,075 101,418 107,149 110,631 83,760 88,690
Operating income........... 4,227 10,764 17,914 6,394 16,518 9,176 16,812
OTHER DATA:
EBITDA(f).................. 24,836 24,094 27,094 18,385 26,096 16,285 22,899
EBITDA margin.............. 8.0% 7.5% 7.4% 5.0% 6.5% 5.5% 7.1%
Cash flow provided by (used
in) operating
activities............... 24,397 6,227 14,647 (3,824) 19,798 7,527 (1,953)
Cash flows provided by
(used in) investing
activities............... (152,020) (6,714) (9,342) (7,374) 1,539 3,435 (3,227)
Cash flows provided by
(used in) financing
activities............... 135,932 (4,974) (4,937) 6,728 (19,738) (10,770) 799
Depreciation and
amortization............. 6,317(e) 6,999 9,180 11,991 9,578 7,109 6,087
Capital expenditures....... 8,676 6,010 9,153 6,822 3,453 1,555 3,227
OPERATING DATA:
Comparable store sales
increase/(decrease)(g)... 1.2% (4.0)% 5.7% (4.9)% 3.7% 2.4% 7.1%
End of period stores....... 147 162 175 192 196 193 202
Inventory turns(h)......... 2.0x 1.8x 1.9x 1.8x 2.2x 2.1x 2.2x
</TABLE>
<TABLE>
<CAPTION>
LTM
FISCAL YEAR SEPT. 28,
----------- ---------
1996 1997
----------- ---------
<S> <C> <C>
PRO FORMA DATA:
Net sales....................................................................... $ 404,265 $ 432,086
EBITDA.......................................................................... 26,330 32,944
Cash interest expense........................................................... 19,475 18,800
Ratio of EBITDA to cash interest expense........................................ 1.8x
Net debt/EBITDA................................................................. 5.3x
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 28, 1997
------------------------
HISTORICAL PRO FORMA
---------- ---------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................................................... $ 416 $ 416
Net working capital(i).......................................................... 79,558 79,558
Total assets.................................................................... 203,856 208,518
Total debt (includes current maturities)........................................ 87,226 176,179
Stockholder's equity (deficit).................................................. 40,369 (43,922)
</TABLE>
9
<PAGE> 15
(Notes to table on previous page)
- ------------------------------
(a) The Company's fiscal year is a 52 or 53 week year ending on the Sunday
closest to the calendar year end. All fiscal years presented consist of 52
weeks except for Fiscal 1992, which consisted of 53 weeks. The nine month
period of 1996 was a 39 week period that ended on September 29, 1996 and the
nine month period of 1997 was a 39 week period that ended on September 28,
1997. The financial data for Pro Forma 1992 is unaudited and combines the
results of operations for the 39 weeks ended September 25, 1992 for the
Company prior to the acquisition of the Company from Pacific Enterprises
("PE")(the "PE Acquisition") and the results of operations of the Company
for the 14 weeks ended January 3, 1993 and gives effect to the PE
Acquisition as though it occurred at the beginning of the 1992 fiscal year.
The unaudited pro forma financial data for Pro Forma 1992 does not purport
to represent the results that actually would have occurred if such
transactions had in fact occurred on such date.
(b) The Company prior to the PE Acquisition recorded inventory on a LIFO basis.
In connection with the PE Acquisition, the Company adopted the FIFO method
for recording inventory. As a result, Pro Forma 1992 is revised to reflect
the FIFO method as of the beginning of the year.
(c) Includes $11,080 decrease related to purchase accounting inventory
revaluation.
(d) Includes $6,332 decrease related to purchase accounting inventory
revaluation.
(e) Includes $3,828 increase in depreciation and amortization expense due to
purchase accounting revaluation of assets.
(f) For purposes of this Prospectus, EBITDA represents net earnings (loss)
before taking into consideration net interest expense, income tax expense,
depreciation expense, amortization expense, and non-cash rent expense, and
where relevant to the period referenced, amortization expense associated
with the write-up of assets related to the PE Acquisition, expense incurred
related to management stock grants related to the PE Acquisition, the LIFO
provision incurred prior to the PE Acquisition and extraordinary loss from
early extinguishment of debt. While EBITDA is not intended to represent
cash flow from operations as defined by generally accepted accounting
principles ("GAAP") and should not be considered as an indicator of
operating performance or an alternative to cash flow (as measured by GAAP)
as a measure of liquidity, it is included herein to provide additional
information with respect to the ability of the Company to meet its future
debt service, capital expenditure and working capital requirements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(g) Comparable store sales data for a period reflect stores open throughout that
period and the corresponding period of the prior fiscal year.
(h) Inventory turns equal fiscal year or latest twelve month cost of goods sold,
buying and occupancy costs divided by 4 quarter average FIFO inventory
balances adjusted to exclude the uniform capitalization adjustment to
inventory balances.
(i) Net working capital is defined as current assets less current liabilities
excluding current maturities of long-term debt.
10
<PAGE> 16
RISK FACTORS
In addition to the other matters described in this Prospectus, prospective
investors should carefully consider the following risk factors before deciding
to participate in the Exchange Offer, although certain matters set forth below
are equally applicable to the Old Notes. Holders of the Old Notes should also
refer to the "Disclosure Regarding Forward-Looking Statements" found on page ii
of this Prospectus when evaluating this "Risk Factors" section and the Company's
financial condition and operations.
HIGH LEVERAGE
The Company is highly leveraged. In addition to the obligations evidenced
by the $131.0 million aggregate principal of the Notes offered hereby, the debt
obligations of the Company will include all existing and future indebtedness of
the Company, including indebtedness outstanding under the CIT Credit Facility.
As of December 28, 1997, the Company had $43.4 million of long-term Indebtedness
ranking pari passu with the Notes, all of which constitutes secured Indebtedness
under the CIT Credit Facility. The CIT Credit Facility, subject to its terms and
conditions, allows secured borrowings of up to $125.0 million. The foregoing
leverage will have important consequences to holders of the Notes, including the
following: (i) the Company's highly leveraged condition could make the
procurement of additional capital resources difficult if that were to become
necessary; (ii) a substantial portion of the Company's cash flow from operations
will be required to be dedicated to the payment of the Company's interest
expense and principal repayment obligations; (iii) the Company's high degree of
leverage could make it more vulnerable to economic downturns and more limited in
its ability to withstand competitive pressures than its competitors that are not
as highly leveraged; and (iv) the Company's interest expense and principal
repayment obligations could limit the amount of internally generated funds
available to fund the Company's expansion and, therefore, could require a
reduction of its expansion plans.
The Company's ability to meet its debt service obligations will be
dependent upon its future performance, which, in turn, will be subject to
general economic conditions and to financial, business and other factors
affecting the operations of the Company, including factors beyond its control.
The Company's earnings were insufficient to cover fixed charges for the 53 weeks
ended January 3, 1993 (on a pro forma basis giving effect to the PE Acquisition)
and the fiscal years ended January 2, 1994 and December 31, 1995 by $7.3
million, $1.7 million and $6.4 million, respectively. On a pro forma basis after
giving effect to the Recapitalization, earnings were insufficient to cover fixed
charges by $4.9 million and $6.9 million for the year ended December 29, 1996
and the nine months ended September 29, 1996, respectively. However, based upon
its current and anticipated level of operations, the Company believes that its
cash flow from operations, together with amounts available under the CIT Credit
Facility, should be adequate to meet its anticipated cash requirements for
working capital, capital expenditures, interest payments and scheduled principal
payments. There can be no assurance, however, that the Company's business will
continue to generate cash flow at or above current levels. If the Company is
unable to generate sufficient cash flows from operations in the future to
service its indebtedness, it may be required to refinance all or a portion of
its indebtedness, including the Notes, or to obtain additional financing or to
dispose of material assets or discontinue certain of its operations. The CIT
Credit Facility and the Indenture will restrict the Company's ability to sell
assets and/or use the proceeds therefrom. There can be no assurance that any
such refinancing or asset sales would be possible under the Company's debt
instruments existing at such time, that the proceeds which the Company could
realize from such refinancing or asset sales would be sufficient to meet the
Company's obligations then due or that any additional financing could be
obtained.
RESTRICTIVE COVENANTS AND ASSET ENCUMBRANCES
The CIT Credit Facility and the Indenture contain numerous restrictive
covenants which limit the discretion of the Company's management with respect to
certain business matters. These covenants place significant restrictions on,
among other things, the ability of the Company to incur additional indebtedness,
to create liens or other encumbrances, to pay dividends or make other restricted
payments, to make investments, loans and guarantees and to sell or otherwise
dispose of a substantial portion of assets to, or merge or consolidate with,
another entity. The CIT Credit Facility also contains a number of financial
covenants that
11
<PAGE> 17
require the Company to meet certain financial ratios and tests. A failure to
comply with the obligations contained in the CIT Credit Facility or the
Indenture, if not cured or waived, could permit acceleration of the related
indebtedness and acceleration of indebtedness under other instruments that
contain cross-acceleration or cross-default provisions. In addition, the
obligations of the Company under the CIT Credit Facility are secured by the
Company's trade accounts receivable, merchandise inventories and general
intangible assets. In the case of an event of default under the CIT Credit
Facility, the lenders thereunder would be entitled to exercise the remedies
available to a secured lender under applicable law. Other indebtedness of the
Company that may be incurred in the future may contain financial or other
covenants more restrictive than those applicable to the CIT Credit Facility or
the Notes. See "Description of the Notes -- Certain Covenants" and "Financing
Arrangements."
EXPANSION PROGRAM
The Company's continued growth is dependent to a significant degree upon
its ability to open new stores on a profitable basis. During the fiscal year
ended December 29, 1996, the Company opened a total of four new stores, which
represented a reduction in its store growth from an average of 15 new stores per
year during the four year period from 1992 through 1995. See
"Business -- Expansion and Store Development." The Company intends to continue
opening new stores and remodeling certain older, existing stores, including
plans to open 14 new stores in 1997, at an aggregate cost, including working
capital, of approximately $9.0 million. The Company met its store opening plan
for 1997.
The Company's ability to expand will depend, in part, on business
conditions and the availability of suitable sites, acceptable lease terms,
qualified managers and sales associates, and sufficient capital. In addition, a
decline in the Company's overall financial performance, increased rents or any
other adverse effects arising from the commercial real estate market in the
Company's markets may adversely impact the Company's current expansion plan. The
Company expects that the net cash generated from operations, together with
borrowings under the CIT Credit Facility to support working capital
requirements, should enable the Company to finance the expenditures related to
its planned expansion. There can be no assurance, however, that the Company will
possess sufficient funds to finance the expenditures related to its planned
expansion, that new stores can be opened on a timely basis, or that such new
stores can be operated on a profitable basis, or that such expansion will be
manageable. In the event net cash generated from operations together with
working capital reserves and borrowings under the CIT Credit Facility are
insufficient to finance the expenditures related to the Company's planned
expansion, the Company may be required to reduce its expansion plans, which
could have an adverse impact on the Company's financial condition and results of
operations.
COMPETITION
The sporting goods business and the retail environment are highly
competitive, and the Company competes with national, regional and local sporting
goods chains, large retailers, specialty stores and sporting goods superstores.
Sporting goods retailers generally compete on the basis of store location and
image, product selection, quality and price, and customer service. A number of
the Company's competitors are larger and have greater resources than the
Company. See "Business -- Industry and Competition."
ABSENCE OF PUBLIC MARKET
There is no existing market for the New Notes and the Company does not
intend to apply for the listing of the New Notes on any national securities
exchange or for their quotation through the Nasdaq system. There can be no
assurance as to the development of any market for any of the New Notes, or as to
the liquidity of any market that may develop for the New Notes. The market for
"high yield" securities such as the Notes is volatile and unpredictable, which
may have an adverse effect on the liquidity of and prices for the Notes. The
Notes could trade at prices that may be lower than their initial offering price
as a result of many factors, including prevailing interest rates, the Company's
operating results and the markets for similar securities. The Old Notes have not
been registered under the Securities Act. Any Old Notes may only be offered or
sold pursuant to an exemption from or in a transaction not subject to the
registration requirements of the Securities
12
<PAGE> 18
Act or pursuant to an effective registration statement. Accordingly, if any Old
Notes are tendered and accepted in the Exchange Offer, the trading market for
the untendered Old Notes could be adversely affected.
REGIONAL MARKET CONCENTRATION
The Company's stores are located in the Western United States. Accordingly,
the Company is subject to regional risks, such as the economy, weather
conditions, natural disasters and government regulations. If the region were to
suffer an economic downturn or if other adverse regional events were to occur
(e.g., the occurrence of an unusually high number of winter storms caused by the
"El Nino" effect or otherwise), there could be an adverse impact on the
Company's net sales and profitability and its ability to implement its planned
expansion program. Several of the Company's competitors operate stores across
the United States and thus are not as vulnerable as the Company to such regional
risks. See "Business -- Industry and Competition."
FRAUDULENT TRANSFER CONSIDERATIONS
The Company's and each Subsidiary Guarantor's incurrence of the obligations
constituting the Notes and the Guarantees, respectively, could become subject to
challenge under federal or state fraudulent transfer laws if a court were to
determine that the Company or a Subsidiary Guarantor, as the case may be, (i)
incurred such obligations with actual intent to hinder, defraud or delay present
or future creditors, or contemplated insolvency with a design to prefer one or
more creditors to the exclusion in whole or in part of others; or (ii) received
less than a reasonably equivalent value or fair consideration for the
obligations incurred under the Old Notes or a Guarantee, as applicable, and, at
the time of such incurrence, was rendered insolvent, was engaged in a business
or transaction for which its remaining assets were unreasonably small, or
intended to incur or believed or reasonably should have believed that it would
incur debts beyond its ability to pay such debts as they became due.
The measure of insolvency for purposes of the foregoing will vary depending
on the law of the jurisdiction being applied. Generally, however, an entity
would be considered insolvent if the sum of its debts (including contingent and
liquidated debts) is greater than the value of all of its property at a fair
valuation or if the present fair salable value of its assets is less than the
amount that will be required to pay its probable liability on its existing debts
as they become absolute and matured. There can be no assurance as to what
standard a court would apply in order to determine whether the Company would be
insolvent upon the consummation of the Recapitalization or whether a Subsidiary
Guarantor would be insolvent upon the incurrence of obligations under its
Guarantee. The Company disclaims any intent to hinder, defraud or delay its
creditors, or to prefer some creditors over others, and believes that the Old
Notes were incurred for proper purposes and in good faith. The Company further
does not believe that any of the other tests for fraudulent transfer were
satisfied with respect to indebtedness incurred by the Company in connection
with the Recapitalization, based in part on an opinion of a nationally
recognized investment banking firm that specializes in solvency opinions
delivered as a condition to the consummation of the offering of the Old Notes as
to the Company's solvency upon consummation of the Recapitalization, as well as
the adequacy of the Company's remaining assets, and its ability to pay its debts
as they come due, after the Recapitalization. However, if a court were to
determine that the Recapitalization or a Subsidiary Guarantor's incurrence of
obligations under its Guarantee, as the case may be, did constitute a fraudulent
transfer, the court could avoid the obligations represented by the Notes (or
such Guarantee) or take other actions detrimental to the holders of such
obligations (such as equitably subordinating the claims of such holders to the
claims of other creditors of the Company or a Subsidiary Guarantor, as
applicable). In such event, there could be no assurance that any repayment on
the Notes would ever be recovered by the holders of the Notes. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a great extent on the management efforts
of its officers and other key personnel and on its ability to retain the
existing senior management in the future. The loss of the services of
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<PAGE> 19
certain members of the existing senior management team could have a material
adverse effect on the Company's business.
SEASONALITY
The Company's business is seasonal in nature. As a result, the Company's
results of operations are likely to vary during its fiscal year. Historically,
the Company's revenues and income are highest during its fourth quarter, due to
several factors. The fourth quarter contributed 26.7% in 1996 and 27.0% in 1995
of fiscal year net sales and 37.6% in 1996 and 42.8% in 1995 of fiscal year
EBITDA. Any decrease in sales for such period could have a material adverse
effect on the Company's business, financial condition and operating results for
the entire fiscal year.
MARKET DATA
The market survey referred to herein was conducted by an independent
research group commissioned by the Company. The survey results may vary from
other surveys due in part to the voluntary nature of the data gathering process.
In addition, comparative information regarding the Company's competitors and
other market data contained herein is based on estimates and the good faith
belief of the Company's management. Accordingly, Holders of the Old Notes should
not place undue emphasis on such survey, comparisons or other market data when
considering whether to participate in the Exchange Offer.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of the Old Notes as set forth in the legend thereon as a consequence
of the issuance of the Old Notes pursuant to exemptions from, or in transactions
not subject to, the registration requirements of the Securities Act and
applicable state securities laws. In general, the Old Notes may not be offered
or sold, unless (i) to a person who the seller reasonably believes is a
qualified institutional buyer in a transaction meeting the requirements of Rule
144A, in a transaction meeting the requirements of Rule 144 under the Securities
Act, outside the United States to a foreign person in a transaction meeting the
requirements of Rule 904 under the Securities Act or in accordance with another
exemption from the registration requirements of the Securities Act (based upon
an opinion of counsel if the Company so requests), (ii) to the Company or (iii)
pursuant to an effective registration statement, and in each case, in accordance
with any applicable securities laws of any State of the United States or any
other applicable jurisdiction. See "Risk Factors -- Absence of Public Market."
The Company does not currently anticipate that it will register the Old Notes
under the Securities Act. Based on interpretations by the staff of the
Commission, as set forth in no-action letters issued to third parties, the
Company believes that New Notes issued pursuant to the Exchange Offer in
exchange for Old Notes may be offered for resale, resold and otherwise
transferred by Holders 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 Notes are acquired in the ordinary
course of such Holder's business and such Holder, other then a broker-dealer,
does not intend to participate, and has no arrangement or understanding with any
person to participate, in the distribution of such New Notes. However, the
Commission has not considered the Exchange Offer in the context of a no-action
letter request by the Company and there can be no assurance that the staff of
the Commission would make a similar determination with respect to the Exchange
Offer.
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<PAGE> 20
THE RECAPITALIZATION
Parent, Robert W. Miller, Steven G. Miller and Green Equity Investors, L.P.
("GEI") agreed to a Plan of Recapitalization and Stock Repurchase Agreement (the
"Recapitalization Agreement"). The following transactions (collectively referred
to as the "Recapitalization") were effected pursuant to the Recapitalization
Agreement: (i) the Company issued the Old Notes ($130.4 million gross proceeds);
(ii) the Company defeased and called for repayment all of its outstanding
13 5/8% Senior Subordinated Notes due 2002 (the "Old Subordinated Notes"); (iii)
Parent issued its Senior Discount Notes in an aggregate principal amount at
maturity of $48.2 million maturing on November 30, 2008 (the "Parent Discount
Notes") with a warrant to purchase approximately three percent of the Common
Stock of Parent, par value $.01 per share (the "Common Stock") at a nominal
exercise price (the "Warrant") ($24.5 million proceeds); (iv) Parent accelerated
vesting of substantially all outstanding options and restricted stock held by
management and employees of the Company; (v) Parent redeemed for cash its
existing Series A 9% Cumulative Redeemable Preferred Stock (the "Parent Old
Preferred") for approximately $21.9 million in the aggregate, including accrued
dividends; (vi) Parent paid a cash distribution of $15 per share on its
outstanding shares of Common Stock (approximately $63.2 million in the
aggregate); (vii) Parent repurchased from Pacific Enterprises ("PE") its warrant
respecting 397,644 shares of Common Stock and 16,667 shares of Parent Old
Preferred (the "PE Warrant") and approximately 2,737,310 shares of Common Stock
from the Selling Stockholders (of which GEI owned 86.8%) for an aggregate of
$17.6 million in cash and $35.0 million of Parent Senior Exchangeable Preferred
Stock (the "Parent New Preferred"); (viii) Parent sold additional Common Stock
to middle and senior level management of the Company (approximately $2.3 million
gross proceeds), increasing the beneficial ownership of management and employees
(and members of their families) from 14.0% to 55.3% (in each instance on a fully
diluted basis); and (ix) other transactions occurred, including a distribution
from the Company to Parent, so that the above referenced transactions could be
effected and the capital structure of the Company would be as set forth under
"Capitalization." The Recapitalization will be accounted for as a
recapitalization transaction for accounting purposes.
USE OF PROCEEDS
The Company will not receive any cash proceeds from the Exchange Offer. In
consideration for issuing the New Notes in exchange for Old Notes as described
in this Prospectus, the Company will receive Old Notes in like principal amount.
The Old Notes surrendered in exchange for the New Notes will be retired and
cancelled.
THE EXCHANGE OFFER
The following discussion sets forth or summarizes the material terms of the
Exchange Offer, including those set forth in the Letter of Transmittal
distributed with this Prospectus. This summary is qualified in its entirety by
reference to the full text of the documents underlying the Exchange Offer
(including the Indenture and the Registration Rights Agreement), copies of which
are filed as exhibits to the Registration Statement on Form S-4 of which this
Prospectus is a part and are incorporated herein by reference.
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Old Notes were sold by the Company to the Initial Purchasers on
November 13, 1997, and were subsequently resold to qualified institutional
buyers pursuant to Rule 144A under the Securities Act and pursuant to offers and
sales that occurred outside the United States within the meaning of Regulation S
under the Securities Act. In connection with the offering of the Old Notes, the
Company entered into the Registration Rights Agreement, which requires, among
other things, that by January 12, 1998 the Company (i) file with the SEC a
registration statement under the Securities Act with respect to an issue of new
notes of the Company identical in all material respects (other than transfer
restrictions, registration rights and the requirement, under certain
circumstances, to pay liquidated damages) to the Old Notes (which obligation has
been satisfied by the filing of the Registration Statement of which this
Prospectus is a part), (ii) use its
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<PAGE> 21
reasonable best efforts to cause such registration statement to become effective
under the Securities Act and (iii) upon the effectiveness of that registration
statement, offer to the Holders of the Old Notes the opportunity to exchange
their Old Notes for a like principal amount of New Notes, which would be issued
without a restrictive legend and may be reoffered and resold by the Holder
without restrictions or limitations under the Securities Act (other than any
such Holder that is an "affiliate" of either Company within the meaning of Rule
405 under the Securities Act).
Any Old Notes tendered and exchanged in the Exchange Offer will reduce the
aggregate principal amount of Old Notes outstanding. Following the consummation
of the Exchange Offer, Holders of the Old Notes who did not tender their Old
Notes generally will not have any further registration rights under the
Registration Rights Agreement, and such Old Notes will continue to be subject to
certain restrictions on transfer. Accordingly, the liquidity of the market for
such Old Notes could be adversely affected. The Old Notes are currently eligible
for sale pursuant to Rule 144A through the Portal System(SM) of the National
Association of Securities Dealers, Inc. Because the Company anticipates that
most Holders of Old Notes will elect to exchange such Old Notes for New Notes
due to the absence of restrictions on the resale of New Notes under the
Securities Act, the Company anticipates that the liquidity of the market for any
Old Notes remaining after the consummation of the Exchange Offer may be
substantially limited.
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 Notes
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 Notes in
exchange for each $1,000 principal amount of outstanding Old Notes accepted in
the Exchange Offer. Holders may tender some or all of their Old Notes pursuant
to the Exchange Offer. However, Old Notes may be tendered only in integral
multiples of $1,000.
The form and terms of the New Notes are the same as the form and terms of
the Old Notes except that (i) the New Notes have been registered under the
Securities Act and hence will not bear legends restricting the transfer thereof
and (ii) the holders of the New Notes generally will not be entitled to certain
rights under the Registration Rights Agreement or with respect to liquidated
damages, which rights generally will terminate upon consummation of the Exchange
Offer. The New Notes will evidence the same debt as the Old Notes and will be
entitled to the benefits of the Indenture.
Holders of Old Notes do not have any appraisal or dissenters' rights under
the Delaware General Corporation Law 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 Securities Exchange Act of 1934 and the
rules and regulations of the SEC thereunder, including Rule 14e-1.
The Company shall be deemed to have accepted validly tendered Old Notes
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 Notes from the Company.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, the certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering Holder thereof as promptly as practicable
after the Expiration Date.
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than transfer taxes in certain circumstances, in connection with the
Exchange Offer. See "-- Fees and Expenses."
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<PAGE> 22
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
February 18, 1998, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
To extend the Exchange Offer, the Company will notify the Exchange Agent of
any extension by oral or written notice, followed by a public announcement
thereof no later than 9:00 a.m., New York City time, on the next business day
after the previously scheduled expiration date.
The Company reserves the right, in its reasonable judgment, (i) to delay
accepting any Old Notes, to extend the Exchange Offer or to terminate the
Exchange Offer if any of the conditions set forth below under "-- Conditions"
shall not have been satisfied, by giving 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 a public
announcement thereof. If the Exchange Offer is amended in a manner determined by
the Company to constitute a material change, the Company will promptly disclose
such amendment by means of a prospectus supplement that will be distributed to
the registered Holders, and, depending upon the significance of the amendment
and the manner of disclosure to the registered Holders, the Company will extend
the Exchange Offer for a period of five to ten business days if the Exchange
Offer would otherwise expire during such five to ten business day period.
INTEREST ON NEW NOTES
The New Notes will bear interest from their date of issuance. Interest will
accrue on the Old Notes that are tendered in exchange for the New Notes through
the issue date of the New Notes. Holders of Old Notes that are accepted for
exchange will not receive interest that is accrued but unpaid on the Old Notes
at the time of exchange, but such interest will be payable, together with
interest on the New Notes, on the first Interest Payment Date after the
Expiration Date. Interest on the New Notes will be payable semi-annually on each
May 15 and November 15, commencing on May 15, 1998.
PROCEDURES FOR TENDERING
Only a Holder of Old Notes may tender such Old Notes 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
Notes and any other required documents, to the Exchange Agent so as to be
received by the Exchange Agent at the address set forth below prior to 5:00
p.m., New York City time, on the Expiration Date. Delivery of the Old Notes may
be made by book-entry transfer in accordance with the procedures described
below. Confirmation of such book-entry transfer must be received by the Exchange
Agent prior to the Expiration Date.
By executing the Letter of Transmittal, each Holder will make to the
Company the representation set forth below in the second paragraph under the
heading "-- Resale of New Notes."
The tender by a Holder and the acceptance thereof by the Company will
constitute an 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 NOTES 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
OVER NIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE.
LETTERS OF TRANSMITTAL AND NOTES SHOULD NOT BE SENT TO THE COMPANY. HOLDERS MAY
REQUEST THEIR
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<PAGE> 23
RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO
EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Old Notes 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.
Signatures on the Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Old Notes tendered pursuant thereto are tendered (i) by a registered
Holder who has not completed the box entitled "Special Registration
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or
(ii) for the account of an Eligible Institution. In the event that signatures on
a Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantee must be by a member firm of a
registered national securities exchange or of the 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 Securities Exchange Act of 1934 (as
"Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered Holder of any Old Notes listed therein, such Old Notes 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 Notes
with the signature thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Old Notes and withdrawal of tendered Old Notes
will be determined by the Company in its sole discretion, which determination
will be final and binding. The Company reserves the absolute right to reject any
and all Notes not properly tendered or any Old Notes the Company's acceptance of
which would, in the opinion of counsel for the Company, be unlawful. The Company
also reserves the right to waive any defects, irregularities or conditions of
tender as to particular Old Notes. The Company's interpretation of the terms and
conditions of the Exchange Offer (including the instructions in the Letter of
Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Old Notes 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
Notes, none of the Company, the Exchange Agent or any other person shall incur
any liability for failure to give such notification. Tenders of Old Notes will
not be deemed to have been made until such defects or irregularities have been
cured or waived. Any Old Notes received by the Exchange Agent that are not
properly tendered and as to which the defects or irregularities have not been
cured or waived will be returned by the Exchange Agent to the tendering Holders,
unless otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
Tender of Old Notes Held Through DTC
The Exchange Agent and DTC have confirmed that the Exchange Offer is
eligible for ATOP, the DTC Automated Tender Offer Program. Accordingly, DTC
participants may, in lieu of physically completing and signing the applicable
Letter of Transmittal and delivering it to the Exchange Agent, electronically
transmit their acceptance of the Exchange Offer by causing DTC to transfer Old
Notes to the Exchange Agent in accordance with DTC's ATOP procedures for
transfer. DTC will then send an Agent's Message to the Exchange Agent.
The term "Agent's Message" means a message transmitted by DTC, received by
the Exchange Agent and forming part of the Book-Entry Confirmation, which states
that DTC has received an express acknowledgement from a participant in DTC that
is tendering Old Notes which are the subject of such Book
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<PAGE> 24
Entry Confirmation, that such participant has received and agrees to be bound by
the terms of the applicable Letter of Transmittal (or, in the case of an Agent's
Message relating to guaranteed delivery, that such participant has received and
agrees to be bound by the applicable Notice of Guaranteed Delivery), and that
the Company may enforce such agreement against such participant.
Book Entry Delivery Procedures
Within two business days after the date hereof, the Exchange Agent will
establish accounts with the respect to the Securities at DTC, the Midwest
Securities Transfer Company ("MSTC") and the Philadelphia Depositary Trust
Company ("Philadep") (each a "Book-Entry Transfer Facility" and, collectively,
the "Book-Entry Transfer Facilities") for purposes of the Exchange Offer. Any
financial institution that is a participant in any of the Book-Entry Transfer
Facilities systems may make book-entry delivery of the Old Notes by causing DTC,
MSTC or Philadep to transfer such Old Notes into the Exchange Agent's account at
such Book-Entry Transfer Facility in accordance with such Book-Entry Transfer
Facility's procedures for such transfer. Timely book-entry delivery of Old Notes
pursuant to the Exchange Offer, however, requires receipt of a Book-Entry
Confirmation prior to 5:00 p.m., New York City time, on the Expiration Date. In
addition, although delivery of Old Notes may be effected through book-entry
transfer into the Exchange Agent's account at a Book-Entry Transfer Facility,
the Letter of Transmittal (or a manually signed facsimile thereof), together
with any required signature guarantees and any other required documents, or an
Agent's Message in connection with a book-entry transfer, must, in any case, be
delivered or transmitted to and received by the Exchange Agent at its address
set forth on the back cover page of this Prospectus prior to the Expiration Date
to receive New Notes for tendered Old Notes, or the guaranteed delivery
procedure described below must be complied with. Tender will not be deemed made
until such documents are received by the Exchange Agent. Delivery of documents
to a Book-Entry Transfer Facility does not constitute delivery to the Exchange
Agent.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available, (ii) who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent or (iii) who
cannot complete the procedures for book-entry transfer, 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 Notes and the principal amount of Old Notes tendered, stating
that the tender is being made thereby and guaranteeing that, within three
New York Stock Exchange trading days after the Expiration Date, the Letter
of Transmittal (or facsimile thereof), together with the certificate(s)
representing the Old Notes (or a confirmation of book-entry transfer of
such Old Notes into the Exchange Agent's account at DTC) and any other
documents required by the Letter of Transmittal, will be deposited by the
Eligible Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered
Old Notes in proper form for transfer (or a confirmation of book-entry
transfer of such Old Notes into the Exchange Agent's account at DTC) and
all other documents required by the Letter of Transmittal, are received by
the Exchange Agent within three New York Stock Exchange trading days after
the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to Holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
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<PAGE> 25
WITHDRAWALS OF TENDERS
Except as otherwise provided herein, tenders of Old Notes 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 Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at the 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 Notes to be withdrawn (the "Depositor"),
(ii) identify the Old Notes to be withdrawn (including the certificate number(s)
and principal amount of such Old Notes, or, in the case of notes transferred by
book-entry transfer, the name and number of the account at DTC 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 Notes were tendered (including any
required signature guarantees) or be accompanied by documents of transfer
sufficient to have the Trustee register the transfer of such Old Notes into the
name of the person withdrawing the tender and (iv) specify the name in which any
such Old Notes are to be registered, if different from that of the Depositor.
All questions as to the validity, form and eligibility (including time or
receipt) of such notices will be determined by the Company, whose determination
shall be final and binding on all parties. Any Old Notes so withdrawn will be
deemed not to have been validly tendered for purposes of the Exchange Offer and
no New Notes will be issued with respect thereto unless the Old Notes so
withdrawn are validly retendered. Any Old Notes which have been tendered but
which are not accepted for exchange will be returned to the Holder thereof
without cost to such Holder as soon as practicable after withdrawal, rejection
of tender or termination of the Exchange Offer. Properly withdrawn Old Notes may
be retendered by following one of the procedures described above under
"-- Procedures for Tendering" at any time prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or to exchange New Notes for any Old Notes,
and may terminate or amend the Exchange Offer as provided herein before the
acceptance of such Old Notes, if:
(a) in the opinion of counsel to the Company, the Exchange Offer or
any part thereof contemplated herein violates any applicable law, policy or
interpretation of the staff of the SEC;
(b) any action or proceeding shall have been instituted or threatened
in any court or by any governmental agency which might materially impair
the ability of the Company to proceed with the Exchange Offer or any
material adverse development shall have occurred in any such existing
action or proceeding with respect to the Company;
(c) any cessation of trading on The Nasdaq Stock Exchange, Inc. or any
exchange, or any banking moratorium, shall have occurred, as a result of
which the Company is unable to proceed with the Exchange Offer; or
(d) a stop order shall have been issued by the SEC or any state
securities authority suspending the effectiveness of the Registration
Statement of which this Prospectus is a part or proceedings shall have been
initiated or, to the knowledge of the Company, threatened for that purpose.
If the Company determines in its reasonable judgment that any of the
conditions are not satisfied, the Company may (i) refuse to accept any Old Notes
and return all tendered Old Notes to the tendering Holders, (ii) extend the
Exchange Offer and retain all Old Notes tendered prior to the expiration of the
Exchange Offer, subject, however, to the rights of Holders to withdraw such Old
Notes (see "-- Withdrawals of Tenders") or (iii) waive such unsatisfied
conditions with respect to the Exchange Offer and accept all properly tendered
Notes which have not been withdrawn. If such waiver constitutes a material
change to the Exchange Offer, the Company will promptly disclose such waiver by
means of a prospectus supplement that will be distributed to the registered
Holders, and, depending upon the significance of the waiver and the manner of
disclosure to the registered Holders, the Company will extend the Exchange Offer
for a period of
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<PAGE> 26
five to ten business days if the Exchange Offer would otherwise expire during
such five to ten business-day period.
EXCHANGE AGENT
First Trust National Association will act as Exchange Agent for the
Exchange Offer with respect to the Old Notes.
Questions and requests for assistance, requests for additional copies of
this Prospectus or of the Letter of Transmittal for the Old Notes and requests
for copies of Notice of Guaranteed Delivery should be directed to the Exchange
Agent, addressed as follows:
<TABLE>
<S> <C>
By Mail: By Hand or Overnight Delivery:
First Trust National Association First Trust National Association
180 East Fifth Street 180 East Fifth Street
St. Paul, Minnesota 55101 4th Floor Bond Drop Window
Attention: Specialized Finance Department St. Paul, Minnesota 55101
Attention: Specialized Finance Department
By Facsimile:
(612) 244-1537 or
Confirm By Telephone: First Trust New York
100 Wall Street
(612) 244-1572 20th Floor
New York, New York 10005
Attn: Bernice Chapman
</TABLE>
FEES AND EXPENSES
The expenses of soliciting Old Notes for exchange will be borne by the
Company. The principal solicitation is being made by mail by the Exchange Agent
which will be paid a reasonable and customary fee for its solicitation services.
However, additional solicitation may be made by telephone, facsimile or in
person by officers and regular employees of the Company and its affiliates and
by persons so engaged by the Exchange Agent.
The Company will pay the Exchange Agent reasonable and customary fees for
its services and will reimburse it for its reasonable out-of-pocket expenses in
connection therewith and pay other registration expenses, including fees and
expenses of the Trustee, filing fees, blue sky fees and printing and
distribution expenses.
The Company will pay all transfer taxes, if any, applicable to the exchange
of the Old Notes pursuant to the Exchange Offer. If, however, certificates
representing the New Notes or the Old Notes for principal amounts not tendered
or accepted for exchange are to be delivered to, or are to be issued in the name
of, any person other than the registered Holder of the Old Notes tendered, or if
tendered Old Notes are registered in the name of any person other than the
person signing the Letter of Transmittal, or if a transfer tax is imposed for
any reason other than the exchange of the Old Notes pursuant to the Exchange
Offer, then the amount of any such transfer taxes (whether imposed on the
registered Holder or any other person) will be payable by the tendering Holder.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
which is the aggregate principal amount of the Old Notes, as reflected in the
Company's accounting records on the date of exchange. Accordingly, no gain or
loss for accounting purposes will be recognized in connection with the Exchange
Offer. The expenses of the Exchange Offer will be amortized over the term of the
New Notes.
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<PAGE> 27
RESALE OF NEW NOTES
Based on interpretations by the staff of the SEC set forth in no-action
letters issued to third parties, the Company believes that New Notes issued
pursuant to the Exchange Offer in exchange for Old Notes may be offered for
resale, resold and otherwise transferred by any Holder of such New Notes (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
Notes are acquired in the ordinary course of such Holder's business and such
Holder does not intend to participate, and has no arrangement or understanding
with any person to participate, in the distribution of such New Notes. Any
Holder who tenders in the Exchange Offer with the intention to participate, or
for the purpose of participating, in a distribution of the New Notes, or any
broker-dealer who purchased Old Notes from the Company may not rely on the
position of the staff of the SEC enunciated in Exxon Capital Holdings
Corporation (available May 13, 1988) and Morgan Stanley & Co., Incorporated
(available June 5, 1991), or similar no-action letters, but rather must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale transaction. In addition, any such resale
transaction should be covered by an effective registration statement containing
the selling security holders' information required by Item 507 of Regulation S-K
of the Securities Act. Each broker-dealer that receives New Notes for its own
account in exchange for Old Notes, where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, may be a statutory underwriter and must acknowledge that it will
deliver a prospectus in connection with any resale of such New Notes.
By tendering in the Exchange Offer, each Holder will represent to the
Company that, among other things, (i) the New Notes acquired pursuant to the
Exchange Offer are being obtained in the ordinary course of business of the
person receiving such New Notes, whether or not such person is the registered
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
Notes and (iii) the Holder and such other person acknowledge that if they
participate in the Exchange Offer for the purpose of distributing the New Notes
(a) they must, in the absence of an exemption therefrom, comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale of the New Notes and cannot rely on the no-action
letters referenced above and (b) failure to comply with such requirements in
such instance could result in such Holder or such other person incurring
liability under the Securities Act for which such Holder or such other person is
not indemnified by the Company. Further, by tendering in the Exchange Offer,
each Holder and such other person that may be deemed an "affiliate" (as defined
under Rule 405 of the Securities Act) of the Company will represent to the
Company that such Holder and such other person understand and acknowledge that
the New Notes may not be offered for resale, resold or otherwise transferred by
that Holder or such other person without registration under the Securities Act
or an exemption therefrom.
CONSEQUENCES OF FAILURE TO EXCHANGE
As a result of the making of this Exchange Offer, the Company will have
fulfilled certain of their obligations under the Registration Rights Agreement,
and Holders of Old Notes who do not tender their Notes will not have any further
registration rights under the Registration Rights Agreement or otherwise or
rights to receive liquidated damages for failure to register. If (i) prior to
the consummation of the Exchange Offer, any change in law or in applicable
interpretations of the staff of the SEC do not permit the Company to effect the
Exchange Offer or (ii) for any other reason the Exchange Offer is not
consummated by May 12, 1998, then the Company is required to file with the SEC a
shelf registration statement to cover resales of the Old Notes by the Holders
thereof who satisfy certain conditions relating to the provision of information
in connection with such shelf registration statement. Accordingly, any Holder of
Old Notes that does not exchange that Holder's Old Notes for New Notes will
continue to hold the untendered Old Notes and will be entitled to all the rights
and subject to all the limitations applicable thereto under the Indenture,
except to the extent that such rights or limitations, by their terms, terminate
or cease to have further effectiveness as a result of the Exchange Offer.
22
<PAGE> 28
The Old Notes that are not exchanged for New Notes pursuant to the Exchange
Offer will remain restricted securities. Accordingly, such Old Notes may be
resold only (i) to a person who the seller reasonably believes is a qualified
institutional buyer in a transaction meeting the requirements of Rule 144A, in a
transaction meeting the requirements of Rule 144 under the Securities Act,
outside the United States to a foreign person in a transaction meeting the
requirements of Rule 904 under the Securities Act or in accordance with another
exemption from the registration requirements of the Securities Act (and based
upon an opinion of counsel if the Company so requests), (ii) to the Company or
(iii) pursuant to an effective registration statement, and, in each case, in
accordance with any applicable securities laws of any State of the United States
or any other applicable jurisdiction. See "Risk Factors -- Restrictions on
Transfer."
OTHER
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept. Holders of the Old Notes are urged to
consult their financial and tax advisors in making their own decision on what
action to take.
The Company may in the future seek to acquire untendered Old Notes in open
market or privately negotiated transactions, through subsequent exchange offers
or otherwise. The Company has no present plans to acquire any Old Notes that are
not tendered in the Exchange Offer or to file a registration statement to permit
resales of any untendered Old Notes.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following sets forth a summary of the material anticipated federal
income tax consequences expected to result to holders from the Exchange Offer
and from the purchase, ownership and disposition of the New Notes. The following
summary is based upon current provisions of the Internal Revenue Code of 1986,
as amended (the "Code"), applicable Treasury regulations, judicial authority and
administrative rulings and practice. Holders should note that this summary is
not binding on the Internal Revenue Service (the "Service") and there can be no
assurance that the Service will take a similar view with respect to the tax
consequences described below. No ruling has been or will be requested by the
Company from the Service on any tax matters relating to the Exchange Offer or
the New Notes. Legislative, judicial or administrative changes or
interpretations may be forthcoming that could alter or modify the statements and
conclusions set forth herein. Any such changes or interpretations may or may not
be retroactive and could affect the tax consequences to holders.
The following summary is for general information only. The tax treatment of
a holder of the New Notes may vary depending upon such holder's particular
situation. Certain holders (including insurance companies, tax-exempt
organizations, financial institutions or 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. EACH HOLDER OF OLD NOTES SHOULD
CONSULT SUCH HOLDER'S OWN TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES OF
PURCHASING, HOLDING, EXCHANGING AND DISPOSING OF THE NEW NOTES, INCLUDING THE
APPLICABILITY AND EFFECT OF ANY FEDERAL, STATE, LOCAL OR FOREIGN TAX LAWS.
EXCHANGE OF OLD NOTES FOR NEW NOTES
The exchange of the New Notes for the Old Notes pursuant to the Exchange
Offer should not be taxable to the Holders thereof for federal income tax
purposes. An exchanging Holder should continue such Holder's holding period and
basis in the New Notes as if no exchange had occurred.
ORIGINAL ISSUE DISCOUNT AND STATED INTEREST
The New Notes will be issued without original issue discount. Stated
interest on the Old and New Notes will be includable in the holder's income
under such holder's method of accounting.
23
<PAGE> 29
BOND PREMIUM ON THE NEW NOTES
If the New Notes are purchased, or if the Old Notes were purchased, for an
amount in excess of the amount payable at the maturity date (or a call date, if
appropriate) of the New Notes, such excess will be deductible by the holder of
the New Notes as amortizable bond premium over the term of the New Notes (taking
into account earlier call dates, as appropriate), under a yield-to-maturity
formula, only if an election by the holder under Section 171 of the Code is made
or is already in effect. An election under Section 171 is available only if the
New Notes are held as capital assets. This election is revocable only with the
consent of the Service and applies to all obligations owned or subsequently
acquired by the holder. To the extent the excess is deducted as amortizable bond
premium, the holder's adjusted tax basis in the New Notes will be reduced.
Except as may otherwise be provided in Treasury regulations, under the Code the
amortizable bond premium will be treated as an offset to interest income on the
New Notes rather than as a separate deduction item.
MARKET DISCOUNT ON THE NEW NOTES
Holders of the New Notes should be aware that a disposition of the New
Notes may be affected by the market discount provisions of Sections 1276-1278 of
the Code. These rules generally provide that if a holder acquired the Old Notes
or acquires the New Notes (other than in an original issue, which may not
include the issuance of the New Notes pursuant to the Exchange Offer) at a
market discount which equals or exceeds 1/4 of 1% of the stated redemption price
of the New Notes at a maturity multiplied by the number of remaining complete
years to maturity and thereafter recognizes gain upon a disposition (or makes a
gift) of the New Notes, the lesser of (i) such gain (or appreciation, in the
case of a gift) or (ii) the portion of the market discount which accrued while
the Old Notes or New Notes were held by such holder will be treated as ordinary
income at the time of the disposition (or gift). For these purposes, market
discount means the excess (if any) of the stated redemption price at maturity
over the basis of such Old Notes or New Notes immediately after their
acquisition by the holder. A holder of the New Notes may elect to include any
market discount (whether accrued under the Old Notes or the New Notes) in income
currently rather than upon disposition of the New Notes. This election once made
applies to all market discount obligations acquired on or after the first
taxable year to which the election applies, and may not be revoked without the
consent of the Service.
A holder of any New Note who acquired the Old Note or New Note at a market
discount generally will be required to defer the deduction of a portion of the
interest on any indebtedness incurred or maintained to purchase or carry such
Old Note or New Note until the market discount is recognized upon a subsequent
disposition of such New Note. Such a deferral is not required, however, if the
holder elects to include accrued market discount in income currently.
REDEMPTION OR SALE OF THE NEW NOTES
Generally, any redemption or sale of the New Notes by a holder would result
in taxable gain or loss equal to the difference between the amount of cash and
the fair market value of property received (except to the extent that such cash
or property received is attributable to accrued, but previously untaxed,
interest) and the holder's tax basis in the New Notes. The tax basis of a holder
of the New Notes will generally be equal to the price paid for such New Notes or
the Old Notes exchanged therefor, plus any accrued market discount on the New
Notes (and the Old Notes exchanged therefor) included in the holder's income
prior to sale or redemption of the New Notes, or reduced by any amortizable bond
premium applied against the holder's income prior to sale or redemption of the
New Notes. Such gain or loss generally would be long-term capital gain or loss
if the holding period exceeded one year and the holder holds the New Notes as
capital assets (with the applicable tax rates for an individual taxpayer having
such long-term capital gain generally depending on whether or not the taxpayer's
holding period exceeds eighteen months), except to the extent such gain
constitutes accrued market discount.
24
<PAGE> 30
BACKUP WITHHOLDING AND REPORTING
A holder of the New Notes may be subject to backup withholding at a rate of
31% with respect to interest paid or accrued on, and gross proceeds of a sale
of, the New Notes unless (i) such holder is a corporation or comes within
certain other exempt categories and, when required, demonstrates this fact or
(ii) provides a correct taxpayer identification number, certifies as to no loss
of exemption from backup withholding and otherwise complies with applicable
requirements of the backup withholding rules. A holder of the New Notes who does
not provide the Company with such holder's correct taxpayer identification
number may be subject to penalties imposed by the Service.
The Company will report to the holders of the New Notes and to the Service
the amount of any "reportable payments" and any amount withheld with respect to
the Old Notes and New Notes during the calendar year.
THE FOREGOING DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES IS FOR
GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. ACCORDINGLY, EACH HOLDER OF THE
OLD NOTES SHOULD CONSULT SUCH HOLDER'S OWN TAX ADVISOR WITH RESPECT TO THE TAX
CONSEQUENCES TO SUCH HOLDER OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF THE
NEW NOTES INCLUDING THE APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL,
FOREIGN AND OTHER TAX LAWS.
25
<PAGE> 31
CAPITALIZATION
The following table sets forth the historical capitalization of the Company
as of September 28, 1997 and the capitalization of the Company at that date
after giving pro forma effect to the Recapitalization. This table should be read
in conjunction with "Unaudited Pro Forma Condensed Financial Data" and the
financial statements of the Company and the notes thereto included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 28, 1997
-----------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ------------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
LONG-TERM DEBT:
CIT Credit Facility.......................................... $ 50,776 $ (5,006) $ 45,770
Senior Notes................................................. -- 130,409 130,409
Old Notes.................................................... 36,450 (36,450) --
-------- -------- --------
Total long-term debt................................. 87,226 88,953 176,179
-------- -------- --------
STOCKHOLDER'S EQUITY........................................... 40,369 (84,291) (43,922)
-------- -------- --------
Total capitalization................................. $ 127,595 $ 4,662 $ 132,257
======== ======== ========
</TABLE>
26
<PAGE> 32
UNAUDITED PRO FORMA CONDENSED FINANCIAL DATA
The following unaudited pro forma condensed financial data have been
prepared by the Company's management from audited and unaudited financial
statements and the notes thereto of United Merchandising Corp. (which was
reincorporated in Delaware as Big 5 Corp. in connection with the
Recapitalization) included elsewhere in this Prospectus. As used herein, with
respect to the unaudited historical and pro forma condensed financial data, the
Company means United Merchandising Corp. The Unaudited Pro Forma Condensed
Statements of Operations for the twelve months ended September 28, 1997, the
fiscal year ended December 29, 1996, the nine months ended September 28, 1997
and the nine months ended September 29, 1996, reflect adjustments as if the
Recapitalization had been consummated and were effective as of the first day of
each such period. The financial effects of the Recapitalization as presented in
the unaudited pro forma condensed financial data are not necessarily indicative
of either the Company's financial position or the results of its operations
which would have been obtained had the Recapitalization actually occurred on the
dates described above nor are they indicative of the results of future
operations. The Unaudited Pro Forma Condensed Financial Data should be read in
conjunction with the notes thereto, which are an integral part thereof, the
financial statements of the Company and the notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
27
<PAGE> 33
UNAUDITED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
TWELVE MONTHS ENDED SEPTEMBER 28, 1997
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net sales...................................................... $ 432,086 $ 432,086
Cost of goods sold, buying and occupancy....................... 292,371 292,371
-------- --------
Gross profit.................................... 139,715 139,715
Operating expenses:
Selling and administrative................................ 107,005 (234)(a) 106,771
Depreciation and amortization............................. 8,556 8,556
-------- ------- --------
Total operating expenses........................ 115,561 (234) 115,327
-------- ------- --------
Operating income................................ 24,154 234 24,388
Interest expense............................................... 10,806 9,130(b) 19,936
-------- ------- --------
Income before income taxes and extraordinary loss......... 13,348 (8,896) 4,452
Income taxes................................................... 1,378 (1,378)(c) --
-------- ------- --------
Income before extraordinary loss.......................... 11,970 (7,518) 4,452
Income tax benefit from early extinguishment of debt........... 937 937
-------- ------- --------
Net income...................................... $ 12,907 (7,518) $ 5,389
======== ======= ========
EBITDA......................................................... $ 32,710 234 $ 32,944
Ratio of earnings to fixed charges(d).......................... 1.7x 1.1x
</TABLE>
YEAR ENDED DECEMBER 29, 1996
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net sales...................................................... $ 404,265 $ 404,265
Cost of goods sold, buying and occupancy....................... 277,116 277,116
-------- --------
Gross profit.................................... 127,149 127,149
Operating expenses:
Selling and administrative................................ 101,053 (234)(a) 100,819
Depreciation and amortization............................. 9,578 9,578
-------- ------- --------
Total operating expenses........................ 110,631 (234) 110,397
-------- ------- --------
Operating income................................ 16,518 234 16,752
Interest expense............................................... 11,482 9,090(b) 20,572
-------- ------- --------
Income before income taxes and extraordinary loss......... 5,036 (8,856) (3,820)
Income taxes................................................... 970 (970)(c) --
-------- ------- --------
Income before extraordinary loss.......................... 4,066 (7,886) (3,820)
Extraordinary loss from early extinguishment of debt net of
income taxes................................................. (1,285) (1,285)
-------- ------- --------
Net income...................................... $ 2,781 (7,886) $ (5,105)
======== ======= ========
EBITDA......................................................... $ 26,096 234 $ 26,330
Ratio of earnings to fixed charges(d).......................... 1.2x --
</TABLE>
See accompanying notes to the unaudited pro forma condensed statements of
operations.
28
<PAGE> 34
UNAUDITED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 28, 1997
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net sales...................................................... $ 324,177 $ 324,177
Cost of goods sold, buying and occupancy....................... 218,675 218,675
-------- --------
Gross profit.................................... 105,502 105,502
Operating expenses:
Selling and administrative................................ 82,603 (175)(a) 82,428
Depreciation and amortization............................. 6,087 6,087
-------- ------- --------
Total operating expenses........................ 88,690 (175) 88,515
-------- ------- --------
Operating income................................ 16,812 175 16,987
Interest expense............................................... 7,913 6,859(b) 14,772
-------- ------- --------
Income before income taxes and extraordinary loss......... 8,899 (6,684) 2,215
Income taxes................................................... 408 (408)(c) --
-------- ------- --------
Income before extraordinary loss.......................... 8,491 (6,276) 2,215
Extraordinary loss from early extinguishment of debt net of
income taxes ................................................ -- --
-------- ------- --------
Net income...................................... $ 8,491 (6,276) $ 2,215
======== ======= ========
EBITDA......................................................... $ 22,899 175 $ 23,074
Ratio of earnings to fixed charges(d).......................... 1.6x 1.1x
</TABLE>
NINE MONTHS ENDED SEPTEMBER 29, 1996
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net sales...................................................... $ 296,356 $ 296,356
Cost of goods sold, buying and occupancy....................... 203,420 203,420
-------- --------
Gross profit.................................... 92,936 92,936
Operating expenses:
Selling and administrative................................ 76,651 (175)(a) 76,476
Depreciation and amortization............................. 7,109 7,109
-------- ------- --------
Total operating expenses........................ 83,760 (175) 83,585
-------- ------- --------
Operating income................................ 9,176 175 9,351
Interest expense............................................... 8,589 6,818(b) 15,407
-------- ------- --------
Income before income taxes and extraordinary loss......... 587 (6,643) (6,056)
Income taxes................................................... -- --(c) --
-------- ------- --------
Income before extraordinary loss.......................... 587 (6,643) (6,056)
Extraordinary loss from early extinguishment of debt net of
income taxes ................................................ (2,222) (2,222)
-------- ------- --------
Net income...................................... $ (1,635) (6,643) $ (8,278)
======== ======= ========
EBITDA......................................................... $ 16,285 175 $ 16,460
Ratio of earnings to fixed charges(d).......................... 1.0x --
</TABLE>
See accompanying notes to the unaudited pro forma condensed statements of
operations.
29
<PAGE> 35
NOTES TO UNAUDITED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(a) Represents a reduction in a management fee historically paid to LGA (as
defined).
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED LTM ENDED
------------- ----------------------- ---------
DECEMBER 29, SEPTEMBER SEPTEMBER SEPTEMBER
1996 1996 1997 1997
------------- --------- --------- ---------
<S> <C> <C> <C> <C>
Historical management fee................. $ (567) $ (425) $ (425) $ (567)
New management fee........................ 333 250 250 333
------- ------ ------ ------
Management fee adjustment............... $ (234) $ (175) $ (175) $ (234)
======= ====== ====== ======
</TABLE>
(b) The interest expense adjustment is as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED LTM ENDED
------------- ----------------------- ---------
DECEMBER 29, SEPTEMBER SEPTEMBER SEPTEMBER
1996 1996 1997 1997
------------- --------- --------- ---------
<S> <C> <C> <C> <C>
New interest on Notes and CIT Credit
Facility................................ $19,142 $14,324 $13,707 $18,526
Other..................................... 776 584 612 802
------- ------ ------ ------
Total........................... 19,918 14,908 14,319 19,328
Less: amounts in historical statements of
operations.............................. 10,828 8,090 7,460 10,198
------- ------ ------ ------
Adjustment to interest expense............ $ 9,090 $ 6,818 $ 6,859 $ 9,130
======= ====== ====== ======
</TABLE>
(c) Tax benefit arising from additional interest.
(d) For the purpose of calculating the ratio of earnings to fixed charges,
earnings represents income before provisions for income taxes and fixed
charges. Fixed charges consist of interest expense, amortization of debt
financing costs, and one-third of lease expense, which management believes
is representative of the interest component of lease expense. On a pro forma
basis, earnings were insufficient to cover fixed charges by $4,918 and
$6,870 for the year ended December 29, 1996 and the nine months ended
September 29, 1996, respectively.
30
<PAGE> 36
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
AS OF SEPTEMBER 28, 1997
<TABLE>
<CAPTION>
PRO FORMA PRO
HISTORICAL ADJUSTMENTS FORMA
---------- ----------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents:................................ $ 416 $ 416
Trade & other receivables, net of allowance for doubtful
accounts................................................ 2,232 2,232
Merchandise inventories................................... 146,513 146,513
Prepaid expenses.......................................... 865 865
-------- --------
Total current assets............................ 150,026 150,026
-------- --------
Property and equipment:
Land...................................................... 186 186
Building, improvements, furniture and equipment........... 47,064 47,064
Less accumulated depreciation and amortization............ (20,487) (20,487)
-------- --------
Net property and equipment...................... 26,763 26,763
-------- --------
Deferred income taxes, net..................................... 4,995 4,995
Leasehold interest, net of amortization........................ 15,051 15,051
Other assets, at cost, less accumulated amortization........... 1,539 4,662(a) 6,201
Excess of cost over net assets acquired, less accumulated
amortization................................................. 5,482 5,482
-------- -------- --------
Total assets.................................... $ 203,856 $ 4,662 $208,518
======== ======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable.......................................... $ 44,453 $ 44,453
Accrued expenses.......................................... 26,015 26,015
-------- --------
Total current liabilities....................... 70,468 70,468
Deferred rent.................................................. 5,793 5,793
Long-term debt................................................. 87,226 88,953(b) 176,179
-------- -------- --------
Total liabilities............................... 163,487 88,953 252,440
-------- -------- --------
Commitments and contingencies
Stockholder's equity........................................... 40,369 (84,291)(c) (43,922)
-------- -------- --------
Total liabilities and stockholder's equity...... $ 203,856 $ 4,662 $208,518
======== ======== ========
</TABLE>
See accompanying notes to unaudited pro forma condensed balance sheet.
31
<PAGE> 37
NOTES TO UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
(DOLLARS IN THOUSANDS)
(a) Represents financing costs associated with the offering of the Notes and the
write-off of $588 of deferred financing fees associated with the Old Notes.
(b) Represents the issuance of Notes for $131,000, less unamortized discount of
$591, partial repayment of the CIT Credit Facility and repayment of Old
Notes.
(c) Represents the net change in stockholder's equity as a result of the
Recapitalization:
<TABLE>
<S> <C>
Cash dividend to Parent........................................ $ 81,575
Premium on repayment of Old Notes.............................. 2,128
Write-off of deferred financing fees on Old Notes.............. 588
-------
$ 84,291
=======
</TABLE>
32
<PAGE> 38
SELECTED HISTORICAL FINANCIAL DATA
The following selected historical financial data have been prepared by the
Company's management from the audited and unaudited financial statements and the
notes thereto of United Merchandising Corp. (which was reincorporated in
Delaware as Big 5 Corp. in connection with the Recapitalization) included
elsewhere in this Prospectus. As used herein, with respect to the selected
historical financial data, the Company means United Merchandising Corp. The
historical financial statements of the Company for the fiscal years 1993, 1994,
1995 and 1996 and as of the end of each such fiscal year have been audited. The
historical financial statements of the Company for pro forma 1992 and the nine
month periods of 1996 and 1997 and as of the end of each such period are
unaudited. The results for the interim period are not necessarily indicative of
the results for the full fiscal year. The selected historical financial data
should be read in conjunction with, and are qualified in their entirety by,
"Unaudited Pro Forma Condensed Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the historical
financial statements of the Company and the notes thereto included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR(a)
--------------------------------------------------------- NINE MONTHS(a)
PRO FORMA -------------------
1992 1993 1994 1995 1996 1996 1997
--------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................. $312,415 $321,933 $364,109 $370,126 $404,265 $296,356 $324,177
Cost of goods sold, buying and
occupancy............................... 221,795 224,094 244,777 256,583 277,116 203,420 218,675
-------- -------- -------- -------- -------- -------- --------
Gross profit............................ 90,620 (b)(c) 97,839(d) 119,332 113,543 127,149 92,936 105,502
Operating expenses:
Selling and administrative.............. 80,076 80,076 92,238 95,158 101,053 76,651 82,603
Depreciation and amortization........... 6,317 (e) 6,999 9,180 11,991 9,578 7,109 6,087
-------- -------- -------- -------- -------- -------- --------
Total operating expenses.................. 86,393 87,075 101,418 107,149 110,631 83,760 88,690
-------- -------- -------- -------- -------- -------- --------
Operating income.......................... 4,227 10,764 17,914 6,394 16,518 9,176 16,812
Interest expense.......................... 10,872 (f) 11,793 11,712 12,347 11,482 8,589 7,913
-------- -------- -------- -------- -------- -------- --------
Income (loss) before income taxes and
extraordinary loss...................... (6,645) (1,029) 6,202 (5,953) 5,036 587 8,899
Income taxes.............................. -- -- 1,903 368 970 -- 408
-------- -------- -------- -------- -------- -------- --------
Income (loss) before extraordinary loss... (6,645) (1,029) 4,299 (6,321) 4,066 587 8,491
Extraordinary loss from early
extinguishment of debt, net of income
taxes................................... -- -- (2,855) -- (1,285) (2,222) --
-------- -------- -------- -------- -------- -------- --------
Net income (loss)......................... $ (6,645) $ (1,029) $ 1,444 $ (6,321) $ 2,781 $ (1,635) $ 8,491
======== ======== ======== ======== ======== ======== ========
OTHER DATA:
EBITDA.................................... $ 24,836 $ 24,094 $ 27,094 $ 18,385 $ 26,096 $ 16,285 $ 22,899
EBITDA margin............................. 8.0 % 7.5% 7.4% 5.0% 6.5% 5.5% 7.1%
Cash flow provided by (used in) operating
activities.............................. 24,397 6,227 14,647 (3,824) 19,798 7,527 (1,953)
Cash flows provided by (used in) investing
activities.............................. (152,020) (6,714) (9,342) (7,374) 1,539 3,435 (3,227)
Cash flows provided by (used in) financing
activities.............................. 135,932 (4,974) (4,937) 6,728 (19,738) (10,770) 799
Capital expenditures...................... $ 8,676 $ 6,010 $ 9,153 $ 6,822 $ 3,453 $ 1,555 $ 3,227
Ratio of earnings to fixed charges(g)..... -- -- 1.3x -- 1.2x 1.0x 1.6x
OPERATING DATA:
Comparable store sales
increase/(decrease)(h).................. 1.2 % (4.0)% 5.7% (4.9)% 3.7% 2.4% 7.1%
End of period stores...................... 147 162 175 192 196 193 202
Inventory turns(i)........................ 2.0 x 1.8x 1.9x 1.8x 2.2x 2.1x 2.2x
BALANCE SHEET DATA END OF PERIOD:
Net working capital(j).................... $ 71,799 $ 67,278 $ 69,064 $ 74,994 $ 70,428 $ 75,045 $ 79,558
Total assets.............................. 202,330 214,291 227,707 207,119 197,869 195,315 203,856
Total debt................................ 104,000 99,000 96,450 103,594 86,450 95,418 87,226
Stockholder's equity...................... 34,790 33,787 35,395 29,074 31,855 27,439 40,369
</TABLE>
33
<PAGE> 39
(Notes to table on previous page)
- ------------------------------
(a) The Company's fiscal year is a 52 or 53 week year ending on the Sunday
closest to the calendar year end. All fiscal years presented consist of 52
weeks except for Fiscal 1992, which consisted of 53 weeks. The nine month
period of 1996 was a 39 week period that ended on September 29, 1996 and the
nine month period of 1997 was a 39 week period that ended on September 28,
1997. The financial information for Pro Forma 1992 are unaudited and combine
the results of operations of the Company prior to the PE Acquisition for the
39 weeks ended September 25, 1992 and the results of operations of the
Company for the 14 weeks ended January 3, 1993 and gives effect to the PE
Acquisition as though it occurred at the beginning of Fiscal 1992. The
unaudited pro forma information for Pro Forma 1992 does not purport to
represent the results that actually would have occurred if such transactions
had in fact occurred on such date.
(b) The Company prior to the PE Acquisition recorded inventory on a LIFO basis.
In connection with the PE Acquisition, the Company adopted the FIFO method
for recording inventory. As a result, Pro Forma 1992 is revised to reflect
the FIFO method as of the beginning of the year.
(c) Includes $11,080 decrease related to purchase accounting inventory
revaluation.
(d) Includes $6,332 decrease related to purchase accounting inventory
revaluation.
(e) Includes $3,828 increase in depreciation and amortization expense due to
purchase accounting revaluation of assets.
(f) Includes (i) $11,291 net increase in interest expense on debt arising from
the PE Acquisition, and (ii) $640 increase in amortization of financing
fees.
(g) For the purpose of calculating the ratio of earnings to fixed charges,
"earnings" represents income before provisions for income taxes and fixed
charges. "Fixed charges" consist of interest expense, amortization of debt
financing costs, and one third of lease expense, which management believes
is representative of the interest component of lease expense. Earnings were
insufficient to cover fixed charges by approximately $7,284, $1,668 and
$6,383 for fiscal years 1992, 1993 and 1995, respectively.
(h) Comparable store sales data for a period reflect stores open throughout that
period and the corresponding period of the prior fiscal year.
(i) Inventory turns equal fiscal year or latest twelve month cost of goods sold,
buying and occupancy costs divided by 4 quarter average FIFO inventory
balances adjusted to exclude the uniform capitalization adjustment to
inventory balances.
(j) Net working capital is defined as current assets less current liabilities
excluding current maturities of long-term debt.
34
<PAGE> 40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following should be read in conjunction with "Unaudited Condensed Pro
Forma Financial Data" and the historical financial statements of United
Merchandising Corp. (reincorporated in Delaware as the Company) and the related
notes thereto included elsewhere in this Prospectus. The Company's fiscal year
ends on the Sunday closest to December 31. Accordingly, fiscal years 1994, 1995,
and 1996 ended on January 1, 1995, December 31, 1995 and December 29, 1996,
respectively. Certain information in this Management's Discussion and Analysis
section includes forward-looking statements. Such forward-looking statements
relate to the Company's financial condition, results of operations, expansion
plans, and business. Actual results could differ materially from the
forward-looking statements due to, among other things, the risks and
uncertainties noted under the heading "Disclosure Regarding Forward-Looking
Statements" on page ii and "Risk Factors" in this Prospectus.
RESULTS OF OPERATIONS
The table below sets forth certain statement of operations components as a
percentage of net sales.
<TABLE>
<CAPTION>
FISCAL YEAR NINE MONTHS
------------------------- ---------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales....................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit.................................... 32.8% 30.6% 31.5% 31.4% 32.5%
Selling and administrative expenses............. 25.4% 25.7% 25.0% 25.9% 25.5%
Depreciation and amortization................... 2.5% 3.2% 2.4% 2.4% 1.8%
Operating income................................ 4.9% 1.7% 4.1% 3.1% 5.2%
EBITDA.......................................... 7.4% 5.0% 6.5% 5.5% 7.1%
</TABLE>
NINE MONTHS ENDED SEPTEMBER 28, 1997 VERSUS NINE MONTHS ENDED SEPTEMBER 29, 1996
Net Sales. Net sales increased 9.4% (or $27.8 million) from $296.4 million
for the nine months ended September 29, 1996 to $324.2 million for the nine
months ended September 28, 1997. Same store sales increased 7.1% compared with
the same period last year, reflecting improved economic conditions in the
regions in which the Company operates, together with continuing refinements in
advertising and merchandising programs partially resulting from improved
utilization of the management tools derived from the Company's information
systems. Sales attributable to an increase in store count from 193 at September
29, 1996 to 202 at September 28, 1997 constituted the remainder of the 9.4%
sales increase for the nine month period.
Gross Profit. Gross profit increased 13.6% (or $12.6 million) from $92.9
million for the nine months ended September 29, 1996 to $105.5 million for the
nine months ended September 28, 1997, reflecting increased sales (as discussed
above) and improved gross profit margin. Gross profit margin increased from
31.4% for the nine month period ended September 29, 1996 to 32.5% for the
comparable nine month period this year. The improvement is a result of positive
comparisons of gross profit margins in the majority of the Company's product
categories and improved store inventory shrink results, both of which were aided
by the Company's enhanced information systems.
Operating Expenses. Selling and administrative expenses increased 7.7% (or
$5.9 million) from $76.7 million for the nine months ended September 29, 1996 to
$82.6 million for the nine months ended September 28, 1997. As a percentage of
sales, selling and administrative expenses decreased from 25.9% for the 1996
period to 25.5% of sales in the 1997 period, reflecting management's continued
focus on controlling expenses and its leveraging of fixed costs due to increased
sales.
Depreciation and amortization decreased 14.1% (or $1.0 million) from $7.1
million for the prior year period to $6.1 million for the nine months ended
September 28, 1997. The decrease reflected primarily a reduction in leasehold
improvements amortization resulting from the sale/leaseback of the Company's
35
<PAGE> 41
Fontana distribution center in the prior year and an increase in the
amortization term of the Company's leasehold interests.
Interest Expense. Interest expense decreased 8.1% (or $0.7 million) from
$8.6 million for the prior year period to $7.9 million for the nine months ended
September 28, 1997. This decrease reflected lower average borrowing levels on
the Company's revolving credit facility during the current year period resulting
from improved earnings and a continued focus on managing inventory levels. The
Company's revolving debt balance was $50.8 million at September 28, 1997 versus
a balance of $59.0 million at September 29, 1996. The decrease also reflected a
.75% reduction in the rate of interest payable on revolving debt balances
resulting from an amendment to the Company's revolving credit facility effective
August 11, 1997.
Income Taxes. The Company recorded an income tax provision against
operations of $0.4 million for the nine months ended September 28, 1997 versus
no tax provision for the same period last year.
Extraordinary Loss from Early Extinguishment of Debt. During the nine
months ended September 29, 1996, the Company refinanced its indebtedness under a
prior credit facility with borrowings under a new facility with the CIT
Group/Business Credit, Inc. ("CIT"). In connection with the refinancing, the
Company accelerated amortization of $1.0 million of certain fees and paid $1.2
million in prepayment premiums and other fees. Accordingly, a charge of $2.2
million was recorded as an extraordinary loss for the nine months ended
September 29, 1996. No such event occurred during the nine month period this
year.
Net Income (Loss). Net income for the nine months ended September 28, 1997
increased $10.1 million from a net loss of $1.6 million for the nine months
ended September 29, 1996 to a net income of $8.5 million for the nine months
ended September 28, 1997. This improvement reflects the positive sales and gross
profit results achieved during the nine months ended September 28, 1997.
EBITDA. EBITDA increased 40.5% (or $6.6 million) from $16.3 million for
the nine months ended September 29, 1996 to $22.9 million for the nine months
ended September 28, 1997. Increased same store sales, gross margin and operating
efficiencies were the primary factors contributing to the significant
improvement.
FISCAL YEAR 1996 VERSUS FISCAL YEAR 1995
Net Sales. Net sales increased 9.2% (or $34.2 million) from $370.1 million
in Fiscal 1995 to $404.3 million in Fiscal 1996, while the number of stores
increased by four (or 2.1%) from 192 in Fiscal 1995 to 196 in Fiscal 1996. Same
store sales increased 3.7% in Fiscal 1996, reflecting improved economic
conditions in the regions in which the Company operates, together with
continuing refinements in advertising and merchandising programs, partially
resulting from improved utilization of the management tools derived from the
Company's information systems. Sales generated from new stores opened in 1995
and 1996 contributed the remainder of the 9.2% sales increase.
Gross Profit. Gross profit increased 12.0% (or $13.6 million) from $113.5
million in Fiscal 1995 to $127.1 million in Fiscal 1996, reflecting increased
sales and improved gross profit margin. Gross profit margin increased from 30.7%
of sales in the 1995 period to 31.5% of sales in the 1996 period. The
improvement in gross profit margin in Fiscal 1996 reflected the absence of
one-time clearance sales, which negatively impacted prior year gross profit
margins. Results for Fiscal 1995 reflect lower gross profit margins as the
Company implemented a successful campaign focused on inventory reduction with
respect to certain product categories.
Operating Expenses. Selling and administrative expenses increased 6.2% (or
$5.9 million) from $95.2 million in Fiscal 1995 to $101.1 million in Fiscal
1996. As a percentage of sales, selling and administration expenses decreased
from 25.7% of sales in the 1995 period to 25.0% in the 1996 period, reflecting
management's continued focus on controlling expenses and the leveraging of fixed
costs due to increased sales.
Depreciation and amortization expense decreased 20.0% (or $2.4 million)
from $12.0 million in Fiscal 1995 to $9.6 million in Fiscal 1996. This decrease
resulted primarily from a $2.8 million charge related to the
36
<PAGE> 42
non-cash portion of rent expense which was recorded in Fiscal 1995. The decrease
is partially offset by expenditures related to the Company's store growth in
1995 and 1996.
Interest Expense. Interest expense for Fiscal 1996 decreased 6.5% (or $0.8
million) from $12.3 million in Fiscal 1995 to $11.5 million in Fiscal 1996. This
decrease reflects lower average borrowing levels on the Company's existing
revolving credit facility during Fiscal 1996 as a result of improved earnings, a
continued focus on inventory reduction, and a slowdown in store growth in Fiscal
1996. The Company's revolving credit facility balance was $50.0 million at
December 29, 1996 versus a balance of $67.1 million at December 31, 1995.
Income Taxes. The Company recorded an income tax provision against
operations of $1.0 million in Fiscal 1996 versus $0.4 million in Fiscal 1995.
However, the $1.0 million provision was offset by a $0.9 million tax benefit
against the extraordinary loss from early extinguishment of debt described below
resulting in a net tax provision of less than $0.1 million for Fiscal 1996.
Extraordinary Loss From Early Extinguishment of Debt. During Fiscal 1996,
the Company refinanced its indebtedness under a prior credit facility with
borrowings under a new revolving credit facility with CIT. In connection with
the refinancing, the Company accelerated amortization of $1.0 million of certain
fees and paid $1.2 million in prepayment premiums and other fees. Accordingly,
an after-tax charge of $1.3 million ($2.2 million before taxes) is recorded as
an extraordinary loss for Fiscal 1996. No such event occurred during Fiscal
1995.
Net Income. Fiscal 1996 net income was $2.8 million versus a net loss of
$6.3 million for Fiscal 1995. This variance reflects the positive sales and
gross profit results achieved in Fiscal 1996, partially offset by the $1.3
million extraordinary loss ($2.2 million before taxes) related to the Company's
revolving debt refinancing in Fiscal 1996. Also impacting this variance was the
$2.8 million charge related to the non-cash portion of rent expense recorded in
Fiscal 1995.
EBITDA. EBITDA increased 41.8% (or $7.7 million) from $18.4 million for
Fiscal 1995 to $26.1 million for Fiscal 1996. Increased same store sales, gross
margin and operating efficiencies were the primary factors contributing to the
improvement.
FISCAL YEAR 1995 VERSUS FISCAL YEAR 1994
Net Sales. Net sales increased 1.6% (or $6.0 million) from $364.1 million
in Fiscal 1994 to $370.1 million in Fiscal 1995, while the number of stores
increased by 17 (or 9.7%) from 175 in Fiscal 1994 to 192 in Fiscal 1995. Same
store sales decreased 4.9% in Fiscal 1995 reflecting a general slowdown in
retail spending by consumers (particularly in the Company's core market), as
well as a relatively high increase in store openings by competitors during 1995
and 1994, heavy rains experienced in early 1995, the impact of reduced
advertising volume in response to a significant increase in print and paper
stock costs, the short-term positive impact of the Northridge earthquake on
sales in Fiscal 1994, and the extremely dry and warm November and December 1995
weather's impact on ski and winter related product sales. Sales generated from
new stores opened in 1994 and 1995 offset the decline in same store sales,
resulting in the 1.6% increase in net sales for the year.
Gross Profit. Gross profit decreased 4.9% (or $5.8 million) from $119.3
million in Fiscal 1994 to $113.5 million in Fiscal 1995. Gross profit margin
decreased from 32.8% of sales in the 1994 period to 30.7% of sales in the 1995
period. Certain gross profit costs, including minimum rent and other occupancy
and distribution costs, are relatively fixed in nature or fluctuate primarily
based on the number of stores. Accordingly, the same store sales decrease in
Fiscal 1995 negatively impacted the Company's gross margin. Gross margin was
also impacted by an inventory overstock position which resulted from a difficult
integration period relating to the implementation of the Company's perpetual
inventory system, combined with a downturn in the economic environment beginning
in the fourth quarter of 1994. Due to this overstock, the Company implemented an
inventory reduction program which successfully reduced per store inventory
levels by almost 18% in Fiscal 1995. However, gross profit declined
approximately $3.0 million as merchandise prices were marked down to accomplish
the Company's inventory reduction goals.
37
<PAGE> 43
Operating Expenses. Selling and administrative expenses increased 3.3% (or
$3.0 million) from $92.2 million in Fiscal 1994 to $95.2 million in Fiscal 1995.
This increase resulted from significant store growth during Fiscal 1995 and an
increase in advertising costs due to substantially higher print and paper stock
costs. These increases were partially offset by the Company's focus on other
variable expense categories in reaction to the general weakness in the economy.
When measured as a percentage of sales, selling and administration expenses
increased from 25.4% of sales in the 1994 period to 25.7% in the 1995 period,
reflecting the relatively fixed nature of many of these costs combined with the
same store sales decrease discussed above and the impact of increased
advertising costs.
Depreciation and amortization expense increased 30.4% (or $2.8 million)
from $9.2 million in Fiscal 1994 to $12.0 million in Fiscal 1995. This increase
reflects the Company's spending on store growth and computer software and
hardware for the Company's new computerized financial and merchandising systems,
along with an increase of $2.8 million related to the non-cash portion of rent
expense.
Interest Expense. Interest expense for 1995 increased 5.1% (or $0.6
million) from $11.7 million in Fiscal 1994 to $12.3 million in Fiscal 1995. This
variance resulted from higher borrowing balances throughout 1995, partially
offset by lower interest rates. The decrease in interest rates resulted from
lower interest rates under the Company's bank facility, coupled with a full year
impact of lower interest expenses resulting from the repurchase of $18.6 million
of higher interest Old Notes, which took place in the fourth quarter of 1994.
Income Taxes. Income taxes were $0.4 million in Fiscal 1995 versus $1.9
million in Fiscal 1994. The $0.4 million in Fiscal 1995 represents a change in
the valuation allowance for deferred taxes. Such change was based upon the
Company's determination that a 100% valuation allowance was appropriate inasmuch
as the Company had incurred taxable losses during two consecutive fiscal years
and could not substantiate that it would be able to generate future taxable
income in order to realize its deferred tax assets.
Net Income (Loss). Fiscal 1995 net loss was $6.3 million compared to net
income of $1.4 million for Fiscal 1994. Approximately $3.3 million of the Fiscal
1995 loss is related to the non-cash portion of rent expense compared to $0.5
million in 1994. This non-cash rent expense declined significantly in Fiscal
1996. Decreases in same store sales and gross margins and increases in
advertising expense were the other primary factors for the earnings decline in
Fiscal 1995.
EBITDA. EBITDA decreased 32.1% (or $8.7 million) from $27.1 million for
Fiscal 1994 to $18.4 million for Fiscal 1995. Decreased same store sales and
gross margin coupled with advertising expense increases were the primary factors
contributing to the decrease. In addition to a difficult retail environment,
sales were impacted by poor weather conditions throughout the year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are cash flow from operations
and borrowings under the Company's five year, non-amortizing, $125.0 million
revolving credit facility (the "CIT Credit Facility"). The Company amended its
then-current Credit Facility effective November 13, 1997, to provide for the CIT
Credit Facility. The CIT Credit Facility is secured by the Company's trade
accounts receivable, merchandise inventories and general intangible assets. The
Company intends to use net cash provided by operating activities and borrowings
under the CIT Credit Facility to fund its anticipated capital expenditures and
working capital requirements. However, if additional cash is required, it may be
difficult for the Company to obtain because the Company is highly leveraged.
As a result of borrowings regarding the Recapitalization, the Company's
interest expense will increase from $10.8 million for the twelve months ended
September 28, 1997 to $19.9 million (on a pro forma basis). The Company believes
that cash flow from operations will be sufficient to cover the interest expense
arising from the CIT Credit Facility and the Notes. However, the Company's
ability to meet its debt service obligations depends upon its future
performance, which, in turn, is subject to general economic conditions and
regional risks, and to financial, business and other factors affecting the
operations of the Company, including factors beyond its control. See "Risk
Factors." Accordingly, there can be no assurance that cash flow from operations
will be sufficient to meet the Company's debt service obligations.
38
<PAGE> 44
Net cash provided by operating activities was $19.8 million for Fiscal 1996
versus net cash used of $3.8 million for Fiscal 1995. Net cash used in operating
activities was $2.0 million in the nine months ended September 28, 1997 compared
to net cash provided of $7.5 million in the nine months ended September 29,
1996. Improved earnings combined with continued focus on inventory levels and a
reduction in accounts payable related to reduced inventory purchases late in
Fiscal 1995 were the primary factors in the improvements in cash provided by
operating activities in Fiscal 1996. The Company's year-end inventory levels
were 1.9% (or $2.6 million) lower than Fiscal 1995 levels. This reduction was
accomplished even as the Company grew its store base from 192 at December 31,
1995 to 196 at December 29, 1996, and follows the success of the Company's
Fiscal 1995 inventory reduction program where inventories were reduced $13.5
million, or 9.0%, between Fiscal 1994 and Fiscal 1995 despite a 9.7% (17 stores)
increase in store count. The decreases in net cash provided during the nine
months of 1997 compared to the comparable 1996 period was primarily due to
increased inventory purchases as the Company normalized its inventory purchasing
after the planned inventory reduction program in Fiscal 1995 and Fiscal 1996.
Fiscal 1996 cash flow also benefitted from the receipt of $5.0 million in net
proceeds from the sale/leasebacks of the Company's Fontana, California
distribution center and the Culver City, California store.
Net cash used in financing activities was $19.7 million in Fiscal 1996
reflecting repayment of $17.1 million under the Company's revolving credit
facilities, the payment of $1.2 million related to the retirement of a prior
revolving credit facility and $1.4 million in fees and expenses related to the
establishment of the Company's then-existing revolving credit facility in March,
1996. Net cash provided by financing activities was $0.8 million for the nine
months ended September 28, 1997 reflecting increased borrowings under the
Company's then-existing revolving credit facility. As of December 29, 1996, the
Company had borrowings of $50.0 million and letter of credit commitments of $4.4
million outstanding under the then-existing revolving credit facility, with cash
and cash equivalents of $4.8 million versus $3.2 million at December 31, 1995.
As of September 28, 1997, the Company had borrowings of $50.8 million and letter
of credit commitments of $9.6 million outstanding under the then-existing
revolving credit facility, and cash and cash equivalents of $0.4 million versus
a balance of $3.4 million at September 29, 1996.
Capital expenditures for Fiscal 1996 were $3.5 million reflecting a
temporary planned reduction of the Company's store growth program to four new
stores after average annual growth of 15 new stores during the prior four fiscal
years. Capital expenditures for the nine months ended September 28, 1997 were
$3.2 million. During this period the Company has opened six new stores. Capital
expenditures are expected to be approximately $2.2 million for the remainder of
Fiscal 1997 as the Company returns to its historical new store growth program by
opening a total of 14 new stores in Fiscal 1997. Management expects capital
expenditures for Fiscal 1998 will be approximately $6.0 to $7.5 million and will
be used primarily to fund the opening of approximately 15 to 20 new stores. The
Company's store format requires a low investment in fixtures and equipment
(approximately $250,000), working capital (approximately $500,000, of which
one-third is typically financed by vendors) and real estate (leased,
"built-to-suit" locations).
The CIT Credit Facility and the Indenture contain various covenants which
impose certain restrictions on the Company, including the incurrence of
additional indebtedness, the payment of dividends, and the ability to make
acquisitions. See "Risk Factors." In addition, the CIT Credit Facility requires
compliance with the maintenance of certain financial ratios and other financial
covenants.
The Company is not aware of any material environmental liabilities relating
to either past or current properties owned, operated or leased by it. There can
be no assurance that such liabilities do not currently exist or will not exist
in the future.
SEASONALITY
The Company's business is seasonal in nature. As a result, the Company's
results of operations are likely to vary during its fiscal year. Historically,
the Company's revenues and income are highest during its fourth quarter, due to
several factors. The fourth quarter contributed 26.7% in 1996 and 27.0% in 1995
of fiscal year net sales and 37.5% in 1996 and 42.9% in 1995 of fiscal year
EBITDA. Any decrease in sales for such period
39
<PAGE> 45
could have a material adverse effect on the Company's business, financial
condition and operating results for the entire fiscal year.
IMPACT OF NEW ACCOUNTING STANDARDS
In March 1997 the Financial Accounting Standards Board ("FASB") issued SFAS
128, "Earnings per Share". SFAS 128 specifies new computation, presentation and
disclosure of earnings per share and is effective for financial statements for
both interim and annual periods ending after December 15, 1997. Adoption of SFAS
128 will not impact the financial position or results of the Company.
SFAS 129, "Disclosure of Information about Capital Structure," was issued
in February 1997. SFAS 129 lists required disclosures about capital structure
that had previously been included in a number of separate statements and
opinions. SFAS 129 is effective for fiscal years ending December 15, 1997.
Adoption of SFAS 129 will not impact the financial position or results of the
Company.
SFAS 130, "Reporting Comprehensive Income," establishes standards for
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. SFAS 130 is effective for fiscal years
beginning after December 15, 1997. Management does not believe that adoption of
SFAS 130 will have an impact on the financial position or results of the
Company.
SFAS 131, "Disclosures about Segments of an Enterprise and Related
Information," establishes standards for public enterprises to report information
about operating segments in annual and interim financial statements. SFAS 131 is
effective for fiscal years beginning after December 15, 1997. Management does
not believe that adoption of SFAS 131 will have an impact on the financial
position or results of the Company.
40
<PAGE> 46
BUSINESS
GENERAL
The Company is the leading sporting goods retailer in the Western United
States, operating 210 stores under the "Big 5 Sporting Goods" name. The
Company's core market is California, Washington and Nevada and beginning in 1993
it expanded into Arizona, Idaho, Oregon, New Mexico, Texas and Utah. The Company
provides a full-line product offering of over 25,000 SKU's in a traditional
sporting goods store format that averages 11,000 square feet. Specifically, the
Company's products include athletic shoes and apparel, and tennis, golf, ski,
snowboard, in-line skating, fitness, outdoor and team sports equipment for the
competitive and recreational sporting goods customer. The Company offers
customers attractive values on recognized brand-name merchandise at a wide
variety of price points. Important brand-names offered by the Company include
Nike, Reebok, Wilson, K2, Rollerblade, Coleman, Spalding, Adidas, Fila, Speedo,
Easton and Columbia, among others. The Company augments its value image by
emphasizing merchandise produced exclusively for the Company, and on a selective
basis, opportunistic buys comprising first quality items, including overstock
and close-out merchandise. These merchandise values are communicated weekly
through print advertising created by the Company in order to generate store
traffic and drive sales. For the twelve months ended September 28, 1997, the
Company generated $432.1 million of revenue, $32.9 million of pro forma EBITDA
and a same store sales increase of 6.9% over the prior period. Through the
period ended December 28, 1997, the Company has enjoyed 22 consecutive monthly
increases in same store sales over the comparable prior period.
The Company was founded in 1955 by Robert W. Miller, Maurie Liff and Harry
Liff, with the establishment of five retail locations in Los Angeles, Burbank,
Inglewood, Glendale and San Jose. The Company originally sold World War II
surplus items including tents, sleeping bags, air mattresses, housewares, tools
and other merchandise. Other sporting goods gradually entered the product mix
and as a result, in 1963, the Company decided to become a sporting goods
specialist and changed its trade name to "Big 5 Sporting Goods." In 1971, the
Company was acquired by Thrifty Corporation ("Thrifty"), which was subsequently
purchased by PE in 1986. Throughout these changes in ownership, management
remained relatively constant and in 1992, management in conjunction with Leonard
Green & Partners, L.P. ("LGP") bought the Company.
As a result of the Recapitalization, existing management and employees of
the Company (and members of their families) beneficially own the majority of
Parent. Chairman and Chief Executive Officer Robert W. Miller, who co-founded
the Company in 1955, and his son Steven G. Miller, President and Chief Operating
Officer, who has been with the Company for 28 years, significantly increased
their ownership in Parent and control the Board of Directors of Parent. See
"Principal Stockholders." In addition, approximately 60 members of middle and
senior level management increased their stock ownership in Parent. In total,
more than 200 employees own equity in Parent, including over 100 store managers.
The Big 5 team shares many years of experience which management believes have
led to the development of a strong corporate culture and excellent employee
morale.
41
<PAGE> 47
MANAGEMENT EXPERIENCE
Management believes the experience, commitment and longevity with the
Company of its professional staff to be a substantial competitive advantage. The
table below describes the tenure of the professional staff in some of the key
functional areas:
EXPERIENCE OF PROFESSIONAL STAFF
<TABLE>
<CAPTION>
NUMBER OF
EMPLOYEES AVERAGE YEARS
IN CATEGORY WITH BIG 5 AVERAGE AGE
----------- ------------- -----------
<S> <C> <C> <C>
Senior Management............................... 5 26 53
Vice Presidents................................. 7 21 52
Buying Staff.................................... 15 18 44
Store District/Division Supervisors............. 21 18 42
Store Managers.................................. 210 9 35
</TABLE>
STORE FORMAT
The Company has remained focused on its strategy of operating a
traditional, full-line sporting goods store, which typically ranges from 8,000
to 15,000 square feet and averages 11,000 square feet in size. The Company's
stores are located primarily in multi-store shopping centers or free-standing
street locations. The Company's store format and convenient locations encourage
frequent customer visits, even for single item or relatively small purchases.
This is illustrated by the fact that the Company processed over 15 million sale
transactions in 1997 with an average customer sale of approximately $30. Due to
its relatively low start-up and overhead costs, the Big 5 store model is
successful in trade areas with as few as 75,000 people, as well as major
metropolitan areas. These store economics differentiate the Company's sporting
goods stores from superstore concepts (averaging in excess of 35,000 square
feet) which typically require larger trade areas to support higher costs.
Overall, the Company's traditional sporting goods store has competed effectively
against superstore formats. All of the Big 5 stores are making positive
store-level contributions and over its history, the Company has never closed a
store due to poor performance.
MERCHANDISING
Offering approximately 25,000 SKUs, the typical Company store targets the
competitive and recreational sporting goods customer with a full-line product
offering at a wide variety of price points. The Company believes its long
history of success is attributable to its adherence to a consistent
merchandising strategy, the key elements of which are summarized below:
Delivering Consistent Value to Consumers. The Company offers consistent
value to consumers by offering a distinctive combination of in-line products,
"special make-up" merchandise (produced exclusively for the Company under a
manufacturer's brand name), private label merchandise and opportunistic buys.
The Company offers this consistent value to its customers while maintaining
strong margins as a result of its ability to purchase in large quantities and
quickly adjust this combination of merchandise to take advantage of purchasing
opportunities. Through its 42 years of operations, the Company has developed
specific expertise in selling its particular mix of these products, thereby
building the Company's price image, driving its weekly print advertisements and
creating retail traffic. The Company believes it enjoys significant advantages
in the acquisition of opportunistic buys because the Company is able to combine
strong vendor relationships, rapid decision-making, careful inventory management
and effective advertising along with its extensive store network. Although
management believes opportunistic buys typically represent only approximately
10% of sales, they are used in conjunction with special make-up merchandise to
enhance weekly advertising and reinforce the Company's reputation as a retailer
that offers outstanding value to its customers.
42
<PAGE> 48
The Company sources its in-line branded merchandise from an extensive list
of major sporting goods equipment, athletic footwear and apparel manufacturers.
Below is a selection of some of the brands carried by the Company:
<TABLE>
<S> <C> <C> <C> <C>
Adidas Columbia Icon (Proform) Rawlings Side Out
Bauer Daiwa Jansport Reebok Spalding
Brooks Danskin K2 Remington Titleist
Bushnell Discus Nike Rollerblade Wilson
Casio Easton Nordica Russell Athletic Winchester
Coleman Fila Prince Shimano Zebco
</TABLE>
The Company also offers a variety of private label merchandise to
complement its branded product offerings. The Company's private label items
include shoes, apparel, tennis rackets, binoculars, camping equipment and
fishing supplies. They are sold under the labels: Fives, Court Casuals, Sports
Essentials, Rugged Exposure, Hot Voltage, Golden Bear, Body Glove (licensed) and
Pacifica.
Offering a Customized Product Assortment. Through its 42 years of
experience across different demographic, economic and competitive markets, the
Company's management has refined its merchandising strategy to increase sales by
offering a selection of goods that meets customer demands while managing
inventory levels. The Company believes it provides consumers with a merchandise
offering that compares favorably to its competitors, including the superstores,
in terms of category selection. A goal of the Company's merchandising strategy
is to offer a customized and selected assortment of products which enables the
consumer to comparison shop at a Big 5 store without being overwhelmed by a
large number of different products in any one category. The Company tailors its
merchandise selection and quantity on a store-by-store basis in order to satisfy
each region's specific needs and buying habits.
The Company's 15 buyers, who average 18 years of experience with the
Company, work closely with senior management to determine the product selection,
promotion and pricing of the merchandise mix. The Company utilizes a $15 million
integrated merchandising, distribution and financial information system.
Management uses the information provided to continually refine its merchandise
mix, pricing strategy, advertising effectiveness and inventory levels.
The following table illustrates the Company's historical mix of hard and
soft goods as a percent of net sales:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------
1995 1996
----- -----
<S> <C> <C>
Soft Goods:
Athletic and Sport Apparel................................... 16.2% 17.0%
Athletic and Sport Footwear.................................. 31.4% 31.4%
----- -----
Total Soft Goods..................................... 47.6% 48.4%
Hard Goods..................................................... 52.4% 51.6%
----- -----
Total.......................................................... 100.0% 100.0%
===== =====
</TABLE>
Market Leader in Core Market Served. The Company has built a recognized
franchise by establishing a strong presence in its core market of California,
Washington and Nevada and by consistently promoting quality brand-name products
at attractive prices. The Company has over triple the number of stores as its
closest full-line sporting goods competitor in such core market. This
concentration of stores provides economies of scale in advertising and
distribution and increased customer awareness of the Big 5 name. The Company was
named the leading place to purchase sporting goods in the greater Los Angeles
area for every category of sporting goods covered by a survey commissioned by
the Company conducted in October 1996 by America's Research Group, an
independent research group. The survey showed that the Company was preferred
over specialty sporting goods stores (e.g. Foot Locker, Nevada Bob's), mass
merchandisers (e.g. K-Mart, Target) and local superstore operators (e.g.
Sportmart, Sport Chalet). This survey also indicated that over 90% of
respondents recognized the Big 5 name and 73% shopped at a Big 5 store in the
past two years.
43
<PAGE> 49
ADVERTISING
The Company believes that the consistency and reach of the Company's print
advertising programs have created high customer awareness of Big 5. Through
years of focused advertising, the Company has reinforced its reputation for
providing quality products at attractive prices. The Company attempts to
highlight a broad range of merchandise categories in every advertisement to
maintain customer awareness of its full-line product offering. The Company's
advertising message is reinforced through the distribution of over 10 million
advertisements each week, 52 weeks a year, in the form of newspaper inserts or
mailers. Every week, each Big 5 advertisement, which is typically four standard
pages using color photography, profiles 200 to 250 products across all major
merchandise categories. The Company believes that its print advertising
consistently reaches more households in its core market than does the print
advertising of its competitors. The Company's effectiveness in communicating the
product values it offers is evidenced by the fact that typically 40% of sales
have been products included in these weekly advertisements.
The Company utilizes demographic tools to maximize the effectiveness of its
advertising expenditures. The Company places inserts in over 85 newspapers
weekly throughout its markets, supplemented in many areas by distribution to
newspaper non-subscribers to create market saturation. In select markets, the
Company has determined its most cost effective use of advertising dollars is to
distribute through mailers.
The Company uses its professional in-house advertising staff rather than an
outside advertising agency. The staff centrally handles all of its advertising,
including design, layout, production and media management. This approach has
been in place since its founding. The Company's in-house advertising enables
management the flexibility to react quickly to merchandise trends and maximize
the effectiveness of its weekly inserts and mailers.
EXPANSION AND STORE DEVELOPMENT
The Company's expansion within and beyond its core market has been
systematic and designed to take advantage of Big 5 name recognition and to
capitalize on the Company's economical store format and distinctive merchandise
mix. Throughout the Company's history, management has emphasized careful site
selection and controlled growth. Over the past five fiscal years, 63 stores have
been opened (13 new stores annually on average), of which 38% were outside of
markets in which the Company operated in 1992. The following table sets forth
certain information regarding the Company's expansion program during the periods
indicated:
<TABLE>
<CAPTION>
NEW STORES
----------------------------------------------
NEW EXISTING NO. OF STORES
YEAR TOTAL MARKETS MARKETS ACQUISITIONS CLOSURES AT PERIOD END
---------------------- ----- ------- ------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C> <C>
1992.................. 10 -- 10 -- -- 147
1993.................. 15 1 6 8 -- 162
1994.................. 15 4 11 -- (2) 175
1995.................. 19 6 6 7 (2) 192
1996.................. 4 2 2 -- -- 196
1997.................. 14 7 7 -- -- 210
</TABLE>
The Company has identified numerous expansion opportunities to further
penetrate its core market, develop recently entered markets and expand into new
market areas with similar demographic, competitive and economic profiles as its
existing markets. The typical Big 5 store size provides the Company with a large
selection of locations for new store placement which, in turn, allows the
Company to open stores conveniently located to the customer. Continuing its
controlled growth strategy, the Company plans on opening approximately 15-20
stores annually over the next five years. This expansion plan is designed to
take advantage of the growing economies of the Company's existing and recently
entered markets and to capitalize on opportunities in fast growing new markets.
The Company's store format requires a low investment in fixtures and
equipment (approximately $250,000), working capital (approximately $500,000, of
which one-third is typically financed by vendors) and real estate (leased,
"built-to-suit" locations). The Company's leases generally require the lessor,
rather than the Company, to fund all or a significant portion of the capital
expenditures related to new store construction
44
<PAGE> 50
and costs of improvements. The Company expects that the net cash generated from
operations, together with borrowings under the CIT Credit Facility, will enable
the Company to finance the expenditures related to its planned expansion. See
"Risk Factors -- Expansion Program."
MANAGEMENT INFORMATION SYSTEMS
The Company believes its ability to generate an efficiently stocked
merchandise selection and store inventory level that satisfies customer demands
while effectively managing inventory levels is a critical component of its
merchandising strategy and serves to differentiate the Company from its
competition. The Company is able to execute this strategy as a result of its
effective use of its integrated management information systems, called the COACH
(Customer Oriented Approach for Continued High-Performance) system.
The COACH system is a low maintenance data processing environment capable
of supporting the Company's future growth. The COACH system provides the Company
with valuable inventory tracking information through the implementation of
store-level perpetual inventories. Each store has a unique inventory model that
allows the Company to maximize inventory mix at the store level. The COACH
system also includes a local area network that connects all corporate users to
electronic mail, scheduling and the host AS/400 system. The host system and the
Company's stores are linked in a network that provides satellite communications
for credit card, in-house tender authorization, and daily polling of sales at
the store level. In the Company's distribution center, radio frequency terminals
are used in the areas of receiving, stock putaway, stock movement, order
filling, cycle counting and inventory management. Store processes have been
streamlined by implementing radio frequency, hand-held terminals to assist in
store ordering, receiving, transfers and perpetual inventories. The COACH system
also helps the Company to control shrink. Management believes its use of these
systems is more extensive, disciplined and sophisticated than that of many of
its competitors.
While many computer systems and software products are not designed to
distinguish between 20th Century dates and dates occurring after the year 2000,
management has assessed the Company's management information systems and based
on such assessment presently believes that they do not suffer from such a
deficiency.
DISTRIBUTION
The Company maintains a 440,000 square foot leased distribution center in
Fontana, California that services all 210 of its stores. The Fontana facility is
fully integrated with the COACH management information system that provides
warehousing and distribution capabilities. The information system enhances the
Company's distribution process and aids in controlling distribution costs. The
Company believes that its Fontana distribution facility can readily support the
Company's expansion plans discussed above.
The distribution facility was constructed in 1990 and warehouses the
majority of the merchandise carried in the Company's stores. The Company
estimates that 98% of all store merchandise is received from its distribution
center. The Company distributes merchandise from the facility to its stores at
least once a week, Monday through Saturday, using a fleet of 21 leased tractors,
26 leased trailers, two Company-owned tractors, 37 Company-owned trailers as
well as several contract carriers.
On March 5, 1996, the Company purchased the Fontana facility building and
improvements from MLTC Funding, Inc. ("MLTC"), which previously owned and leased
such property to the Company, and then entered into a sale and leaseback
agreement with regard to the Fontana facility. Prior to this transaction, the
Company owned the land associated with the facility and leased the buildings and
improvements. See "Certain Relationships and Related Transactions."
PROPERTIES
The Company operates 210 stores in nine western states. All but one of the
Company's store sites are leased. Only nine, or less than 5%, of the Company's
leases are due to expire in the next five years without renewal options, and
most of the Company's long-term leases contain renewal options. The average
lease expiration term of the Company's existing leases, taking into account
renewal options, is approximately 20 years. The Company believes that it
benefits from long-term below-market leases in many of its locations.
45
<PAGE> 51
The Company's stores average approximately 11,000 square feet in size and are
located primarily in multi-store shopping centers or as free-standing units.
Specific store locations are selected based on market demographics, competitive
factors and site economics. The Company currently leases its Fontana warehouse
facility from the State of Wisconsin Investment Board. The lease for the
facility has an initial term of ten years commencing on March 5, 1996. The
Company also has the right to exercise three five-year options beyond the
initial ten-year term.
The chart below sets forth information with respect to the Company's
geographic markets:
STORE STATISTICS BY REGION
<TABLE>
<CAPTION>
PERCENTAGE
YEAR NUMBER OF TOTAL
REGIONS ENTERED OF STORES NUMBER OF STORES
- ---------------------------------------------------------- ------- --------- ----------------
<S> <C> <C> <C>
California:
Southern California..................................... 1955 80 38%
Central California...................................... 1974 23 11
Northern California..................................... 1971 47 22
--- ---
Total California................................ 150 71
--- ---
Washington................................................ 1984 27 13
Arizona................................................... 1993 10 5
Oregon.................................................... 1995 8 4
New Mexico................................................ 1995 5 3
Nevada.................................................... 1978 5 3
Texas..................................................... 1995 3 1
Idaho..................................................... 1993 1 --
Utah...................................................... 1997 1 --
--- ---
Total........................................... 210 100%
=== ===
</TABLE>
INDUSTRY AND COMPETITION
Sporting goods are marketed through various retail entities, including
sporting goods stores, department stores, discount retailers, specialty stores
and mail order. According to the National Sporting Goods Association, total U.S.
retail sales of sporting goods were approximately $38.4 billion in 1996. In
general, the Company's competitors tend to fall into four basic categories:
traditional sporting goods stores, mass merchandisers, specialty sporting goods
stores and sporting goods superstores.
Traditional Sporting Goods Stores. This category consists of traditional
sporting goods chains, including the Company. These stores range in size from
5,000 to 20,000 square feet and are frequently located in regional malls and
multi-store shopping centers. The traditional chains typically carry a varied
assortment of merchandise and attempt to position themselves as convenient
neighborhood stores. Sporting goods retailers operating stores within this
category include Oshman's and Copeland's.
Mass Merchandisers. This category includes discount retailers such as
Wal-Mart and Kmart and department stores such as JC Penney and Sears. These
stores range in size from approximately 50,000 to 200,000 square feet and are
primarily located in regional malls, shopping centers or free-standing sites.
Sporting goods merchandise and apparel represent a small portion of the total
merchandise in these stores and the selection is often more limited than in
other sporting goods retailers. Although generally price competitive, discount
and department stores typically have limited customer service in their sporting
goods departments.
Specialty Sporting Goods Stores. This category consists of two groups. The
first group generally includes athletic footwear specialty stores, which are
typically 2,000 to 20,000 square feet in size and are located in shopping malls.
Examples include such retail chains as Foot Locker, Lady Foot Locker and Just
for Feet. These retailers are highly focused, with most of their sales coming
from athletic footwear and team licensed apparel. The second group consists of
pro shops and stores specializing in a particular sport or recreation. This
group includes backpacking and mountaineering specialty stores and specialty
skate shops and golf shops.
46
<PAGE> 52
Typically, prices at specialty stores tend to be higher than prices at the
sporting goods superstores and traditional sporting goods stores.
Sporting Goods Superstores. Stores in this category typically are larger
than 35,000 square feet and tend to be free-standing locations. These stores
emphasize high volume sales and a large number of SKU's. Examples include
Oshman's Super Sports, The Sports Authority, Jumbo Sports (formerly Sports &
Recreation), Sport Chalet and Sportmart.
The Company believes that it competes successfully with each of the
competitors discussed above by focusing on what the Company believes are the
primary factors of competition in the sporting goods industry. These factors
include experienced and knowledgeable personnel, personal attention given to
customers, breadth, depth, price and quality of merchandise offered,
advertising, purchasing and pricing policies, effective sales techniques, direct
involvement of senior officers in monitoring store operations, management
information systems and store location and format.
DESCRIPTION OF SERVICE MARKS AND TRADEMARKS
The Company uses the "Big 5 Sporting Goods" name as a service mark in
connection with its business operations and has registered this name as a
federal service mark. The Company has also registered federally and/or locally
as trademarks and service marks certain private labels under which it sells a
variety of merchandise, including apparel.
EMPLOYEES
As of December 28, 1997, the Company had approximately 5,940 employees. The
General Warehousemen Union, Local 598, International Brotherhood of Teamsters
("Local 598") currently represents 410 hourly employees (or approximately 6.9%)
in the Company's distribution center and certain stores. In September 1997, the
Company negotiated two new contracts with Local 598 covering these employees,
which expire on August 31, 2000. The Company has not had a strike or work
stoppage in the last 18 years. The Company believes that it provides working
conditions and wages that are comparable to those offered by other retailers in
the industry, and that its employee relations are good.
The Company emphasizes friendly and knowledgeable customer service at its
stores. To provide the proper incentives, the Company has established various
advancement and compensation programs. Store managers and first assistant
managers receive a commission based on their store's gross sales. In addition,
full-time employees are given opportunities for career advancement, and
part-time employees are eligible to receive merit-based pay increases. Periodic
store sales contests are held throughout the year.
EMPLOYEE TRAINING
The Company has developed an extensive training program for all store
employees, including salespeople, cashiers and management trainees. An
introductory program for all full-time retail employees stresses excellence in
customer service as well as effective selling skills. The Company's InfoWindow,
an interactive, multimedia training system, provides a cost-effective,
consistent method of training employees, which is designed to improve
performance, customer service and on-the-job safety. Store employees gain
hands-on practice using a touch-screen monitor and simulated keyboard to learn
how to provide high quality customer service and use the Company's in-store
systems. Every Company store employee must complete the training program before
commencing work on the sales floor. In addition, cashiers receive additional
training relating to the Company's point-of-sale system and cash handling.
Management trainees receive additional training throughout their careers,
including seminars that focus on advanced management and sales skills, and store
specific information relating to loss prevention, scheduling and merchandising
strategy.
In addition, the Company conducts a bi-annual "Product Expo," a sporting
goods fair it hosts for its employees. The Company invites key vendors to set up
booths where store employees can learn about various products. Most full-time
store employees attend the exposition and the Company believes the program has
been a success both in training and motivating employees.
47
<PAGE> 53
LITIGATION
The Company is from time to time involved in routine litigation incidental
to the conduct of its business. The Company regularly reviews all pending
litigation matters in which it is involved and establishes reserves deemed
appropriate by management for such litigation matters. The Company believes that
no litigation currently pending against it will have a material adverse effect
on its financial position or results of operations.
48
<PAGE> 54
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding the current
executive officers and directors of the Company. The Company's directors are
elected at each annual meeting of shareholders to serve for a period of one year
or until their successors are duly elected and qualified. The Company's
executive officers serve at the discretion of the Company's Board of Directors.
<TABLE>
<CAPTION>
NAME AGE POSITIONS
------------------------------------- --- -------------------------------------
<S> <C> <C>
Robert W. Miller..................... 74 Chief Executive Officer and Chairman
of the Board
Steven G. Miller..................... 45 President, Chief Operating Officer
and Director
Charles P. Kirk...................... 41 Senior Vice President and Chief
Financial Officer
Gary S. Meade........................ 51 Secretary, Vice President and General
Counsel
Richard A. Johnson................... 51 Senior Vice President, Store
Operations
Thomas J. Schlauch................... 52 Senior Vice President, Buying
Dr. Michael D. Miller................ 48 Director
John G. Danhakl...................... 41 Director
Jonathan A. Seiffer.................. 26 Director
</TABLE>
ROBERT W. MILLER became Chairman of the Board in September 1992. Mr. Miller
had been the Company's Chief Executive Officer and President since 1973.
STEVEN G. MILLER became President, Chief Operating Officer and a Director
of the Company in September 1992. Mr. Miller, Robert W. Miller's son, had been
the Company's Executive Vice President, Administration, since 1988.
CHARLES P. KIRK became Senior Vice President and Chief Financial Officer of
the Company in September 1992. Mr. Kirk had been Thrifty's Director of Planning
and Vice President of Planning and Treasury since October 1990. Prior to joining
Thrifty, Mr. Kirk had held various financial positions with Thrifty's former
parent, PE, since 1981.
GARY S. MEADE became Secretary, Vice President and General Counsel of the
Company in August 1997. Mr. Meade had been Thrifty PayLess, Inc.'s Vice
President, Secretary and General Counsel since September 1992 and Thrifty's Vice
President - Legal Affairs since 1979.
RICHARD A. JOHNSON became Senior Vice President, Store Operations, for the
Company in July 1992. Mr. Johnson had been the Company's Vice President, Store
Operations, since 1986.
THOMAS J. SCHLAUCH became Senior Vice President, Buying, for the Company in
July 1992. Mr. Schlauch had been the Company's Head of Buying since 1990 and
Vice President, Buying, since 1982.
MICHAEL D. MILLER, PH.D became a director of the Company in October 1997.
Dr. Miller is a senior mathematician at RAND. Dr. Miller is Robert W. Miller's
son and Steven G. Miller's brother.
JOHN G. DANHAKL became a director of the Company in October 1997. Mr.
Danhakl has been an executive officer and an equity owner of LGP, a merchant
banking firm which manages GEI, since 1995. Mr. Danhakl had previously been a
Managing Director at Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ")
and had been with DLJ since 1990. Prior to joining DLJ, Mr. Danhakl was a Vice
President at Drexel Burnham Lambert Incorporated. Mr. Danhakl is also a director
of The Arden Group, Inc., Twinlab Corporation and Hechinger Company.
49
<PAGE> 55
JONATHAN A. SEIFFER became a director of the Company in October 1997. Since
October 1994, Mr. Seiffer has been an associate at LGP. Prior to October 1994,
Mr. Seiffer was a member of the corporate finance department of DLJ.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth the annual and long-term compensation of the
Company's Chief Executive Officer and four additional most highly compensated
executive officers whose annual salary and bonus exceeded $100,000 in total
during the fiscal year ended December 28, 1997.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION ---------------------------------
-------------------------------- SECURITIES
OTHER UNDERLYING
ANNUAL RESTRICTED STOCK
COMPEN- STOCK OPTIONS/ LTIP ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS SATION AWARDS SARS(1) PAYOUTS COMPENSATION(2)
- ----------------------------- ---- -------- -------- ---------- ---------- ---------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert W. Miller,............ 1997 $300,000 $ (3) $-0- $-0- -0- $ -0- $ 400,000
Chief Executive Officer 1996 290,000 275,000 -0- -0- 6,400 -0- -0-
1995 290,000 -0- -0- -0- -0- -0- -0-
Steven G. Miller,............ 1997 250,000 (3) -0- -0- -0- -0- 350,000
President and Chief 1996 210,000 175,000 -0- -0- 6,400 -0- -0-
Operating Officer 1995 210,000 -0- -0- -0- -0- -0- -0-
Thomas J. Schlauch,.......... 1997 160,000 (3) -0- -0- -0- -0- -0-
Senior Vice President, 1996 150,000 60,000 -0- -0- 3,600 -0- -0-
Buying 1995 150,000 25,000 -0- -0- -0- -0- -0-
Richard A. Johnson,.......... 1997 130,000 (3) -0- -0- -0- -0- -0-
Senior Vice-President, 1996 117,000 45,000 -0- -0- 3,600 -0- -0-
Store Operations 1995 117,000 20,000 -0- -0- -0- -0- -0-
Charles P. Kirk,............. 1997 140,000 (3) -0- -0- -0- -0- -0-
Senior Vice President & 1996 130,000 35,000 -0- -0- 3,600 -0- -0-
Chief Financial Officer 1995 130,000 12,000 -0- -0- -0- -0- -0-
</TABLE>
- ------------------------------
(1) Represents stock options issued under the Parent 1992 Management Equity Plan
(the "Plan"). Options granted under the Plan had an exercise price equal to
the fair market value of the Common Stock at the date of the grant as
determined by Parent's Board of Directors. The options vested and became
exercisable in cumulative 20% installments commencing one year from the date
of grant, with full vesting on the fifth anniversary. Shares of Common Stock
acquired pursuant to the exercise of options are generally subject to terms
and conditions comparable to those contained in various Management
Subscription and Stockholders Agreements pursuant to which members of
management have previously acquired Common Stock. See "Principal
Stockholders." Pursuant to the Recapitalization substantially all of such
options became fully vested (see "Management Stock Purchases") and the
restrictions under such agreements (other than those relating to federal and
state securities acts) became inapplicable.
(2) Such compensation was to facilitate the named executives' Management Stock
Purchases.
(3) As of the date hereof, bonuses for the fiscal year ended December 28, 1997
have not been determined but are anticipated to be at least comparable to
fiscal 1996 bonuses.
Aggregated Option/SAR Exercises in Fiscal 1997 and 1997 Fiscal Year-End Option
Value
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING
UNEXERCISED
SHARES OPTIONS HELD AT FISCAL VALUE OF UNEXERCISED IN THE
ACQUIRED YEAR END MONEY OPTIONS
ON VALUE EXERCISABLE/UNEXERCISABLE AT FISCAL YEAR END
NAME EXERCISE REALIZED (1) EXERCISABLE/UNEXERCISABLE
- ----------------------------- -------- --------- ---------------------------- ----------------------------
<S> <C> <C> <C> <C>
Robert W. Miller............. 31,400 $ 381,700 0/0 $0/0
Steven G. Miller............. 31,400 381,700 0/0 0/0
Thomas J. Schlauch........... 19,600 242,237 0/0 0/0
Richard A. Johnson........... 19,600 242,237 0/0 0/0
Charles P. Kirk.............. 14,100 159,737 0/0 0/0
</TABLE>
- ------------------------------
(1) Pursuant to the Recapitalization substantially all of the options previously
held became fully vested and were exercised. See "Management Stock
Purchases."
50
<PAGE> 56
Employment Contracts and Change in Control Arrangements
The Company and each of Steven G. Miller and Robert W. Miller
(collectively, the "Millers") have entered into employment agreements, dated as
of January 1, 1993, whereby Steven G. Miller is to continue to serve as
President and Chief Operating Officer and Robert W. Miller as Chairman of the
Board of Directors (the "Board") and Chief Executive Officer of the Company
until December 31, 1994 and for additional successive one-year periods
thereafter, unless any party gives timely notice to the other that the
employment term shall not be so extended. The agreements require the Company to
provide the Millers with a base salary and those benefits generally available to
the Company's senior executive officers, including health insurance, sick leave,
and profit sharing plan participation, and require the Board to make an annual
determination as to whether each is entitled to receive a bonus for such year
and an increase in base salary for the next year. Robert W. Miller's agreement
also provides for supplemental annual retirement benefits and health insurance
benefits for himself and his surviving spouse upon his retirement.
Employment under both agreements is terminable by the Company at any time,
with or without cause, and, under Robert W. Miller's agreement, by him, if for
good reason (as defined in his employment agreement). If Steven G. Miller or
Robert W. Miller is terminated without cause or, in the case of Robert W.
Miller, by him for good reason, each is entitled to receive as severance pay his
base salary through the remainder of the employment term as then in effect. The
agreement of either of the Millers may be terminated if such person becomes
unable to render full services during certain prescribed periods of time. The
agreements contain covenants precluding the Millers from engaging in certain
competition with the Company and from soliciting certain employees of the
Company and its affiliates for a specified period following the termination of
employment, the basis of which depends upon the reason for the termination.
MANAGEMENT STOCK PURCHASES
Pursuant to the Recapitalization, Parent accelerated the vesting periods
under substantially all outstanding employee option and restricted stock
agreements. Parent facilitated the exercise of such stock options by existing
employees by offering to such employees the option to pay the aggregate exercise
price of such outstanding options (in excess of the par value of the shares
being acquired upon exercise) by way of a personal recourse obligation secured
by such employee's existing Common Stock and the Common Stock issued pursuant to
the exercise of the options, and the proceeds thereof. Option holders who
exercised their stock options at the effective date of the Recapitalization
received the distributions on Common Stock described under the heading "The
Recapitalization." As a result thereof, there were outstanding 4,215,301 shares
(or 4,612,945 shares on a fully diluted basis) of Common Stock immediately prior
to the Recapitalization.
As part of the Recapitalization, and pursuant to Parent's newly adopted
1997 Management Equity Plan applicable to employees of Parent and its
subsidiaries, Parent sold to existing middle and senior level management
employees of the Company, 462,009 shares of Common Stock for $5 per share (the
"Management Stock Purchases"). Such shares were not entitled to the distribution
on Common Stock described above under the heading "The Recapitalization,"
although any current employees who owned shares otherwise entitled to such
distribution may pay all or a portion of the purchase price of the shares being
purchased by having Parent offset or withhold such amount from the distribution.
The agreements under the 1997 Management Equity Plan prohibit the transfer of
such Common Stock until the fifth anniversary of the issuance thereof or the
occurrence of any earlier specified event that terminates such prohibition, with
an exception for transfers of vested shares to "related transferees" (as defined
therein). Thereafter, such shares of Common Stock are transferrable subject to a
right of first refusal in favor of Parent. The agreements also contain certain
"call" options as to unvested shares of Common Stock, exercisable, generally,
upon termination of a management employee's employment with the Company. As a
result of the Management Stock Purchases, immediately after the Recapitalization
the continuing management and employees of the Company (and members of their
families) beneficially owned approximately 55.3% of Parent on a fully diluted
basis. Senior management (and members of their families) beneficially own
approximately 34.3% of the outstanding Common Stock on a fully diluted basis.
See "Executive Compensation -- Employment Contracts, Changes in Control
Arrangements and Other Payment."
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<PAGE> 57
COMPENSATION OF DIRECTORS
Directors of the Company, as such, do not receive any compensation.
However, during the fiscal year ended December 28, 1997, Leonard Green &
Associates L.P., a California limited partnership ("LGA") received as
compensation for management services an annual fee of $542,071 plus
out-of-pocket expenses. The Company also paid LGA an additional $500,000 in fees
for work performed in securing the Company's bank facility in 1994 and 1996. In
addition, as a result of the consummation of the Recapitalization, LGA was paid
a fee of $4.3 million by the Company. After the Recapitalization, Parent and the
Company entered into a new Management Services Agreement with a term of seven
and one-half years and pursuant to which Parent and the Company will pay LGA a
reduced annual fee for management services ($333,333) plus reasonable and
customary fees for financial advisory and investment banking services in
connection with major financial transactions (plus expenses and indemnities, if
any). LGA is an affiliate of LGP. Mr. Danhakl and three former directors of the
Company are executive officers and equity owners of LGP, and Mr. Seiffer is an
associate of LGP. LGA is the sole general partner and manager of GEI, a
stockholder of Parent. The Company believes that the terms of its agreement and
arrangements with LGA are comparable to what could be obtained from unrelated,
but equally qualified, third parties.
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<PAGE> 58
PRINCIPAL STOCKHOLDERS
The Company's outstanding capital stock is wholly owned by Parent. Prior to
the Recapitalization, Parent's outstanding equity securities consisted of Common
Stock and the Parent Old Preferred. The following table sets forth the ownership
of Common Stock as of December 28, 1997 by any person known to the Company to be
the beneficial owner of more than 5% of either class of Parent's securities, the
Company's directors, executive officers named in the Summary Compensation Table
above, and all executive officers and directors of the Company as a group.
<TABLE>
<CAPTION>
NAME AND ADDRESS(1)
OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF CLASS
- ------------------------------------------------------------ ---------------- ----------------
<S> <C> <C>
Robert W. Miller(2)......................................... 350,509(3) 18.1%
Steven G. Miller(2)......................................... 200,000 10.3%
Dr. Michael D. Miller....................................... (5) (5)
Thomas J. Schlauch.......................................... 40,000 2.1%
Richard A. Johnson.......................................... 48,000 2.5%
Charles P. Kirk............................................. 48,000 2.5%
John G. Danhakl............................................. (6) (6)
Jonathan A. Seiffer......................................... -0- 0%
Green Equity Investors, L.P.(2)............................. 723,580 37.3%
All Executive Officers and Directors as a Group............. 1,488,289(7) 76.7%
</TABLE>
- ------------------------------
(1) The address for each stockholder is 2525 East El Segundo Boulevard, El
Segundo, California 90245, except GEI and Messrs. Danhakl and Seiffer for
which the address is 11111 Santa Monica Boulevard, Suite 2000, Los Angeles,
California 90025.
(2) Pursuant to the Stockholders Agreement (as defined), each of GEI and the
Millers has agreed to vote for the directors designated by the other. See
"Parent Equity and Debt."
(3) Includes shares of Common Stock owned by Dr. Miller over which Robert W.
Miller has voting control.
(4) Less than one percent.
(5) Effective as of the Recapitalization, Dr. Miller granted voting control over
his shares to Robert W. Miller, and such shares are included with Robert W.
Miller's shares.
(6) Mr. Danhakl is a general partner of LGP and may be deemed to be a beneficial
owner of the shares of Common Stock and Parent New Preferred owned by GEI
because of his interest in LGP, which is the affiliate of the sole general
partner of GEI. GEI owns 273,423 shares of Parent New Preferred and an
affiliate of GEI owns 35,070 shares of Parent New Preferred to be purchased
from PE.
(7) Includes the shares identified in note (6) above.
REPURCHASE OF COMMON STOCK AND PE WARRANT
Pursuant to the Recapitalization Agreement, Parent redeemed all of the
issued and outstanding Parent Old Preferred, including shares owned by GEI, at
an aggregate redemption price of $15.0 million plus accrued and unpaid dividends
of approximately $6.9 million.
Thereafter Parent made a distribution of $15 per share of Common Stock, or
approximately $63.2 million in the aggregate, to all holders of record of Common
Stock. Such holders included option holders whose vesting periods were
accelerated as described under "Management -- Management Stock Purchases" and
who exercised their outstanding stock options, but did not include shares of
Common Stock sold to existing middle and senior level management as part of the
Recapitalization.
Following such distribution to the holders of Common Stock, Parent
repurchased (i) 2,737,310 shares of Common Stock, which were originally sold
together with shares of Parent Old Preferred, from the holders of such Common
Stock (including GEI) (the "Selling Stockholders"), and (ii) the PE Warrant. The
aggregate purchase price for the PE Warrant and the Common Stock repurchased
from the Selling Stockholders was approximately $17.6 million in cash and $35.0
million of liquidation value of Parent New Preferred.
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<PAGE> 59
As a result of the Recapitalization, the Selling Stockholders' ownership of
Common Stock was reduced significantly. Their percentage ownership was reduced
from 77.4% (based on the number of fully diluted shares of Common Stock
immediately prior to the Recapitalization) to 41.7% (based on the number of
fully diluted shares of Common Stock immediately after the Recapitalization). In
addition, on a fully diluted basis, the 8.6% Common Stock interest of PE in
respect of the PE Warrant was eliminated in its entirety.
PARENT EQUITY AND DEBT
Parent's certificate of incorporation contains restrictions on transfer of
its outstanding stock and grants to Parent, or Parent's assignee, a right of
first refusal in the event of a proposed sale by any stockholder of Parent. In
addition to the Common Stock, Parent has outstanding the Parent New Preferred
and the Warrant issued with the Parent Discount Notes. See "Financing
Arrangements -- Parent Discount Notes; Parent New Preferred." In connection with
the Recapitalization, Parent, the Millers and GEI entered into a stockholders
agreement (the "Stockholders Agreement") which, among other things, generally
provides that GEI will vote its Common Stock (and will cause its affiliates to
vote) in favor of the election of the Millers and an additional person
designated by them to be directors of Parent. Likewise, the Millers agreed to
vote their Common Stock (and will cause their affiliates to vote) in favor of
the election of two persons designated by GEI to be directors of Parent. The
Stockholders Agreement further provides that all such persons will cause Parent
to vote the common stock of the Company in favor of the election of the same
five persons as directors of the Company. The Stockholders Agreement and the
respective certificates of incorporation of Parent and the Company contain a
requirement for a supermajority director vote generally applicable to
transactions not in the ordinary course of business. The Stockholders Agreement
is generally for a term of ten (10) years, subject to earlier termination upon
the occurrence of certain events, including if the Common Stock is listed or
admitted to trading on a national securities exchange or quoted on The Nasdaq
Stock Market's National Market.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATIONSHIP WITH THRIFTY PAYLESS AND RITE AID CORPORATION
Prior to September 1992, the Company was a wholly-owned subsidiary of
Thrifty, which was in turn a wholly-owned subsidiary of PE. In December 1996,
Thrifty was acquired by Rite Aid Corporation. References herein to "Rite Aid" in
this Offering Memorandum include Rite Aid Corporation and its subsidiaries,
including Thrifty PayLess, Inc. and Thrifty.
As a result of the Company's prior relationship with Thrifty and its
affiliates, the Company continues to maintain certain relationships with Rite
Aid and PE. These relationships include continuing indemnification obligations
of PE to the Company for certain environmental matters; agreements between the
Company and PE with respect to various tax matters and obligations under ERISA
(as defined), including the allocation of various tax obligations relating to
the inclusion of the Company and each member of the affiliated group of which
the Company is the common parent in certain consolidated and/or unitary tax
returns of PE; and the subleases described below.
The Company previously subleased the building and improvements of its
Fontana, California distribution center from Thrifty Realty Company, a
California corporation and a wholly-owned subsidiary of Thrifty. See
"Business -- Distribution." On March 5, 1996, as permitted by the terms of such
sublease, the Company purchased the facility from MLTC for a purchase price of
$8.9 million, thereby terminating such sublease. Concurrently with such
purchase, the Company entered into a sale/leaseback transaction with respect to
the distribution center.
The Company subleases certain business equipment and other personal
property from Thrifty, including the Company's point of sale system (the
"Equipment"), pursuant to a Sublease (the "Sublease") dated as of September 25,
1992 between the Company and Thrifty, as subsequently amended. Thrifty currently
holds a leasehold interest in the Equipment pursuant to an Amended and Restated
Master Lease Agreement dated as of April 20, 1994 between MLTC, as lessor, and
Thrifty, as lessee (the "Master Lease"). The Master Lease contains a
non-disturbance and attornment agreement pursuant to which the Company's use and
enjoyment of
54
<PAGE> 60
the Equipment will not be disturbed as a result of any default under the Master
Lease provided that the Company is not in default under the Sublease.
The Master Lease provides Thrifty with an option to purchase the Equipment,
and the Sublease provides the Company with the same option. The Company's option
to purchase is exercisable notwithstanding any default under the Master Lease
provided the Company is not otherwise in default under the Sublease; however, in
the event a default exists under the Master Lease, the Company's exercise of its
purchase option requires the payment by the Company of all amounts due and
payable under the Master Lease at the time of the consummation of the purchase
pursuant to the exercise of such option. Such amounts may include rent, fees and
other expenses that are not allocable to the Equipment (the "Excess Fees") if
the same are due and payable but have not otherwise been paid by Thrifty. To the
extent the Company is required to pay such Excess Fees, Thrifty is obligated
under the Sublease to reimburse the Company for the full amount of such Excess
Fees.
The Company believes that all other material terms of the Sublease,
including rent payments, are comparable to what could be obtained from an
unrelated third party.
POTENTIAL CONFLICTS OF INTEREST; PAST TRANSACTIONS WITH AFFILIATES.
Messrs. Danhakl and Seiffer of LGP hold two seats on the Board of Directors
of the Company. Jonathan Sokoloff and Jennifer Holden Dunbar of LGP, who
previously served as directors of the Company, hold two seats on the Board of
Directors of Gart Sports Company ("Gart"). Also, affiliates of LGA have a
controlling interest in Gart, and LGA and LGP are affiliates. Messrs. Danhakl
and Seiffer may have conflicts of interest with respect to certain matters
affecting the Company, such as potential business opportunities and business
dealings between the Company and LGP and its affiliated companies.
Gart recently completed its acquisition of Sportmart. Gart and Sportmart
compete with the Company. Although Gart and Sportmart currently pursue different
business strategies than the Company, they compete in some of the Company's
markets and offer some of the same or similar merchandise, and there can be no
assurance that the Company will not encounter increased competition from Gart or
Sportmart in the future or that actions by either will not inhibit the Company's
growth strategy. In addition, there can be no assurance that all potential
conflicts will be resolved in a manner that is favorable to the Company, or that
the Company will be offered business opportunities made available to Gart or
Sportmart. The Company believes it is impossible to predict the precise
circumstances under which future potential conflicts may arise and therefore
intends to address potential conflicts on a case-by-case basis. Under Delaware
law, directors have a fiduciary duty to act in good faith and in what they
believe to be in the best interest of the corporation and its stockholders. Such
duties include the duty to refrain from impermissible self-dealing and to deal
fairly with respect to transactions in which the directors, or other companies
with which such directors are affiliated, have an interest.
OWNERSHIP OF OLD SUBORDINATED NOTES BY AFFILIATES
Certain of the Old Subordinated Notes that were defeased and repaid as a
result of the Recapitalization were owned by certain of the Selling Stockholders
and by affiliates of GEI.
CONSULTING FEES
As consideration for the provision of ongoing management and financial
advisory services, the Company pays LGA certain fees. See
"Management -- Compensation of Directors."
FINANCING ARRANGEMENTS
CIT CREDIT FACILITY
In connection with the Recapitalization, the lender amended the Company's
then-current credit facility to provide a five year, non-amortizing, $125.0
million revolving credit facility, the CIT Credit Facility, which
55
<PAGE> 61
is the Company's principal senior financing arrangement. Although the Notes are
senior unsecured obligations of the Company, the payment of principal of, and
interest on, the Notes will be effectively subordinated to the prior payment of
the CIT Credit Facility because the latter is secured Indebtedness and the Notes
are unsecured Indebtedness. As of December 28, 1997, there were borrowings of
$43.4 million and letter of credit commitments of $4.5 million outstanding under
the CIT Credit Facility.
Subject to certain terms and conditions, the CIT Credit Facility permits
the Company to obtain revolving loans up to a maximum aggregate principal amount
that, together with the aggregate undrawn amount of all outstanding letters of
credit and of all unreimbursed amounts drawn under letters of credit, does not
exceed the lesser of $125.0 million and the Borrowing Base (as defined therein),
which is generally equal to 70% of the aggregate value of Eligible Inventory (as
defined therein) during November through February and 65% of the aggregate value
of Eligible Inventory during the remaining months of the year. The value of the
Company's Eligible Inventory as of December 28, 1997 was approximately $135.3
million. The Company may elect (provided it is not in default), to have interest
determined under the CIT Credit Facility with reference to LIBOR or Chase
Manhattan Bank's prime lending rate. Loans under the CIT Credit Facility bear
interest based on the Company's performance, with a floor of LIBOR plus 1.5% or
the Chase Manhattan Bank's prime lending rate and a ceiling of LIBOR plus 2.5%
or the Chase Manhattan Bank's prime lending rate plus 0.75%. Loans under the CIT
Credit Facility currently bear interest at a rate of LIBOR plus 2.0% or the
Chase Manhattan Bank prime lending rate plus 0.25%. While an Event of Default
(as defined therein) is continuing, interest is payable at a rate per annum
equal to 2.0% in excess of the otherwise applicable rate.
The CIT Credit Facility requires a monthly payment of an unused line of
credit fee equal to 0.325% per annum on the average daily amount by which the
$125.0 million line of credit exceeds the sum of the average daily outstanding
revolving loans and the average daily undrawn face amount of outstanding letters
of credit.
Subject to certain terms and conditions, the Company may request that the
lenders party to the CIT Credit Facility assist the Company in obtaining letters
of credit in amounts not exceeding $15.0 million in the aggregate. With respect
to letters of credit, in addition to customary fees and charges by the issuing
bank, the Company is required to pay a letter of credit guaranty fee to the
agent on the undrawn amount of such letter of credit at a rate equal to 1.25%
per annum (3.25% per annum while any Event of Default is continuing).
The CIT Credit Facility has an initial term of five years, after which it
is renewable for successive one-year periods unless terminated by either party.
Revolving loans under the CIT Credit Facility are non-amortizing during the term
thereof and become due and payable upon termination. Subject to certain
limitations set forth in the CIT Credit Facility, the Company may borrow, repay
and reborrow the revolving loans throughout the term of the CIT Credit Facility.
Upon notice, the Company may at any time, permanently and irrevocably reduce the
line of credit available under the CIT Credit Facility, without penalty,
provided that each such reduction is for a minimum of $5.0 million. The Company
is obligated to pay an early termination fee if the Company terminates the CIT
Credit Facility in full prior to the end of the initial five-year term.
The CIT Credit Facility is secured by the Company's trade accounts
receivable, merchandise inventories and general intangible assets (including
trademarks and tradenames) of the Company and is also guaranteed by Parent which
guarantee is secured by Parent's pledge of all of the Company's issued and
outstanding Common Stock. The CIT Credit Facility contains covenants restricting
the ability of the Company to, among other things, incur additional debt, merge
or consolidate with or invest in other companies, sell or lease or otherwise
transfer all or substantially all of its properties or assets, make certain
payments with respect to its outstanding capital stock, and engage in certain
transactions with affiliates. The CIT Credit Facility includes covenants that,
among other things, limit the Company's ability to incur debt or make certain
payments with respect to its outstanding capital stock, and require the Company
to comply, during each quarter, with certain financial covenants. In addition,
the CIT Credit Facility contains certain customary representations, warranties
and covenants found in credit agreements of this nature.
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<PAGE> 62
PARENT DISCOUNT NOTES
As part of the Recapitalization, Ares Leveraged Investment Fund, L.P.,
purchased senior discount notes in an aggregate principal amount at maturity of
$48.2 million maturing on November 30, 2008 (the "Parent Discount Notes") from
Parent. The Parent Discount Notes were issued with the Warrant for aggregate
consideration of $24.5 million. The Parent Discount Notes are senior unsecured
obligations of Parent. Cash interest will not accrue on the Parent Discount
Notes prior to November 30, 2002, and the Parent Discount Notes will accrete at
a rate equal to 13.45% per annum (the "Coupon Rate") on a notional principal
amount of $25.0 million. Thereafter, cash interest on the Parent Discount Notes
will accrue at the Coupon Rate per annum and will be payable semiannually in
arrears on each May 31 and November 30, commencing in May 2003.
The Parent Discount Notes are redeemable at the option of Parent, in whole
or in part, on or after November 30, 2002 at the redemption prices set forth in
the Parent Discount Notes indenture. In addition, the Parent Discount Notes
indenture contains covenants that, among other things, limit the ability of
Parent to enter into certain mergers or consolidations or incur certain liens
and of Parent and its subsidiaries to incur additional indebtedness, pay
dividends and make certain other restricted payments and engage in certain
transactions with affiliates. Under certain circumstances, including a change in
control (as defined in the Parent Discount Notes indenture), Parent will be
required to make an offer to purchase the Parent Discount Notes at prices
specified in the Parent Discount Notes indenture. The Parent Discount Notes
indenture contains certain customary events of default, which will include the
failure to pay interest and principal, the failure to comply with certain
covenants in the Parent Discount Notes or certain events occurring under
bankruptcy laws.
PARENT NEW PREFERRED
The Parent New Preferred has a liquidation preference over the Common Stock
equal to the initial liquidation value of the Parent New Preferred plus accrued
and unpaid dividends thereon. Such initial liquidation value is $35.0 million.
The Parent New Preferred is subject to a mandatory redemption on November 13,
2009 at 100% of the liquidation preference plus accrued and unpaid dividends.
Parent may redeem the Parent New Preferred after five years, at its liquidation
preference plus accrued and unpaid dividends and a stated premium. The Parent
New Preferred bears cumulative dividends at the rate of 13.45% per annum.
Dividends may, at the option of the Parent, be paid in cash or by adding to the
liquidation preference of the Parent New Preferred an amount equal to the
dividends then accrued and payable. The Parent New Preferred may, subject to
certain conditions, be exchanged at the option of the Parent into Subordinated
Exchange Debentures, which shall have terms substantially similar to those of
the Parent New Preferred.
DESCRIPTION OF THE NOTES
Set forth below is a summary of certain provisions of the New Notes. The
Old Notes were issued and the New Notes will be issued pursuant to Indenture.
The form and terms of the New Notes are the same as the form and terms of the
Old Notes except that (i) the New Notes have been registered under the
Securities Act and hence will not bear legends restricting the transfer thereof
and (ii) the holders of the New Notes generally will not be entitled to certain
rights under the Registration Rights Agreement or with respect to liquidated
damages, which rights generally will terminate upon consummation of the Exchange
Offer. The New Notes will evidence the same debt as the Old Notes and will be
entitled to the benefits of the Indenture. Where the Indenture requires approval
of or action by a specified percentage of Holders, Holders of New Notes shall be
aggregated with Holders of any Old Notes that are not exchanged for New Notes
pursuant to the Exchange Offer. The following summaries of certain provisions of
the Indenture are summaries only, do not purport to be complete and are
qualified in their entirety by reference to all of the provisions of the
Indenture. Capitalized terms used herein and not otherwise defined shall have
the meanings assigned to them in the Indenture. Wherever particular provisions
of the Indenture are referred to in this summary, such provisions are
incorporated by reference as a part of the statements made and such statements
are qualified in their entirety by such reference. A copy of the form of
Indenture is available upon request.
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<PAGE> 63
GENERAL
The Old Notes are and the New Notes will be general unsecured obligations
of the Company, limited in aggregate principal amount to $131.0 million, and
rank and will rank senior in right of payment to all existing and future
Indebtedness of the Company that is subordinated to the Notes and rank and will
rank pari passu in right of payment with all current and future unsubordinated
Indebtedness of the Company; provided, however, that certain Indebtedness of the
Company currently is and may in the future be secured by assets held by the
Company, subject to certain restrictions described herein. As of December 28,
1997, the Company had $43.4 million of long-term Indebtedness ranking pari passu
with the Old Notes and which would rank pari passu with the New Notes, all of
which constituted secured Indebtedness under the CIT Credit Facility. The Old
Notes are and the New Notes will be jointly and severally irrevocably and
unconditionally guaranteed by each of the Company's future Subsidiaries (the
"Subsidiary Guarantors"). The Guarantees will be general unsecured obligations
of the Subsidiary Guarantors and will rank senior in right of payment to all
future Indebtedness of the Subsidiary Guarantors that is subordinated to the
Guarantees and will rank pari passu in right of payment with all future
unsubordinated Indebtedness of the Subsidiary Guarantors; provided, however,
that certain Indebtedness of the Subsidiary Guarantors may in the future be
secured by assets held by Subsidiary Guarantors, subject to certain restrictions
described herein. The obligations of each Subsidiary Guarantor under its
guarantee, however, will be limited in a manner intended to avoid it being
deemed a fraudulent conveyance under applicable law. See "Certain Bankruptcy
Limitations" and "Risk Factors -- Fraudulent Transfer Considerations." The term
"Subsidiaries" as used herein, however, does not include Unrestricted
Subsidiaries. The Old Notes were issued and the New Notes will be issued only in
fully registered form, without coupons, in denominations of $1,000 and integral
multiples thereof.
The Notes will mature on November 15, 2007. The Notes will bear interest at
the rate per annum stated on the cover page hereof from the date of issuance or
from the most recent Interest Payment Date to which interest has been paid or
provided for, payable semi-annually on May 15 and November 15 of each year,
commencing May 15, 1998, to the persons in whose names such Notes are registered
at the close of business on the May 1 or November 1 immediately preceding such
Interest Payment Date. Interest will be calculated on the basis of a 360-day
year consisting of twelve 30-day months.
Principal of, premium, if any, and interest and Liquidated Damages, if any,
on the Notes will be payable, and the Notes may be presented for registration of
transfer or exchange, at the office or agency of the Company maintained for such
purpose, which office or agency shall be maintained in the Borough of Manhattan,
The City of New York. Except as set forth below, at the option of the Company,
payment of interest may be made by check mailed to the Holders of the Notes at
the addresses set forth upon the registry books of the Company. No service
charge will be made for any registration of transfer or exchange of Notes, but
the Company may require payment of a sum sufficient to cover any tax or other
governmental charge payable in connection therewith. Until otherwise designated
by the Company, the Company's office or agency will be the corporate trust
office of the Trustee presently located at the office of the Trustee in the
Borough of Manhattan, The City of New York.
CERTAIN BANKRUPTCY LIMITATIONS
Each Subsidiary Guarantor will guarantee the Company's obligations with
respect to the Notes, as provided under "Future Subsidiary Guarantors" below.
Holders of the Notes will be direct creditors of each Subsidiary Guarantor by
virtue of its guarantee. Nonetheless, in the event of the bankruptcy or
financial difficulty of a Subsidiary Guarantor, such Subsidiary Guarantor's
obligations under its guarantee may be subject to review and avoidance under
state and federal fraudulent transfer laws. Among other things, such obligations
may be avoided if a court concludes that such obligations were incurred for less
than reasonably equivalent value or fair consideration at a time when the
Subsidiary Guarantor was insolvent, was rendered insolvent, or was left with
inadequate capital to conduct its business. A court would likely conclude that a
Subsidiary Guarantor did not receive reasonably equivalent value or fair
consideration to the extent that the aggregate amount of its liability on its
guarantee exceeds the economic benefits it receives in the Offering. The
obligations of each Subsidiary Guarantor under its guarantee will be limited in
a manner intended to cause it
58
<PAGE> 64
not to be a fraudulent conveyance under applicable law, although no assurance
can be given that a court would give the holder the benefit of such provision.
See "Risk Factors -- Fraudulent Transfer Considerations."
If the obligations of a Subsidiary Guarantor under its guarantee were
avoided, Holders of Notes would have to look to the assets of any remaining
Subsidiary Guarantors and the Company for payment. There can be no assurance in
that event that such assets would suffice to pay the outstanding principal and
interest on the Notes.
OPTIONAL REDEMPTION
The Company will not have the right to redeem any Notes prior to November
15, 2002 (other than out of the Net Cash Proceeds of a Public Equity Offering of
common stock, as described in the next paragraph). The Notes will be redeemable
for cash at the option of the Company, in whole or in part, at any time on or
after November 15, 2002, upon not less than 30 days nor more than 60 days notice
to each holder of Notes, at the following redemption prices (expressed as
percentages of the principal amount) if redeemed during the 12-month period
commencing November 15 of the years indicated below, in each case (subject to
the right of Holders of record on a Record Date to receive the corresponding
interest due (and the corresponding Liquidated Damages due, if any) on an
Interest Payment Date corresponding to such Record Date that is on or prior to
such Redemption Date) together with accrued and unpaid interest and Liquidated
Damages, if any, thereon to the Redemption Date:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
-------------------------------------------------------- -------
<S> <C>
2002.................................................... 105.475%
2003.................................................... 103.650%
2004.................................................... 101.825%
2005 and thereafter..................................... 100.000%
</TABLE>
Notwithstanding the foregoing, at any time on or prior to November 15,
2000, the Company may redeem, on one or more occasions, up to an aggregate of
35% of the aggregate principal amount of the Notes originally outstanding at a
redemption price equal to 110.95% of the principal amount thereof, (subject to
the right of Holders of record on a Record Date to receive interest due on an
Interest Payment Date that is on or prior to such Redemption Date) together with
accrued and unpaid interest and Liquidated Damages, if any, to the date of
redemption, with cash from the Net Cash Proceeds to the Company of one or more
Public Equity Offerings; provided, that at least 65% of the aggregate principal
amount of the Notes originally outstanding remain outstanding immediately after
the occurrence of each such redemption; provided, further, that such notice of
redemption shall be sent within 30 days after the date of closing of any such
Public Equity Offering, and such redemption shall occur within 60 days after the
date such notice is sent.
In the case of a partial redemption, the Trustee shall select the Notes or
portions thereof for redemption on a pro rata basis, by lot or in such other
manner it deems appropriate and fair. The Notes may be redeemed in part in
multiples of $1,000 only.
The Notes will not have the benefit of any sinking fund.
Notice of any redemption will be sent, by first class mail, at least 30
days and not more than 60 days prior to the date fixed for redemption to the
Holder of each Note to be redeemed to such Holder's last address as then shown
upon the registry books of the Registrar. Any notice which relates to a Note to
be redeemed in part only must state the portion of the principal amount equal to
the unredeemed portion thereof and must state that on and after the date of
redemption, upon surrender of such Note, a new Note or Notes in a principal
amount equal to the unredeemed portion thereof will be issued. On and after the
date of redemption, interest will cease to accrue on the Notes or portions
thereof called for redemption, unless the Company defaults in the payment
thereof.
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CERTAIN COVENANTS
Repurchase of Notes at the Option of the Holder Upon a Change of Control
The Indenture provides that in the event that a Change of Control has
occurred, each holder of Notes will have the right, at such holder's option,
pursuant to an offer (subject only to conditions required by applicable law, if
any) by the Company (the "Change of Control Offer"), to require the Company to
repurchase all or any part of such holder's Notes (provided, that the principal
amount of such Notes must be $1,000 or an integral multiple thereof) on a date
(the "Change of Control Purchase Date") that is no later than 45 Business Days
after the occurrence of such Change of Control, at a cash price equal to 101% of
the principal amount thereof (the "Change of Control Purchase Price"), together
with accrued and unpaid interest and Liquidated Damages, if any, to the Change
of Control Purchase Date. The Change of Control Offer shall be made within 15
Business Days following a Change of Control and shall remain open for 20
Business Days following its commencement (the "Change of Control Offer Period").
Upon expiration of the Change of Control Offer Period, the Company promptly
shall purchase all Notes properly tendered in response to the Change of Control
Offer.
As used herein, a "Change of Control" means (i) any merger or consolidation
of the Company or Parent with or into any person or any sale, transfer or other
conveyance, whether direct or indirect, of all or substantially all of the
assets of the Company or Parent on a consolidated basis, in one transaction or a
series of related transactions, if, immediately after giving effect to such
transaction(s), any "person" or "group" (as such terms are used for purposes of
Sections 13(d) and 14(d) of the Exchange Act, whether or not applicable), other
than any Excluded Person or Excluded Persons or Parent, is or becomes the
Beneficial Owner, directly or indirectly, of more than 50% of the total voting
power in the aggregate normally entitled to vote in the election of directors,
managers, or trustees, as applicable, of the transferee(s) or surviving entity
or entities, (ii) any "person" or "group," other than any Excluded Person or
Excluded Persons or Parent, is or becomes the Beneficial Owner, directly or
indirectly, of more than 50% of the total voting power in the aggregate of all
classes of Capital Stock of the Company then outstanding normally entitled to
vote in elections of directors, provided that any "person" or "group" will be
deemed to be the Beneficial Owner of any Capital Stock of the Company held by
Parent so long as such person or group is the Beneficial Owner of, directly or
indirectly, in the aggregate a majority of the Capital Stock of Parent then
outstanding normally entitled to vote in elections of directors, (iii) during
any period of 12 consecutive months after the Issue Date, individuals who at the
beginning of any such 12-month period constituted the Board of Directors of
either the Company or Parent (together, in each case, with any new directors
whose election by such Board of Directors or whose nomination for election by
the shareholders of the Company or Parent was approved by LGP or a Related Party
of LGP or by the Excluded Persons or by a vote of a majority of the directors
then still in office who were either directors at the beginning of such period
or whose election or nomination for election was previously so approved) cease
for any reason to constitute a majority of the Board of Directors of the Company
or Parent then in office, as applicable, or (iv) at any time after the Issue
Date, the Company no longer continues, for Federal income tax purposes, to be a
member of the affiliated group of Parent under circumstances that would
accelerate the unrealized gain in respect of Parent's investment account in the
Company.
On or before the Change of Control Purchase Date, the Company will (i)
accept for payment Notes or portions thereof properly tendered pursuant to the
Change of Control Offer, (ii) deposit with the Paying Agent cash sufficient to
pay the Change of Control Purchase Price (together with accrued and unpaid
interest and Liquidated Damages, if any), of all Notes so tendered and (iii)
deliver to the Trustee Notes so accepted together with an Officers' Certificate
listing the Notes or portions thereof being purchased by the Company. The Paying
Agent promptly will pay the Holders of Notes so accepted an amount equal to the
Change of Control Purchase Price (together with accrued and unpaid interest and
Liquidated Damages, if any), and the Trustee promptly will authenticate and
deliver to such Holders a new Note equal in principal amount to any unpurchased
portion of the Note surrendered. Any Notes not so accepted will be delivered
promptly by the Company to the Holder thereof. The Company publicly will
announce the results of the Change of Control Offer on or as soon as practicable
after the Change of Control Purchase Date.
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The indenture governing the terms of the Parent Discount Notes provides
that, prior to making an offer to purchase Parent Discount Notes upon a change
of control as defined under such indenture, but in any event within 90 days
following such a change of control, Parent will either repay all outstanding
Indebtedness of its subsidiaries (including the Company and any Subsidiary
Guarantors) or obtain the requisite consents, if any, under the Credit Agreement
and the Notes to permit the repurchase of the Parent Discount Notes as required
by the Parent Discount Note indenture.
The Change of Control purchase feature of the Notes may make more difficult
or discourage a takeover of the Company and the removal of incumbent management.
The phrase "all or substantially all" of the assets of the Company will likely
be interpreted under applicable state law and will be dependent upon particular
facts and circumstances. As a result, there may be a degree of uncertainty in
ascertaining whether a sale or transfer of "all or substantially all" of the
assets of the Company has occurred. In addition, no assurances can be given that
the Company will be able to acquire Notes tendered upon the occurrence of a
Change of Control.
Any Change of Control Offer will be made in compliance with all applicable
laws, rules and regulations, including, if applicable, Regulation 14E under the
Exchange Act and the rules thereunder and all other applicable Federal and state
securities laws and any provisions of the Indenture which conflict with such
laws shall be deemed to be superseded by the provisions of such laws.
If the Change of Control Purchase Date hereunder is on or after an interest
payment Record Date and on or before the associated Interest Payment Date, any
accrued and unpaid interest (and Liquidated Damages, if any, due on such
Interest Payment Date) will be paid to the person in whose name a Note is
registered at the close of business on such Record Date, and such interest (and
Liquidated Damages, if applicable) will not be payable to Holders who tender the
Notes pursuant to the Change of Control Offer.
Limitation on Incurrence of Additional Indebtedness and Disqualified Capital
Stock
The Indenture provides that, except as set forth in this covenant, the
Company and the Subsidiary Guarantors will not, and will not permit any of their
Subsidiaries to, directly or indirectly, issue, assume, guaranty, incur, become
directly or indirectly liable with respect to (including as a result of an
Acquisition), or otherwise become responsible for, contingently or otherwise
(individually and collectively, to "incur" or, as appropriate, an "incurrence"),
any Indebtedness or any Disqualified Capital Stock (including Acquired
Indebtedness), other than Permitted Indebtedness. Notwithstanding the foregoing,
if (i) no Default or Event of Default shall have occurred and be continuing at
the time of, or would occur after giving effect on a pro forma basis to, such
incurrence of Indebtedness (including, without duplication, guarantees of
Indebtedness of the Company and the Subsidiary Guarantors otherwise permitted by
the Indenture) or Disqualified Capital Stock and (ii) on the date of such
incurrence (the "Incurrence Date"), the Consolidated Coverage Ratio of the
Company for the Reference Period immediately preceding the Incurrence Date,
after giving effect on a pro forma basis to such incurrence of such Indebtedness
(without duplication) or Disqualified Capital Stock and, to the extent set forth
in the definition of Consolidated Coverage Ratio, the use of proceeds thereof,
would be at least 2.0 to l (the "Debt Incurrence Ratio"), then the Company may
incur such Indebtedness or Disqualified Capital Stock and the Subsidiary
Guarantors may incur such Indebtedness other than Disqualified Capital Stock.
In addition, the foregoing limitations will not apply to:
(a) the incurrence by the Company or any Subsidiary Guarantor of
Purchase Money Indebtedness on or after the Issue Date, provided, that (i)
the aggregate principal amount of such Indebtedness incurred on or after
the Issue Date and outstanding at any time pursuant to this paragraph (a)
(including any Indebtedness issued to refinance, replace or refund such
Indebtedness) shall not exceed $20.0 million, and (ii) in each case, such
Indebtedness as originally incurred shall not constitute more than 100% of
the cost (determined in accordance with GAAP) to the Company or such
Subsidiary Guarantor, as applicable, of the property so purchased or
leased;
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(b) the incurrence by the Company or any Subsidiary Guarantor of
Indebtedness in an aggregate principal amount outstanding at any time
(including Indebtedness incurred to refinance, replace or refund such
Indebtedness) of up to $15.0 million (which may be incurred pursuant to the
Credit Agreement); and
(c) the incurrence by the Company or any Subsidiary Guarantor of
Indebtedness pursuant to the Credit Agreement up to an aggregate principal
amount outstanding at any time (including any Indebtedness incurred to
refinance, replace or refund such Indebtedness) of $125.0 million, minus
the amount of any such Indebtedness retired with the Net Cash Proceeds from
any Asset Sale or assumed by a transferee in an Asset Sale.
Indebtedness or Disqualified Capital Stock of any Person which is
outstanding at the time such Person becomes a Subsidiary of the Company
(including upon designation of any subsidiary or other person as a Subsidiary)
or is merged with or into or consolidated with the Company or a Subsidiary of
the Company shall be deemed to have been incurred at the time such Person
becomes such a Subsidiary of the Company or is merged with or into or
consolidated with the Company or a Subsidiary of the Company, as applicable.
Notwithstanding anything to the contrary contained in the Indenture, (i)
the Subsidiary Guarantors each may guaranty Indebtedness of the Company or any
other Subsidiary Guarantor that is permitted to be incurred under the Indenture,
either at the time such Subsidiary Guarantor becomes a Guarantor of the Notes or
if later the time the Company or such other Subsidiary Guarantor incurs such
Indebtedness, and (ii) the Company may guaranty Indebtedness of any Subsidiary
Guarantor permitted to be incurred under the Indenture.
Notwithstanding anything to the contrary contained in the Indenture, the
Company and the Subsidiary Guarantors will not, and will not permit any of their
Subsidiaries to, incur any Indebtedness that is contractually subordinate to any
other Indebtedness of the Company or any Subsidiary Guarantor unless such
Indebtedness is at least as subordinate to the Notes and the Guarantees, as
applicable.
Limitation on Restricted Payments
The Indenture provides that the Company and the Subsidiary Guarantors will
not, and will not permit any of their Subsidiaries to, directly or indirectly,
make any Restricted Payment if, after giving effect to such Restricted Payment
on a pro forma basis, (1) a Default or an Event of Default shall have occurred
and be continuing, (2) the Company is not permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Debt Incurrence Ratio in the covenant
"Limitation on Incurrence of Additional Indebtedness and Disqualified Capital
Stock," or (3) the aggregate amount of all Restricted Payments made by the
Company and its Subsidiaries, including after giving effect to such proposed
Restricted Payment, from and after the Issue Date, would exceed the sum of (a)
50% of the aggregate Consolidated Net Income of the Company for the period
(taken as one accounting period), commencing on the first day after the Issue
Date, to and including the last day of the fiscal quarter ended immediately
prior to the date of each such calculation (or, in the event Consolidated Net
Income for such period is a deficit, then minus 100% of such deficit), plus (b)
the aggregate Net Cash Proceeds received by the Company as a Capital
Contribution or from the sale of the Company's Qualified Capital Stock (other
than in each case (i) to a Subsidiary of the Company, (ii) to the extent applied
in connection with a Qualified Exchange, (iii) to the extent applied to
repurchase Capital Stock pursuant to clause (g) of the definition of Permitted
Payments and (iv) to the extent received by the Company or any Subsidiary
Guarantor pursuant to clause (c) or (d) of the definition of Permitted Payments)
after the Issue Date.
The provisions of the immediately preceding paragraph will not prohibit or
be violated by (A) a Qualified Exchange; (B) the payment or making of any
Restricted Payment within 60 days after the date of declaration thereof or the
making of any binding commitment in respect thereof, if at said date of
declaration or commitment, such Restricted Payment would have complied with the
provisions contained in clauses (1), (2) and (3) of the immediately preceding
paragraph; and (C) Permitted Payments. The full amount of any Restricted Payment
made pursuant to the foregoing clause (B) (but not pursuant to clauses (A) or
(C)) of
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the immediately preceding sentence, however, will be deducted in the calculation
of the aggregate amount of Restricted Payments available to be made referred to
in clause (3) of the immediately preceding paragraph.
Additionally, the foregoing clause (3) of the first paragraph of this
covenant will not prohibit any payment of cash dividends to Parent on or after
May 15, 2003, in each case (i) made not less than 2 Business Days nor more than
15 Business Days after the then most recent Interest Payment Date, provided the
Company shall have first paid to the Holders all interest (and Liquidated
Damages, if any) due and owing on the Notes on or prior to such Interest Payment
Date, and (ii) the proceeds of which are used by Parent concurrently with such
payment to make a scheduled interest payment on the Parent Discount Notes as
required by the terms of the Parent Discount Notes in effect on the Issue Date.
The full amount of any Restricted Payment made pursuant to this paragraph,
however, will be deducted in the calculation of the aggregate amount of
Restricted Payments available to be made referred to in clause (3) of the first
paragraph of this covenant.
For purposes of this covenant, the amount of any Restricted Payment, if
other than in cash, shall be the fair market value thereof, as determined in the
good faith reasonable judgment of the Board of Directors of the Company.
Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries
The Indenture provides that the Company and the Subsidiary Guarantors will
not, and will not permit any of their Subsidiaries to, directly or indirectly,
create, assume or suffer to exist any consensual restriction on the ability of
any Subsidiary of the Company to pay dividends or make other distributions to or
on behalf of, or to pay any obligation to or on behalf of, or otherwise to
transfer assets or property to or on behalf of, or make or pay loans or advances
to or on behalf of, the Company or any Subsidiary of the Company, except (a)
restrictions imposed by the Notes or the Indenture or by other indebtedness of
the Company (which may also be guaranteed by the Subsidiary Guarantors) ranking
pari passu with the Notes or the Guarantees, as applicable, provided such
restrictions are not materially more restrictive than those imposed by the
Indenture and the Notes, (b) restrictions imposed by applicable law, (c)
existing restrictions under Indebtedness outstanding on the Issue Date, (d)
restrictions under any Acquired Indebtedness not incurred in violation of the
Indenture or any agreement relating to any property, asset, or business acquired
by the Company or any of its Subsidiaries, which restrictions in each case
existed at the time of acquisition, were not put in place in connection with or
in anticipation of such acquisition and are not applicable to any person, other
than the person acquired, or to any property, asset or business, other than the
property, assets and business so acquired, (e) any such restriction or
requirement imposed by Indebtedness incurred under the Credit Agreement in
accordance with the Indenture, provided such restriction or requirement is not
materially more restrictive than that imposed by the CIT Credit Facility as of
the Issue Date, (f) restrictions with respect solely to a Subsidiary of the
Company imposed pursuant to a binding agreement which has been entered into for
the sale or disposition of all or substantially all of the Equity Interests or
assets of such Subsidiary, provided such restrictions apply solely to the Equity
Interests or assets of such Subsidiary which are being sold, (g) restrictions on
transfer contained in Purchase Money Indebtedness incurred pursuant to paragraph
(a) of the covenant "Limitation on Incurrence of Additional Indebtedness and
Disqualified Capital Stock," provided such restrictions relate only to the
transfer of the property acquired with the proceeds of such Purchase Money
Indebtedness, and (h) in connection with and pursuant to permitted Refinancings,
replacements of restrictions imposed pursuant to clauses (a), (c), (d), (e) or
(g) of this paragraph that are not materially more restrictive than those being
replaced and do not apply to any other person or assets than those that would
have been covered by the restrictions in the Indebtedness so refinanced.
Notwithstanding the foregoing, neither (a) customary provisions restricting
subletting or assignment of any lease entered into in the ordinary course of
business, consistent with industry practice, nor (b) Liens permitted under the
terms of the Indenture shall in and of themselves be considered a restriction on
the ability of the applicable Subsidiary to transfer such agreement or assets,
as the case may be.
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Limitation on Liens Securing Indebtedness
The Company and the Subsidiary Guarantors will not, and will not permit any
of their Subsidiaries to, create, incur, assume or suffer to exist, to secure
any Indebtedness, any Lien of any kind, other than Permitted Liens, upon any of
their respective assets now owned or acquired on or after the date of the
Indenture or upon any income or profits therefrom unless the Company provides,
and causes its Subsidiaries to provide, concurrently therewith or immediately
thereafter, that the Notes and the Guarantees, as applicable, are equally and
ratably so secured for so long as such Indebtedness so secured remains
outstanding; provided that, if such Indebtedness is Subordinated Indebtedness,
the Lien securing such Subordinated Indebtedness shall be subordinate and junior
to the Lien securing the Notes with the same relative priority as such
Subordinated Indebtedness shall have with respect to the Notes; provided,
further, that, in the case of Indebtedness of a Subsidiary Guarantor, if such
Subsidiary Guarantor shall cease to be a Subsidiary Guarantor in accordance with
the provisions of the Indenture, such equal and ratable Lien to secure the Notes
shall, without any further action, cease to exist.
Limitation on Sale of Assets and Subsidiary Stock
The Indenture provides that the Company and the Subsidiary Guarantors will
not, and will not permit any of their Subsidiaries to, in one or a series of
related transactions, convey, sell, transfer, assign or otherwise dispose of,
directly or indirectly, any of its property, business or assets (other than cash
or Cash Equivalents), including by merger or consolidation (in the case of a
Subsidiary Guarantor), and including any sale or other transfer or issuance of
any Equity Interests (other than directors qualifying shares) of any Subsidiary
of the Company, whether by the Company or a Subsidiary of the Company, and
including (except as provided in clause (vi) of the third paragraph of this
covenant) any Sale and Leaseback Transaction (any of the foregoing, an "Asset
Sale"), unless (l)(a) within 360 days after the date of such Asset Sale, the Net
Cash Proceeds therefrom (the "Asset Sale Offer Amount") are applied to the
optional redemption of the Notes in accordance with the terms of the Indenture
and other Indebtedness of the Company ranking on a parity with the Notes from
time to time outstanding with similar provisions requiring the Company to make
an offer to purchase or to redeem such Indebtedness with the proceeds from asset
sales, pro rata in proportion to the respective principal amounts (or accreted
values in the case of Indebtedness issued with an original issue discount) of
the Notes and such other Indebtedness then outstanding or to the repurchase of
the Notes and such other Indebtedness pursuant to a cash offer (subject only to
conditions required by applicable law, if any) (pro rata in proportion to the
respective principal amounts (or accreted values in the case of Indebtedness
issued with an original issue discount) of the Notes and such other Indebtedness
then outstanding) (the "Asset Sale Offer") at a purchase price of 100% of
principal amount (or accreted value in the case of Indebtedness issued with an
original issue discount) (the "Asset Sale Offer Price") together with accrued
and unpaid interest and Liquidated Damages, if any, to the date of payment, made
within 360 days of such Asset Sale, or (b) within 360 days following such Asset
Sale, the Asset Sale Offer Amount is used (i) to make one or more Acquisitions
or invested in assets and property (other than notes, bonds, obligations and
securities) which in the good faith reasonable judgment of the Board of
Directors of the Company will constitute or be a part of a Related Business of
the Company or such Subsidiary (if it continues to be a Subsidiary) immediately
following such transaction or (ii) to retire permanently Indebtedness incurred
under the Credit Agreement pursuant to paragraph (c) of the covenant "Limitation
on Incurrence of Additional Indebtedness and Disqualified Capital Stock"
(including that in the case of a revolver or similar arrangement that makes
credit available, such commitment is so permanently reduced by such amount), (2)
at least 75% of the consideration for such Asset Sale or series of related Asset
Sales consists of cash or Cash Equivalents, provided that (x) the amount of any
liabilities (as shown on the Company's most recent consolidated balance sheet)
of the Company or any Subsidiary (other than Subordinated Indebtedness) that are
assumed by the transferee in such Asset Sale (provided that the Company and its
Subsidiaries are released from all obligations in respect thereof) and (y) any
notes or other obligations received by the Company or any such Subsidiary
Guarantor from such transferee that are promptly (but in no event more than 90
days after receipt) converted by the Company or such Subsidiary Guarantor into
cash or Cash Equivalents (to the extent of the cash or Cash Equivalents, as the
case may be, received), shall be deemed to be cash or Cash Equivalents, as the
case may be, for purposes of this provision, and such cash and Cash Equivalents
shall be deemed to be Net Cash
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Proceeds received from the Asset Sale of the related property sold for such
notes or other obligations, for purposes of this covenant, and, provided,
further, this clause (2) shall not apply to the sale or disposition of assets as
a result of a foreclosure (or a secured party taking ownership of such assets in
lieu of foreclosure) or as a result of an involuntary proceeding in which the
Company cannot, directly or through its Subsidiaries, direct the type of
proceeds received, and (3) with respect to any Asset Sale or series of related
Asset Sales, the Net Cash Proceeds of which exceed $500,000, the Board of
Directors of the Company determines in good faith that the Company or such
Subsidiary, as applicable, receives fair market value for such Asset Sale.
The Indenture provides that an acquisition of Notes pursuant to an Asset
Sale Offer may be deferred until the accumulated Net Cash Proceeds from Asset
Sales not applied to the uses set forth in clause 1(b) above (the "Excess
Proceeds") exceeds $10 million and that each Asset Sale Offer shall remain open
for 20 Business Days following its commencement (the "Asset Sale Offer Period").
Upon expiration of the Asset Sale Offer Period, the Company shall apply the
Asset Sale Offer Amount plus an amount equal to accrued and unpaid interest and
Liquidated Damages, if any, to the purchase of all Indebtedness properly
tendered (on a pro rata basis if the Asset Sale Offer Amount is insufficient to
purchase all Indebtedness so tendered) at the Asset Sale Offer Price (together
with accrued interest and Liquidated Damages, if any). To the extent that the
aggregate amount of Indebtedness tendered pursuant to an Asset Sale Offer is
less than the Asset Sale Offer Amount, the Company may use any remaining Net
Cash Proceeds for general corporate purposes as otherwise permitted by the
Indenture and following each Asset Sale Offer the Excess Proceeds amount shall
be reset to zero.
Notwithstanding the foregoing provisions of this covenant, the following
transactions shall not be deemed Asset Sales:
(i) the Company and the Subsidiary Guarantors may, in the ordinary
course of business, convey, sell, lease, transfer, assign or otherwise
dispose of property in the ordinary course of business;
(ii) the Company and the Subsidiary Guarantors may (x) convey, sell,
lease, transfer, assign or otherwise dispose of assets pursuant to and in
accordance with the limitation on mergers, sales or consolidations
provisions in the Indenture, (y) make Restricted Payments permitted by the
covenant "Limitation on Restricted Payments" and (z) engage in Exempted
Affiliate Transactions;
(iii) the Company and the Subsidiary Guarantors may convey, sell,
transfer, assign or otherwise dispose of assets or issue Capital Stock to
the Company or any of the Subsidiary Guarantors;
(iv) the Company and the Subsidiary Guarantors may sell or dispose of
damaged, worn out or other obsolete property in the ordinary course of
business so long as such property is no longer necessary for the proper
conduct of the business of the Company or such Subsidiary Guarantor, as
applicable;
(v) the Company and the Subsidiary Guarantors may exchange assets held
by the Company or a Subsidiary Guarantor for assets held by any person or
entity; provided that (i) the assets received by the Company or a
Subsidiary Guarantor in any such exchange in the good faith reasonable
judgment of the Board of Directors of the Company will immediately
constitute, be a part of, or be used in, a Related Business, (ii) the Board
of Directors of the Company has determined that the terms of any exchange
are fair and reasonable, and (iii) any such exchange shall be deemed to be
an Asset Sale to the extent that the Company or any Subsidiary Guarantor
receive cash or Cash Equivalents in such exchange;
(vi) the Company and each of the Subsidiary Guarantors may engage in
Sale and Leaseback Transactions with respect to property acquired after the
Issue Date (other than property acquired in exchange for or with the
proceeds from the sale or other disposition of property held by the Company
or any Subsidiary Guarantor on the Issue Date);
(vii) the Company and each of the Subsidiary Guarantors may liquidate
Cash Equivalents in the ordinary course of business;
(viii) the Company and each of the Subsidiary Guarantors may create or
assume Liens (or permit any foreclosure thereon) not prohibited by the
Indenture;
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(ix) the Company and each of the Subsidiary Guarantors may surrender
or waive contract rights or the settlement, release or surrender of
contract, tort or other claims of any kind; and
(x) the Company and the Subsidiary Guarantors, collectively, may
convey, sell, transfer, assign or otherwise dispose of assets having an
aggregate fair market value not exceeding $2.0 million in any fiscal year.
All Net Cash Proceeds from an Event of Loss (other than the proceeds of any
business interruption insurance) shall be invested or otherwise used as provided
in clause 1 of the first paragraph of this covenant, all within 18 months from
the occurrence of such Event of Loss.
Any Asset Sale Offer will be made in compliance with all applicable laws,
rules and regulations, including, if applicable, Regulation 14E under the
Exchange Act and the rules thereunder and all other applicable Federal and state
securities laws and any provisions of the Indenture which conflict with such
laws shall be deemed to be superseded by the provisions of such laws.
If the payment date in connection with an Asset Sale Offer hereunder is on
or after an interest payment Record Date and on or before the associated
Interest Payment Date, any accrued and unpaid interest (and Liquidated Damages
due on such Interest Payment Date, if any) will be paid to the person in whose
name a Note is registered at the close of business on such Record Date, and such
interest (and Liquidated Damages, if applicable) will not be payable to Holders
who tender Notes pursuant to such Asset Sale Offer.
Limitation on Transactions with Affiliates
The Indenture provides that neither the Company nor any of the Subsidiary
Guarantors will be permitted after the Issue Date to enter into any contract,
agreement, arrangement or transaction with any Affiliate (an "Affiliate
Transaction"), or any series of related Affiliate Transactions (other than
Exempted Affiliate Transactions), unless the terms of such Affiliate Transaction
are fair and reasonable to the Company or such Subsidiary Guarantor, as the case
may be, and are at least as favorable as the terms which could reasonably be
expected to be obtained by the Company or such Subsidiary Guarantor, as the case
may be, in a comparable transaction made on an arm's length basis with persons
who are not Affiliates.
Without limiting the foregoing, in connection with any Affiliate
Transaction or series of related Affiliate Transactions (other than Exempted
Affiliate Transactions) (1) involving consideration to either party in excess of
$1.0 million, the Company must deliver an Officers' Certificate to the Trustee,
stating that the terms of such Affiliate Transaction are fair and reasonable to
the Company, and no less favorable to the Company than could reasonably be
expected to have been obtained in an arm's length transaction with a
non-Affiliate, and (2) involving consideration to either party in excess of $5.0
million, the Company must also, prior to the consummation thereof, obtain a
favorable written opinion as to the fairness of such transaction to the Company
from a financial point of view from an independent investment banking firm of
national reputation or, if pertaining to a matter for which such investment
banking firms do not customarily render such opinions, an appraisal or valuation
firm of national reputation; provided, that this sentence shall not apply to the
sale or purchase of products by the Company or its Subsidiaries to or from any
Affiliate of LGP or any Related Party thereof, which sale or purchase is in the
ordinary course of business and in accordance with industry practice.
Limitation on Merger, Sale or Consolidation
The Indenture provides that the Company will not consolidate with or merge
with or into another person or, directly or indirectly, sell, lease, convey or
transfer all or substantially all of its assets (computed on a consolidated
basis), whether in a single transaction or a series of related transactions, to
another Person or group of affiliated Persons or adopt a plan of liquidation,
unless (i) either (a) the Company is the continuing entity or (b) the resulting,
surviving or transferee entity or, in the case of a plan of liquidation, the
entity which receives the greatest value from such plan of liquidation is a
corporation organized under the laws of the United States, any state thereof or
the District of Columbia and expressly assumes by supplemental indenture all of
the obligations of the Company in connection with the Notes and the Indenture;
(ii) no Default or Event of Default shall exist or shall occur immediately after
giving effect on a pro forma basis to such transaction;
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(iii) immediately after giving effect to such transaction on a pro forma basis,
the Consolidated Net Worth of the consolidated surviving or transferee entity
or, in the case of a plan of liquidation, the entity which receives the greatest
value from such plan of liquidation is at least equal to the Consolidated Net
Worth of the Company immediately prior to such transaction; and (iv) immediately
after giving effect to such transaction on a pro forma basis, the consolidated
resulting, surviving or transferee entity or, in the case of a plan of
liquidation, the entity which receives the greatest value from such plan of
liquidation would immediately thereafter be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Debt Incurrence Ratio set forth in the
covenant "Limitation on Incurrence of Additional Indebtedness and Disqualified
Capital Stock."
Upon any consolidation or merger or any transfer of all or substantially
all of the assets of the Company or consummation of a plan of liquidation in
accordance with the foregoing, the successor corporation formed by such
consolidation or into which the Company is merged or to which such transfer is
made or, in the case of a plan of liquidation, the entity which receives the
greatest value from such plan of liquidation shall succeed to and (except in the
case of a lease) be substituted for, and may exercise every right and power of,
the Company under the Indenture with the same effect as if such successor
corporation had been named therein as the Company, and (except in the case of a
lease) the Company shall be released from the obligations under the Notes and
the Indenture except with respect to any obligations that arise from, or are
related to, such transaction.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise) of all or substantially all of the properties and assets of one or
more Subsidiaries, the Company's interest in which constitutes all or
substantially all of the properties and assets of the Company shall be deemed to
be the transfer of all or substantially all of the properties and assets of the
Company.
Limitation on Lines of Business
The Indenture provides that neither the Company nor any of its Subsidiaries
shall directly or indirectly engage to any substantial extent in any line or
lines of business activity other than that which, in the reasonable good faith
judgment of the Board of Directors of the Company, is a Related Business.
Restriction on Sale and Issuance of Subsidiary Stock
The Indenture provides that the Company will not sell, and the Subsidiary
Guarantors will not issue or sell, any shares of Capital Stock (other than
directors qualifying shares) of any Subsidiary of the Company to any person
other than the Company or a wholly owned Subsidiary of the Company, except for
shares of common stock with no preferences or special rights or privileges and
with no redemption or prepayment provisions. Notwithstanding the foregoing, (a)
the Company and the Subsidiary Guarantors may consummate an Asset Sale of all of
the Capital Stock owned by the Company and the Subsidiary Guarantors of any
Subsidiary and (b) the Company or any Subsidiary Guarantor may pledge,
hypothecate or otherwise grant a Lien on any Capital Stock of any Subsidiary to
the extent not prohibited under the covenant "Limitation on Liens."
Future Subsidiary Guarantors
The Indenture provides that all future Subsidiaries of the Company jointly
and severally will guaranty irrevocably and unconditionally all principal,
premium, if any, and interest and Liquidated Damages, if any, on the Notes on a
basis senior in right of payment to all existing and future subordinated
Indebtedness of such Subsidiaries. The term Subsidiary does not include
Unrestricted Subsidiaries.
Limitation on Merger of Subsidiary Guarantors and Release of Subsidiary
Guarantors
The Indenture provides that no Subsidiary Guarantor shall consolidate or
merge with or into (whether or not such Subsidiary Guarantor is the surviving
person) another person unless (i) subject to the provisions of the following
paragraph and certain other provisions of the Indenture, the person formed by or
surviving any such consolidation or merger (if other than such Subsidiary
Guarantor) assumes all the obligations of such
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Subsidiary Guarantor pursuant to a supplemental indenture in form reasonably
satisfactory to the Trustee, pursuant to which such person shall unconditionally
guarantee, on a basis senior in right of payment to all existing and future
subordinated Indebtedness of such person, all of such Subsidiary Guarantor's
obligations under such Subsidiary Guarantor's guarantee and the Indenture on the
terms set forth in the Indenture; and (ii) immediately before and immediately
after giving effect to such transaction on a pro forma basis, no Default or
Event of Default shall have occurred or be continuing.
Upon the sale or disposition (whether by merger, stock purchase, asset sale
or otherwise) of a Subsidiary Guarantor (or all or substantially all of the
assets of any such Subsidiary Guarantor or 50% or more of the Equity Interests
of any such Subsidiary Guarantor) to an entity which is not a Subsidiary
Guarantor or the designation of a Subsidiary to become an Unrestricted
Subsidiary, which transaction is otherwise in compliance with the Indenture
(including, without limitation, the provisions of the covenant "Limitations on
Sale of Assets and Subsidiary Stock"), such Subsidiary Guarantor will be deemed
released from its obligations under its Guarantee of the Notes; provided,
however, that any such termination shall occur only to the extent that all
obligations of such Subsidiary Guarantor under all of its guarantees of, and
under all of its pledges of assets or other security interests which secure, any
Indebtedness of the Company or any other Subsidiary of the Company shall also
terminate upon such release, sale or transfer.
Limitation on Status as Investment Company
The Indenture prohibits the Company and its Subsidiaries from being
required to register as an "investment company" (as that term is defined in the
Investment Company Act of 1940, as amended), or from otherwise becoming subject
to regulation under the Investment Company Act.
REPORTS
The Indenture provides that whether or not the Company is subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company
shall deliver to the Trustee and, to each Holder and to prospective purchasers
of Notes identified to the Company by an Initial Purchaser, within 15 days after
it is or would have been (if it were subject to such reporting obligations)
required to file such with the Commission, annual and quarterly financial
statements substantially equivalent to financial statements that would have been
included in reports filed with the Commission, if the Company were subject to
the requirements of Section 13 or 15(d) of the Exchange Act, including, with
respect to annual information only, a report thereon by the Company's certified
independent public accountants as such would be required in such reports to the
Commission, and, in each case, together with a management's discussion and
analysis of financial condition and results of operations which would be so
required and, unless the Commission will not accept such reports, file with the
Commission the annual, quarterly and other reports which it is or would have
been required to file with the Commission.
EVENTS OF DEFAULT AND REMEDIES
The Indenture defines an Event of Default as (i) the failure by the Company
to pay any installment of interest (or Liquidated Damages, if any) on the Notes
as and when the same becomes due and payable and the continuance of any such
failure for 30 days, (ii) the failure by the Company to pay all or any part of
the principal, or premium, if any, on the Notes when and as the same becomes due
and payable at maturity, redemption, by acceleration or otherwise, including,
without limitation, payment of the Change of Control Purchase Price or the Asset
Sale Offer Price, or otherwise, (iii) the failure by the Company or any
Subsidiary of the Company to observe or perform any other covenant or agreement
contained in the Notes or the Indenture and, subject to certain exceptions, the
continuance of such failure for a period of 30 days after written notice is
given to the Company by the Trustee or to the Company and the Trustee by the
Holders of at least 25% in aggregate principal amount of the Notes outstanding,
specifying such Default, (iv) certain events of bankruptcy, insolvency or
reorganization in respect of the Company or any of its Significant Subsidiaries,
(v) a default in any Indebtedness of the Company or any of its Subsidiaries,
with an aggregate principal amount in excess of $15 million (a) resulting from
the failure to pay principal at maturity or (b) as a result of which the
maturity of such Indebtedness has been accelerated prior to its stated maturity,
and (vi) final
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unsatisfied judgments not covered by insurance aggregating in excess of $15
million, at any one time rendered against the Company or any of its Subsidiaries
and not stayed, bonded or discharged within 60 days. The Indenture provides that
if an Event of Default occurs and is continuing, the Trustee must, within 90
days after the occurrence of such Event of Default, give to the Holders notice
of such Event of Default.
If an Event of Default occurs and is continuing (other than an Event of
Default specified in clause (iv), above, relating to the Company or any of its
Significant Subsidiaries), then in every such case, unless the principal of all
of the Notes shall have already become due and payable, either the Trustee or
the Holders of at least 25% in aggregate principal amount of the Notes then
outstanding, by notice in writing to the Company (and to the Trustee if given by
Holders) (an "Acceleration Notice"), may declare all principal, determined as
set forth below, and accrued interest (and Liquidated Damages, if any) thereon
to be due and payable immediately. If an Event of Default specified in clause
(iv), above, relating to the Company or any of its Significant Subsidiaries
occurs, all principal and accrued interest (and Liquidated Damages, if any)
thereon will be immediately due and payable on all outstanding Notes without any
declaration or other act on the part of Trustee or the Holders. The Holders of a
majority in aggregate principal amount of Notes generally are authorized to
rescind such acceleration if all existing Events of Default, other than the
non-payment of the principal of, premium, if any, and interest on the Notes
which have become due solely by such acceleration and except on default with
respect to any provision requiring a supermajority approval to amend, which
default may only be waived by such a supermajority, have been cured or waived.
The Holders of a majority in aggregate principal amount of the Notes at the
time outstanding may waive on behalf of all the Holders any default, except a
default with respect to any provision requiring a supermajority approval to
amend, which default may only be waived by such a supermajority, and except a
default in the payment of principal of or interest on any Note not yet cured or
a default with respect to any covenant or provision which cannot be modified or
amended without the consent of the Holder of each outstanding Note affected.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, the Trustee will be under no obligation to exercise any of its rights
or powers under the Indenture at the request, order or direction of any of the
Holders, unless such Holders have offered to the Trustee reasonable security or
indemnity. Subject to all provisions of the Indenture and applicable law, the
Holders of a majority in aggregate principal amount of the Notes at the time
outstanding will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee, or exercising
any trust or power conferred on the Trustee.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Indenture provides that the Company may, at its option, elect to have
its obligations and the obligations of the Subsidiary Guarantors discharged with
respect to the outstanding Notes ("Legal Defeasance"). Such Legal Defeasance
means that the Company shall be deemed to have paid and discharged the entire
indebtedness represented, and the Indenture shall cease to be of further effect
as to all outstanding Notes and Guarantees, except as to (i) rights of Holders
to receive payments in respect of the principal of, premium, if any, and
interest (and Liquidated Damages, if any) on such Notes when such payments are
due from the trust funds; (ii) the Company's obligations with respect to such
Notes concerning issuing temporary Notes, registration of Notes, mutilated,
destroyed, lost or stolen Notes, 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 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 and the Subsidiary Guarantors released with respect
to certain covenants that are described in the Indenture ("Covenant Defeasance")
and thereafter any omission to comply with such obligations shall not constitute
a Default or Event of Default with respect to the Notes. In the event Covenant
Defeasance occurs, certain events (not including non-payment, guarantees,
bankruptcy, receivership, rehabilitation and insolvency events) described under
"Events of Default" will no longer constitute an Event of Default with respect
to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the holders of the Notes, U.S. legal tender,
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U.S. Government Obligations 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 such
Notes on the stated date for payment thereof or on the redemption date of such
principal or installment of principal of, premium, if any, or interest on such
Notes, and the holders of Notes must have a valid, perfected, exclusive security
interest in such trust; (ii) in the case of Legal Defeasance before the date
that is one year prior to the Stated Maturity, 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 Notes 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
Defeasance had not occurred; (iii) in the case of Covenant Defeasance before the
date that is one year prior to the Stated Maturity, the Company shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to such Trustee confirming that the holders of such Notes will not
recognize income, gain or loss for federal income tax purposes as a result of
such Covenant Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such Covenant Defeasance had not occurred; (iv) no Default or Event of Default
shall have occurred and be continuing on the date of such deposit; (v) such
Legal Defeasance or Covenant Defeasance shall not result in a breach or
violation of, or constitute a default under the Indenture or any other material
agreement or instrument to which the Company or any 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 Officers' Certificate stating
that the deposit was not made by the Company with the intent of preferring the
holders of such Notes over any other creditors of the Company or with the intent
of defeating, hindering, delaying or defrauding any other creditors of the
Company or others; and (vii) the Company shall have delivered to the Trustee an
Officers' Certificate and an opinion of counsel, each stating that the
conditions precedent provided for in, in the case of the Officers' Certificate,
(i) through (vi) and, in the case of the opinion of counsel, clauses (i), (with
respect to the validity and perfection of the security interest) (ii), (iii) and
(v) of this paragraph have been complied with.
AMENDMENTS AND SUPPLEMENTS
The Indenture contains provisions permitting the Company, the Subsidiary
Guarantors and the Trustee to enter into a supplemental indenture for certain
limited purposes without the consent of the Holders. With the consent of the
Holders of not less than a majority in aggregate principal amount of the Notes
at the time outstanding, the Company, the Subsidiary Guarantors and the Trustee
are permitted to amend or supplement the Indenture or any supplemental indenture
or modify the rights of the Holders; provided that no such modification may,
without the consent of holders of at least 66 2/3% in aggregate principal amount
of Notes at the time outstanding, modify the provisions (including the defined
terms used therein) of the covenant "Repurchase of Notes at the Option of the
Holder Upon a Change of Control" or the guarantee provisions of the Indenture in
a manner adverse to the holders; and provided, that no such modification may,
without the consent of each Holder affected thereby: (i) change the Stated
Maturity on any Note, or reduce the principal amount thereof or the rate (or
extend the time for payment) of interest thereon or any premium payable upon the
redemption at the option of the Company thereof, or change the place of payment
where, or the coin or currency in which, any Note or any premium or the interest
thereon is payable, or impair the right to institute suit for the enforcement of
any such payment on or after the Stated Maturity thereof (or, in the case of
redemption at the option of the Company, on or after the Redemption Date), or
reduce the Change of Control Purchase Price or the Asset Sale Offer Price or
alter the provisions (including the defined terms used therein) regarding the
right of the Company to redeem the Notes at its option in a manner adverse to
the Holders, or (ii) reduce the percentage in principal amount of the
outstanding Notes, the consent of whose Holders is required for any such
amendment, supplemental indenture or waiver provided for in the Indenture, or
(iii) modify any of the waiver provisions, except to increase any required
percentage or to provide that certain other provisions of the Indenture cannot
be modified or waived without the consent of the Holder of each
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outstanding Note affected thereby, or (iv) cause the Notes or any Guarantee to
become subordinate in right of payment to any other Indebtedness.
NO PERSONAL LIABILITY OF PARTNERS, STOCKHOLDERS, OFFICERS, DIRECTORS
The Indenture provides that no direct or indirect stockholder, employee,
officer or director, as such, past, present or future of the Company, the
Subsidiary Guarantors or any successor entity shall have any personal liability
in connection with the Indenture or the Notes solely by reason of his or its
status as such stockholder, employee, officer or director. Each Holder of Notes
by accepting a Note waives and releases all such liability, and acknowledges and
consents to the transactions described under "Recapitalization." The waiver and
release are part of the consideration for the issuance of the Notes. Such waiver
may not be effective to waive liabilities under the federal securities laws and
it is the view of the Commission that such a waiver is against public policy.
Notwithstanding the foregoing, nothing in this paragraph shall in any way limit
the obligation of any Subsidiary Guarantor pursuant to any guarantee of the
Notes.
CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness or Disqualified Capital Stock of
any person existing at the time such person becomes a Subsidiary of the Company,
including by designation, or is merged or consolidated into or with the Company
or one of its Subsidiaries.
"Acquisition" means the purchase or other acquisition of any person
(including, without limitation, the acquisition of more than 50% of the Equity
Interests of any person) or all or substantially all the assets of any person by
any other person, whether by purchase, stock purchase, merger, consolidation, or
other transfer, and whether or not for consideration.
"Affiliate" means any person directly or indirectly controlling or
controlled by or under direct or indirect common control with the Company. For
purposes of this definition, the term "control" means the power to direct the
management and policies of a person, directly or through one or more
intermediaries, whether through the ownership of voting securities, by contract,
or otherwise, provided, that, with respect to ownership interest in the Company
and its Subsidiaries, a Beneficial Owner of 10% or more of the total voting
power normally entitled to vote in the election of directors, managers or
trustees, as applicable, shall for such purposes be deemed to constitute
control.
"Average Life" means, as of the date of determination, with respect to any
security or instrument, the quotient obtained by dividing (i) the sum of the
products (a) of the number of months from the date of determination to the date
or dates of each successive scheduled principal (or redemption) payment of such
security or instrument and (b) the amount of each such respective principal (or
redemption) payment by (ii) the sum of all such principal (or redemption)
payments.
"Beneficial Owner" or "beneficial owner" for purposes of the definition of
Change of Control and Affiliate has the meaning attributed to it in Rules 13d-3
and 13d-5 under the Exchange Act (as in effect on the Issue Date), whether or
not applicable.
"Board of Directors" means, with respect to any person, the board of
directors of such person or any committee of the Board of Directors of such
person authorized, with respect to any particular matter, to exercise the power
of the board of directors of such person.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in New York, New York are
authorized or obligated by law or executive order to close.
"Capital Contribution" means a contribution of cash or Cash Equivalents by
Parent to the consolidated stockholders' equity of the Company solely in
exchange for, if anything, shares of the Company's common stock with no
preferences or special rights or privileges and with no redemption or prepayment
provisions.
"Capitalized Lease Obligation" means, as to any person, the obligations of
such Person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP and, for purposes of
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this definition, the amount of such obligations at any date shall be the
capitalized amount of such obligations at such date, determined in accordance
with GAAP.
"Capital Stock" means, with respect to any corporation, any and all shares,
interests, rights to purchase (other than convertible or exchangeable
Indebtedness that is not itself otherwise capital stock), warrants, options,
participations or other equivalents of or interests (however designated) in
stock issued by that corporation.
"Cash Equivalent" means (a) 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 one year from the
date of acquisition; (b) marketable general obligations issued by any state of
the United States of America or any political subdivision of any such state or
any public instrumentality thereof maturing within one year from the date of
acquisition thereof and, at the time of acquisition thereof, having a credit
rating of "A" or better from either Standard & Poor's Ratings Group or Moody's
Investors Service, Inc.; (c) certificates of deposit, time deposits, eurodollar
time deposits, overnight bank deposits or bankers' acceptances having maturities
of not more than one year from the date of acquisition thereof of any domestic
commercial bank, the long-term debt of which is rated at the time of acquisition
thereof at least A or the equivalent thereof by Standard & Poor's Ratings Group,
or A or the equivalent thereof by Moody's Investors Service, Inc. and having
capital and surplus in excess of $500,000,000; (d) repurchase obligations with a
term of not more than seven days for underlying securities of the types
described in clauses (a), (b) and (c) above entered into with any bank meeting
the qualifications specified in clause (c) above; (e) commercial paper rated at
the time of acquisition thereof at least A-2 or the equivalent thereof by
Standard & Poor's Ratings Group or P-2 or the equivalent thereof by Moody's
Investors Service, Inc., or carrying an equivalent rating by a nationally
recognized rating agency, if both of the two named rating agencies cease
publishing ratings of investments, and in either case maturing within 270 days
after the date of acquisition thereof; and (f) interests in any investment
company which invests solely in instruments of the type specified in clauses (a)
through (e) above.
"Consolidated Coverage Ratio" of any person on any date of determination
(the "Transaction Date") means the ratio, on a pro forma basis, of (a) the
aggregate amount of Consolidated EBITDA of such person attributable to
continuing operations and businesses (exclusive of amounts attributable to
operations and businesses permanently discontinued or disposed of) for the
Reference Period to (b) the aggregate Consolidated Fixed Charges of such person
(exclusive of amounts attributable to operations and businesses permanently
discontinued or disposed of, but only to the extent that the obligations giving
rise to such Consolidated Fixed Charges would no longer be obligations
contributing to such person's Consolidated Fixed Charges subsequent to the
Transaction Date) during the Reference Period; provided, that for purposes of
calculating Consolidated EBITDA and Consolidated Fixed Charges for this
definition, (i) Acquisitions which occurred during the Reference Period or
subsequent to the Reference Period and on or prior to the Transaction Date shall
be assumed to have occurred on the first day of the Reference Period, (ii)
transactions giving rise to the need to calculate the Consolidated Coverage
Ratio shall be assumed to have occurred on the first day of the Reference
Period, (iii) the incurrence of any Indebtedness or issuance of any Disqualified
Capital Stock during the Reference Period or subsequent to the Reference Period
and on or prior to the Transaction Date (and the application of the proceeds
therefrom to the extent used to refinance or retire other Indebtedness) shall be
assumed to have occurred on the first day of the Reference Period, and (iv) the
Consolidated Fixed Charges of such person attributable to interest on any
Indebtedness or dividends on any Disqualified Capital Stock bearing a floating
interest (or dividend) rate shall be computed on a pro forma basis as if the
average rate in effect from the beginning of the Reference Period to the
Transaction Date had been the applicable rate for the entire period, unless such
Person or any of its Subsidiaries is a party to an Interest Swap or Hedging
Obligation (which shall remain in effect for the 12-month period immediately
following the Transaction Date) that has the effect of fixing the interest rate
on the date of computation, in which case such rate (whether higher or lower)
shall be used.
"Consolidated EBITDA" means, with respect to any person, for any period,
the Consolidated Net Income of such person for such period adjusted to add
thereto (to the extent deducted from net revenues in determining Consolidated
Net Income), without duplication, the sum of (i) Consolidated income tax
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expense, (ii) Consolidated depreciation and amortization expense (including
amortization of debt discount and deferred financing costs in connection with
any Indebtedness of such person and its Subsidiaries), (iii) Consolidated Fixed
Charges and (iv) all other non-cash charges; provided that Consolidated income
tax expense, depreciation and amortization expense of a Subsidiary of such
person that is less than wholly owned shall only be added to the extent of the
equity interest of such person in such Subsidiary.
"Consolidated Fixed Charges" of any person means, for any period, the
aggregate amount (without duplication and determined in each case in accordance
with GAAP) of (a) interest expensed or capitalized, paid, accrued, or scheduled
to be paid or accrued (including, in accordance with the following sentence,
interest attributable to Capitalized Lease Obligations) of such person and its
Consolidated Subsidiaries during such period, excluding amortization of debt
issuance costs incurred in connection with the Notes or the Credit Agreement but
including (i) original issue discount and non-cash interest payments or accruals
on any Indebtedness, (ii) the interest portion of all deferred payment
obligations, and (iii) all commissions, discounts and other fees and charges
owed with respect to bankers' acceptances and letters of credit financings and
currency and Interest Swap and Hedging Obligations, in each case to the extent
attributable to such period, and (b) the amount of cash dividends paid by such
person or any of its Consolidated Subsidiaries in respect of Preferred Stock
(other than by Subsidiaries of such person to such person or such person's
wholly owned Subsidiaries). For purposes of this definition, (x) interest on a
Capitalized Lease Obligation shall be deemed to accrue at an interest rate
reasonably determined by the Company to be the rate of interest implicit in such
Capitalized Lease Obligation in accordance with GAAP and (y) to the extent such
expense would result in a liability upon the consolidated balance sheet of such
person in accordance with GAAP, interest expense attributable to any
Indebtedness represented by the guaranty by such person or a Subsidiary of such
person of an obligation of another person shall be deemed to be the interest
expense attributable to the Indebtedness guaranteed. Notwithstanding the
foregoing, Consolidated Fixed Charges shall not include (A) costs, fees and
expenses incurred in connection with the Recapitalization, (B) interest expense
on the Old Notes incurred after the Issue Date, provided that on the Issue Date
the Company's obligations under the Old Notes shall have been released to the
extent provided in Article Nine of the indenture governing the Old Notes, and
within 45 days after the Issue Date the Old Notes are redeemed or otherwise
acquired by the Company in compliance with the Old Note indenture and the
Indenture, and (C) any one-time non-cash charge or expense associated with the
write-off of deferred debt issuance costs associated with the Credit Agreement
or the Notes.
"Consolidated Net Income" means, with respect to any person for any period,
the net income (or loss) of such person and its Consolidated Subsidiaries
(determined on a consolidated basis in accordance with GAAP) for such period,
adjusted to exclude (only to the extent included in computing such net income
(or loss) and without duplication): (a) all gains and losses which are either
extraordinary (as determined in accordance with GAAP) or are either unusual or
nonrecurring (including any gain from the sale or other disposition of assets
outside the ordinary course of business or from the issuance or sale of any
capital stock), (b) the net income, if positive, of any person, other than a
Consolidated Subsidiary, in which such person or any of its Consolidated
Subsidiaries has an interest, except to the extent of the amount of any
dividends or distributions actually paid in cash to such person or a
Consolidated Subsidiary of such person during such period, but in any case (i)
not in excess of such person's pro rata share of such person's net income for
such period and (ii) excluding any such payments made to the Company or any
Subsidiary Guarantor pursuant to clause (c) or (d) of the definition of
Permitted Payments, (c) the net income or loss of any person acquired in a
pooling of interests transaction for any period prior to the date of such
acquisition, (d) the net income, if positive, of any of such person's
Consolidated Subsidiaries in the event and solely to the extent that the
declaration or payment of dividends or similar distributions is not at the time
permitted by operation of the terms of its charter or bylaws or any other
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to such Consolidated Subsidiary, (e) the effects of
changes in accounting principles, (f) any non-cash compensation expense in
connection with the exercise of, grant to or repurchase from officers, directors
and employees of stock, stock options or stock equivalents, (g) any one-time
non-cash charge or expense associated with the write-off of deferred debt
issuance costs associated with the Credit Agreement or the Notes, (h) costs,
fees and expenses incurred in connection with the Recapitalization, and (i)
interest expense on the Old Notes incurred after the Issue Date, provided that
on the Issue Date the
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Company's obligations under the Old Notes shall have been released to the extent
provided in Article Nine of the indenture governing the Old Notes, and within 45
days after the Issue Date the Old Notes are redeemed or otherwise acquired by
the Company in compliance with the Old Note indenture and the Indenture.
"Consolidated Net Worth" of any person at any date means the aggregate
consolidated stockholders' equity of such person (plus amounts of equity
attributable to preferred stock) and its Consolidated Subsidiaries, as would be
shown on the consolidated balance sheet of such person prepared in accordance
with GAAP, adjusted to exclude (to the extent included in calculating such
equity), (a) the amount of any such stockholders' equity attributable to
Disqualified Capital Stock or treasury stock of such person and its Consolidated
Subsidiaries, (b) all upward revaluations and other write-ups in the book value
of any asset of such person or a Consolidated Subsidiary of such person
subsequent to the Issue Date, and (c) all investments in subsidiaries that are
not Consolidated Subsidiaries and in persons that are not Subsidiaries.
"Consolidated Subsidiary" means, for any person, each Subsidiary of such
person (whether now existing or hereafter created or acquired) the financial
statements of which are consolidated for financial statement reporting purposes
with the financial statements of such person in accordance with GAAP.
"Consolidation" means, with respect to the Company, the consolidation of
the accounts of its Subsidiaries with those of the Company, all in accordance
with GAAP; provided that "consolidation" will not include consolidation of the
accounts of any Unrestricted Subsidiary with the accounts of the Company. The
term "consolidated" has a correlative meaning to the foregoing.
"Credit Agreement" means the one or more credit agreements (including,
without limitation, the CIT Credit Facility) entered into by and among the
Company, certain of its subsidiaries (if any) and certain financial
institutions, which provide for in the aggregate one or more term loans and/or
revolving credit facilities, including any related notes, guarantees, collateral
documents, instruments and agreements executed in connection therewith, as such
credit agreement and/or related documents may be amended, restated,
supplemented, renewed, replaced or otherwise modified from time to time whether
or not with the same agent, trustee, representative lenders or holders, and,
subject to the proviso to the next succeeding sentence, irrespective of any
changes in the terms and conditions thereof. Without limiting the generality of
the foregoing, the term "Credit Agreement" shall include any amendment,
amendment and restatement, renewal, extension, restructuring, supplement or
modification to any such credit agreement and all refundings, refinancings and
replacements of any such credit agreement, including any agreement (i) extending
the maturity of any Indebtedness incurred thereunder or contemplated thereby,
(ii) adding or deleting borrowers or guarantors thereunder, so long as borrowers
and issuers include one or more of the Company and its Subsidiaries and their
respective successors and assigns, (iii) increasing the amount of Indebtedness
incurred thereunder or available to be borrowed thereunder, provided that on the
date such Indebtedness is incurred it would not be prohibited by the covenant
"Limitation on Incurrence of Additional Indebtedness and Disqualified Capital
Stock," or (iv) otherwise altering the terms and conditions thereof in a manner
not prohibited by the terms hereof.
"Disqualified Capital Stock" means (a) except as set forth in (b), with
respect to any person, Equity Interests of such person that, by its terms or by
the terms of any security into which it is convertible, exercisable or
exchangeable, is, or upon the happening of an event or the passage of time or
both would be, required to be redeemed or repurchased (including at the option
of the holder thereof) by such person or any of its Subsidiaries, in whole or in
part, on or prior to the Stated Maturity of the Notes and (b) with respect to
any Subsidiary of such person (including with respect to any Subsidiary of the
Company), any Equity Interests other than any common equity with no preference,
privileges, or redemption or repayment provisions.
"Equity Interest" of any Person means any shares, interests, participations
or other equivalents (however designated) in such Person's equity, and shall in
any event include any Capital Stock issued by, or partnership or membership
interests in, such Person.
"Event of Loss" means, with respect to any property or asset, any (i) loss,
destruction or damage of such property or asset or (ii) any condemnation,
seizure or taking, by exercise of the power of eminent domain or otherwise, of
such property or asset, or confiscation or requisition of the use of such
property or asset.
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"Excluded Person" means Green Equity Investors, L.P., Robert Miller, Steven
Miller, Michael Miller and their respective Related Parties.
"Exempted Affiliate Transaction" means (a) compensation, indemnification
and other benefits paid or made available (x) pursuant to the employment
agreements between the Company and members of its senior management, or (y) for
or in connection with services actually rendered and comparable to those
generally paid or made available by entities engaged in the same or similar
businesses (including reimbursement or advancement of reasonable out-of-pocket
expenses, loans to officers, directors and employees in the ordinary course of
business consistent with past practice and directors' and officers' liability
insurance), (b) transactions, expenses and payments in connection with the
Recapitalization, (c) any Restricted Payments or other payments or transactions
expressly permitted under the covenant "Limitation on Restricted Payments," (d)
payments to LGA for management services under the Management Services Agreement
in an amount not to exceed $1.0 million in any fiscal year, plus reimbursement
of reasonable out-of-pocket costs and expenses, (e) payments to LGA for
reasonable and customary fees and expenses for financial advisory and investment
banking services provided to the Company in connection with major financial
transactions, and (f) transactions between or among the Company and its
Subsidiaries or between or among Subsidiaries of the Company, provided that any
ownership interest in any such Subsidiary which is not beneficially owned
directly or indirectly by the Company or any of its Subsidiaries is not
beneficially owned by an Affiliate of the Company or Parent other than by virtue
of the direct or indirect ownership interest in such Subsidiary held (in the
aggregate) by the Company and/or one or more of its Subsidiaries.
"GAAP" means United States 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 approved by a significant segment of the
accounting profession in the United States as in effect on the Issue Date.
"Indebtedness" of any person means, without duplication, (a) all
liabilities and obligations, contingent or otherwise, of such any person, to the
extent such liabilities and obligations would appear as a liability upon the
consolidated balance sheet of such person in accordance with GAAP, (i) in
respect of borrowed money (whether or not the recourse of the lender is to the
whole of the assets of such person or only to a portion thereof), (ii) evidenced
by bonds, notes, debentures or similar instruments, (iii) representing the
balance deferred and unpaid of the purchase price of any property or services,
except those incurred in the ordinary course of its business that would
constitute ordinarily a trade payable to trade creditors; (b) all liabilities
and obligations, contingent or otherwise, of such person (i) evidenced by
bankers' acceptances or similar instruments issued or accepted by banks, (ii)
relating to any Capitalized Lease Obligation, or (iii) evidenced by a letter of
credit or a reimbursement obligation of such person with respect to any letter
of credit; (c) all net obligations of such person under Interest Swap and
Hedging Obligations; (d) all liabilities and obligations of others of the kind
described in the preceding clauses (a), (b) or (c) that such person has
guaranteed or that is otherwise its legal liability or which are secured by one
or more Liens on any assets or property of such person; provided that if the
liabilities or obligations which are secured by a Lien have not been assumed in
full by such person or are not such person's legal liability in full, the amount
of such Indebtedness for the purposes of this definition shall be limited to the
lesser of the amount of such Indebtedness secured by such Lien or the fair
market value of the assets or property securing such Lien; (e) any and all
deferrals, renewals, extensions, refinancing and refundings (whether direct or
indirect) of, or amendments, modifications or supplements to, any liability of
the kind described in any of the preceding clauses (a), (b), (c) or (d), or this
clause (e), whether or not between or among the same parties; and (f) all
Disqualified Capital Stock of such Person (measured at the greater of its
voluntary or involuntary maximum fixed repurchase price plus accrued and unpaid
dividends). For purposes hereof, the "maximum fixed repurchase price" of any
Disqualified Capital Stock which does not have a fixed repurchase price shall be
calculated in accordance with the terms of such Disqualified Capital Stock as if
such Disqualified Capital Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to the Indenture, and if such price
is based upon, or measured by, the Fair Market Value of such Disqualified
Capital Stock, such Fair Market Value to be
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determined in good faith by the board of directors of the issuer (or managing
general partner of the issuer) of such Disqualified Capital Stock.
"Interest Swap and Hedging Obligation" means any obligation of any person
pursuant to any interest rate swap agreement, interest rate cap agreement,
interest rate collar agreement, interest rate exchange agreement, currency
exchange agreement or any other agreement or arrangement designed to protect
against fluctuations in interest rates or currency values, including, without
limitation, any arrangement whereby, directly or indirectly, such person is
entitled to receive from time to time periodic payments calculated by applying
either a fixed or floating rate of interest on a stated notional amount in
exchange for periodic payments made by such person calculated by applying a
fixed or floating rate of interest on the same notional amount.
"Investment" by any person in any other person means (without duplication)
(a) the acquisition (whether by purchase, merger, consolidation or otherwise) by
such person (whether for cash, property, services, securities or otherwise) of
capital stock, bonds, notes, debentures, partnership or other ownership
interests or other securities, including any options or warrants, of such other
person or any agreement to make any such acquisition; (b) the making by such
person of any deposit with, or advance, loan or other extension of credit to,
such other person (including the purchase of property from another person
subject to an understanding or agreement, contingent or otherwise, to resell
such property to such other person) or any commitment to make any such advance,
loan or extension (but excluding accounts receivable, endorsements for
collection or deposits arising in the ordinary course of business); (c) other
than guarantees of Indebtedness of the Company or any Subsidiary Guarantor to
the extent permitted by the covenant "Limitation on Incurrence of Additional
Indebtedness and Disqualified Capital Stock," the entering into by such person
of any guarantee of, or other credit support or contingent obligation with
respect to, Indebtedness or other liability of such other person; (d) the making
of any capital contribution by such person to such other person; and (e) the
designation by the Board of Directors of the Company of any person to be an
Unrestricted Subsidiary. The Company shall be deemed to make an Investment in an
amount equal to the fair market value of the net assets of any subsidiary (or,
if neither the Company nor any of its Subsidiaries has theretofore made an
Investment in such subsidiary, in an amount equal to the Investments being
made), at the time that such subsidiary is designated an Unrestricted
Subsidiary, and any property transferred to an Unrestricted Subsidiary from the
Company or a Subsidiary of the Company shall be deemed an Investment valued at
its fair market value at the time of such transfer. The amount of any such
Investment shall be reduced by any liabilities or obligations of the Company or
any of its Subsidiaries to be assumed or discharged in connection with such
Investment by an entity other than the Company or any of its Subsidiaries. For
purposes of clarification and greater certainty, the designation of a newly
formed subsidiary as an Unrestricted Subsidiary and the initial capitalization
thereof under clause (d) of the definition of Permitted Payment shall not
constitute an Investment.
"Issue Date" means the date of first issuance of the Notes under the
Indenture.
"Lien" means any mortgage, charge, pledge, lien (statutory or otherwise),
privilege, security interest, hypothecation or other encumbrance upon or with
respect to any property of any kind, real or personal, movable or immovable, now
owned or hereafter acquired.
"Management Services Agreement" means the management services agreement,
dated as of the Issue Date, between Parent, the Company and LGA substantially as
in effect on the Issue Date.
"Net Cash Proceeds" means the aggregate amount of cash or Cash Equivalents
received by the Company in the case of a sale of Qualified Capital Stock or a
Capital Contribution and by the Company and its Subsidiaries in respect of an
Asset Sale plus, in the case of an issuance of Qualified Capital Stock upon any
exercise, exchange or conversion of securities (including options, warrants,
rights and convertible or exchangeable debt) of the Company that were issued for
cash on or after the Issue Date, the amount of cash originally received by the
Company upon the issuance of such securities (including options, warrants,
rights and convertible or exchangeable debt) less, in each case, the sum of all
payments, fees, commissions and (in the case of Asset Sales, reasonable and
customary) expenses (including, without limitation, the fees and expenses of
legal counsel and investment banking fees and expenses) incurred in connection
with such Asset Sale or sale of Qualified Capital Stock, and, in the case of an
Asset Sale only, less (i) the amount (estimated
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reasonably and in good faith by the Company) of income, franchise, sales and
other applicable taxes required to be paid by the Company or any of its
respective Subsidiaries in connection with such Asset Sale, (ii) the amounts of
any repayments of Indebtedness secured, directly or indirectly, by Liens on the
assets which are the subject of such Asset Sale or Indebtedness associated with
such assets which is due by reason of such Asset Sale (i.e., such disposition is
permitted by the terms of the instruments evidencing or applicable to such
Indebtedness, or by the terms of a consent granted thereunder, on the condition
that the proceeds (or portion thereof) of such disposition be applied to such
Indebtedness), and other fees, expenses and other expenditures, in each case,
reasonably incurred as a consequence of such repayment of Indebtedness (whether
or not such fees, expenses or expenditures are then due and payable or made, as
the case may be); (iii) all amounts deemed appropriate by the Company (as
evidenced by a signed certificate of the Chief Financial Officer of the Company
delivered to the Trustee) to be provided as a reserve, in accordance with GAAP,
against any liabilities associated with such assets which are the subject of
such Asset Sale; and (iv) with respect to Asset Sales by Subsidiaries of the
Company, the portion of such cash payments attributable to Persons holding a
minority interest in such Subsidiary.
"Permitted Indebtedness" means any of the following:
(a) that the Company and the Subsidiary Guarantors may incur
Indebtedness evidenced by the Notes and represented by the Indenture up to
the amounts specified therein as of the date thereof;
(b) that the Company and the Subsidiary Guarantors, as applicable, may
incur Refinancing Indebtedness with respect to any Indebtedness or
Disqualified Capital Stock, as applicable, that was permitted by the
Indenture to be incurred and any Indebtedness of the Company outstanding on
the Issue Date (except the Old Notes) after giving effect to the
Recapitalization;
(c) the Company and the Subsidiary Guarantors may incur Indebtedness
solely in respect of bankers's acceptances and letters of credit (in
addition to any such Indebtedness incurred under the Credit Agreement in
accordance with the Indenture) (to the extent that such incurrence does not
result in the incurrence of any obligation to repay any obligation relating
to borrowed money of others), all in the ordinary course of business in
accordance with customary industry practices, in amounts and for the
purposes customary in the Company's industry; provided, that the aggregate
principal amount outstanding of such Indebtedness (including any
Indebtedness issued to refinance, refund or replace such Indebtedness)
shall not exceed $5.0 million;
(d) the Company and the Subsidiary Guarantors may incur Indebtedness
arising from tender, bid, performance or government contract bonds, other
obligations of like nature, or warranty or contractual service obligations
of like nature, in any case, incurred by the Company or the Subsidiary
Guarantors in the ordinary course of business;
(e) the Company and the Subsidiary Guarantors may incur Interest Swap
and Hedging Obligations that are incurred for the purpose of fixing or
hedging interest rate or currency risk with respect to any fixed or
floating rate Indebtedness that is permitted by the Indenture to be
outstanding or any receivable or liability the payment of which is
determined by reference to a foreign currency; provided, that the notional
amount of any such Interest Swap and Hedging Obligation does not exceed the
principal amount of Indebtedness to which such Interest Swap and Hedging
Obligation relates; and
(f) the Company may incur Indebtedness to any Subsidiary Guarantor,
and any Subsidiary Guarantor may incur Indebtedness to any other Subsidiary
Guarantor or to the Company; provided, that, in the case of Indebtedness of
the Company, such obligations shall be unsecured and subordinated in all
respects to the Company's obligations pursuant to the Notes and the date of
any event that causes such Subsidiary Guarantor no longer to be a
Subsidiary Guarantor shall be an Incurrence Date.
"Permitted Investment" means Investments in (a) any of the Notes; (b) Cash
Equivalents; (c) intercompany notes to the extent permitted under clause (f) of
the definition of "Permitted Indebtedness," provided that Indebtedness under any
such notes of a Subsidiary Guarantor shall be deemed to be a Restricted
Investment if such person ceases to be a Subsidiary Guarantor; (d) Investments
in the form of promissory notes of members of the Company's or Parent's
management not to exceed $2.0 million in
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principal amount at any time outstanding solely in consideration of the purchase
by such persons of Qualified Capital Stock of the Company or Parent; (e)
Investments by the Company or any Subsidiary Guarantor in any person that is or
immediately after such Investment becomes a Subsidiary Guarantor, or immediately
after such Investment merges or consolidates into the Company or any Subsidiary
Guarantor in compliance with the terms of the Indenture, provided that such
Person is engaged in all material respects in a Related Business; (f)
Investments in the Company by any Subsidiary Guarantor, provided that in the
case of Indebtedness constituting any such Investment, such Indebtedness shall
be unsecured and subordinated in all respects to the Company's obligations under
the Notes; (g) Investments in securities of trade creditors or customers
received in settlement of obligations that arose in the ordinary course of
business or pursuant to any plan of reorganization or similar arrangement upon
the bankruptcy or insolvency of such trade creditors or customers; (h)
Investments by the Company outstanding on the Issue Date; (i) transactions or
arrangements with officers or directors of the Company or any Subsidiary
Guarantor entered into in the ordinary course of business (including
compensation or employee benefit arrangements with any officer or director of
the Company or any Subsidiary Guarantor permitted under the covenant "Limitation
on Transactions with Affiliates"); (j) Investments in Persons (other than
Affiliates of the Company) received as consideration from Asset Sales to the
extent not prohibited by the covenant "Limitation on Sale of Assets and
Subsidiary Stock"; and (k) additional Investments at any time outstanding not to
exceed the sum of (i) $4.0 million and (ii) the cumulative gain (net of taxes
and all payments, fees, commissions and expenses incurred in such sale or
disposition) realized by the Company and the Subsidiary Guarantors in cash or
Cash Equivalents on the sale or other disposition after the Issue Date of
Investments (including Permitted Investments and Restricted Investments) made
after the Issue Date in accordance with the Indenture (but only to the extent
that such gain is excluded from the net income of the Company and the
Consolidated Subsidiaries by the definition of Consolidated Net Income).
"Permitted Lien" means (a) Liens existing on the Issue Date; (b) Liens
imposed by governmental authorities for taxes, assessments or other charges not
yet subject to penalty or which are being contested in good faith and by
appropriate proceedings, if adequate reserves with respect thereto are
maintained on the books of the Company in accordance with GAAP; (c) statutory
liens of carriers, warehousemen, mechanics, materialmen, landlords, repairmen or
other like Liens arising by operation of law in the ordinary course of business
provided that (i) the underlying obligations are not overdue for a period of
more than 60 days, or (ii) such Liens are being contested in good faith and by
appropriate proceedings and adequate reserves with respect thereto are
maintained on the books of the Company in accordance with GAAP; (d) Liens
securing the performance of bids, trade contracts (other than borrowed money),
leases, statutory obligations, surety and appeal bonds, performance bonds and
other obligations of a like nature incurred in the ordinary course of business;
(e) easements, rights-of-way, zoning, similar restrictions and other similar
encumbrances or title defects which, singly or in the aggregate, do not in any
case materially detract from the value of the property subject thereto (as such
property is used by the Company or any of its Subsidiaries) or interfere with
the ordinary conduct of the business of the Company or any of its Subsidiaries;
(f) Liens arising by operation of law in connection with judgments, only to the
extent, for an amount and for a period not resulting in an Event of Default with
respect thereto; (g) pledges or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other types
of social security legislation; (h) Liens securing the Notes; (i) Liens securing
Indebtedness of a Person existing at the time such Person becomes a Subsidiary
or is merged with or into the Company or a Subsidiary or Liens securing
Indebtedness incurred in connection with an Acquisition, provided that such
Liens were in existence prior to the date of such acquisition, merger or
consolidation, were not incurred in anticipation thereof, and do not extend to
any other assets; (j) Liens arising from Purchase Money Indebtedness permitted
to be incurred under paragraph (a) of the covenant "Limitation on Incurrence of
Additional Indebtedness and Disqualified Capital Stock" provided such Liens
relate solely to the property which is subject to such Purchase Money
Indebtedness; (k) leases or subleases granted to other persons in the ordinary
course of business not materially interfering with the conduct of the business
of the Company or any of its Subsidiaries or materially detracting from the
value of the relative assets of the Company or any Subsidiary; (l) Liens arising
from precautionary Uniform Commercial Code financing statement filings regarding
operating leases entered into by the Company or any of its Subsidiaries in the
ordinary course of business; (m) Liens securing Refinancing Indebtedness
incurred to
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refinance any Indebtedness that was previously so secured in accordance with the
Indenture; (n) Liens securing Indebtedness incurred under the Credit Agreement
in accordance with the Indenture; (o) Liens securing Indebtedness incurred under
paragraph (b) of the covenant "Limitation on Incurrence of Additional
Indebtedness and Disqualified Capital Stock"; and (p) any interest or title of a
lessor under any lease, whether or not characterized as capital or operating,
provided that such Liens do not extend to any property or assets which is not
leased property subject to such lease.
"Permitted Payments" means, without duplication, (a) payments to Parent in
an aggregate amount not to exceed $500,000 in any fiscal year in an amount
sufficient to permit Parent to pay reasonable and necessary operating expenses
and other general corporate expenses to the extent such expenses relate or are
fairly allocable to the Company and its Subsidiaries (including any reasonable
professional fees and expenses, but excluding all expenses payable to or to be
paid to or on behalf of an Excluded Person except in a transaction constituting
an Exempted Affiliate Transaction); (b) payments to Parent to enable Parent to
pay foreign, federal, state or local tax liabilities, not to exceed the amount
of any tax liabilities that would be otherwise payable by the Company and its
Subsidiaries and Unrestricted Subsidiaries to the appropriate taxing authorities
if they filed separate tax returns to the extent that Parent has an obligation
to pay such tax liabilities relating to the operations, assets or capital of the
Company or its Subsidiaries and Unrestricted Subsidiaries, provided such payment
shall either be used by Parent to pay such tax liabilities within 90 days of
Parent's receipt of such payment or refunded to the payee; (c) payments to
Parent by the Company made concurrently with and in an amount equal to or less
than payments to Company (directly or indirectly through one or more Subsidiary
Guarantors) by an Unrestricted Subsidiary, provided that in each case the
Company distributes the same property as that so received by the Company from
such Unrestricted Subsidiary; (d) payments to an Unrestricted Subsidiary by the
Company (directly or indirectly through one or more Subsidiary Guarantors) made
concurrently with and in an amount equal to or less than payments to Company by
Parent, provided that in each case the Company distributes the same property as
that so received by the Company from Parent; (e) payments to redeem or otherwise
acquire the Old Notes after the Issue Date solely with funds used to defease the
Old Notes on the Issue Date in connection with the Recapitalization; (f)
payments to Parent to enable Parent to pay, or the payment by the Company
directly of, the payments provided for by clauses (a), (d) and (e) of the
definition of "Exempted Affiliated Transaction"; (g) cash dividends paid to
Parent to the extent necessary to permit Parent to repurchase common stock,
stock options and stock equivalents of Parent held by former directors, officers
or employees of Parent, the Company or any of the Subsidiary Guarantors, in an
aggregate amount not to exceed in any fiscal year $1,000,000 plus (x) the
cumulative amount by which (1) the product of $1,000,000 times the number of
preceding fiscal years subsequent to the Issue Date exceeds (2) the aggregate
amount of such payments made during such fiscal years, plus (y) the aggregate
net cash consideration received by Parent, after the Issue Date (excluding any
such consideration received by Parent in connection with the Recapitalization)
and prior to or substantially concurrently with the date of such repurchase,
from the sale or issuance of common stock of Parent to directors, officers and
employees of Parent, the Company and the Subsidiary Guarantors (including, to
the extent not otherwise included in the amount of such cash consideration, cash
repayments of principal received by Parent on loans made to such persons to
enable them to purchase such stock) to the extent such cash consideration was
contributed to the Company as a Capital Contribution less any payments made in
such fiscal year under clause (j) of this definition; (h) payments to Parent in
amounts sufficient to permit Parent to pay amounts required to be paid under the
Tax Indemnity Agreement dated September 25, 1992 among Parent, PE, Thrifty and
TCH Corporation; (i) Restricted Payments in an aggregate amount not to exceed
$4.0 million; and (j) cash dividends paid to Parent in an aggregate amount not
to exceed $1.0 million to the extent necessary to permit Parent to repurchase
common stock, stock options and stock equivalents of Parent held by former
directors, officers or employees of Thrifty.
"Public Equity Offering" means an underwritten offering of common stock of
the Company or Parent for cash pursuant to an effective registration statement
under the Securities Act, provided at the time of or upon consummation of such
offering, such common stock of the Company or Parent is listed on a national
securities exchange or quoted on the national market system of the Nasdaq Stock
Market.
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"Purchase Money Indebtedness" of any person means any Indebtedness of such
person to any seller or other person incurred to finance the acquisition or
construction (including in the case of a Capitalized Lease Obligation, the
lease) of any business or real or personal tangible property (or, in each case,
any interest therein) acquired or constructed after the Issue Date which, in the
reasonable good faith judgment of the Board of Directors of the Company, is
related to a Related Business of the Company and which is incurred concurrently
with, or within 180 days of, such acquisition or the completion of such
construction and, if secured, is secured only by the assets so financed.
"Qualified Capital Stock" means any Capital Stock that is not Disqualified
Capital Stock.
"Qualified Exchange" means any legal defeasance, redemption, retirement,
repurchase or other acquisition of Capital Stock or Indebtedness of the Company
issued on or after the Issue Date with the Net Cash Proceeds received by the
Company from the substantially concurrent sale of its Qualified Capital Stock or
any exchange of Qualified Capital Stock of the Company for any Capital Stock or
Indebtedness of the Company issued on or after the Issue Date.
"Reference Period" with regard to any person means the four full fiscal
quarters (or such lesser period during which such person has been in existence)
ended immediately preceding any date upon which any determination is to be made
pursuant to the terms of the Notes or the Indenture.
"Refinancing Indebtedness" means Indebtedness or Disqualified Capital Stock
(a) issued in exchange for, or the proceeds from the issuance and sale of which
are used substantially concurrently to repay, redeem, defease, refund,
refinance, discharge or otherwise retire for value, in whole or in part, or (b)
constituting an amendment, modification or supplement to, or a deferral or
renewal of ((a) and (b) above are, collectively, a "Refinancing"), any
Indebtedness or Disqualified Capital Stock in a principal amount or, in the case
of Disqualified Capital Stock, liquidation preference, not to exceed (after
deduction of the amount of fees, consents, premiums, prepayment penalties and
reasonable expenses incurred in connection with such Refinancing) the lesser of
(i) the principal amount or, in the case of Disqualified Capital Stock,
liquidation preference, of the Indebtedness or Disqualified Capital Stock so
Refinanced and (ii) if such Indebtedness being Refinanced was issued with an
original issue discount, the accreted value thereof (as determined in accordance
with GAAP) at the time of such Refinancing; provided, that (A) such Refinancing
Indebtedness of any Subsidiary of the Company shall only be used to Refinance
outstanding Indebtedness or Disqualified Capital Stock of such Subsidiary, (B)
such Refinancing Indebtedness shall (x) not have an Average Life shorter than
the Indebtedness or Disqualified Capital Stock to be so refinanced at the time
of such Refinancing and (y) in all respects, be no less subordinated or junior,
if applicable, to the rights of Holders of the Notes than was the Indebtedness
or Disqualified Capital Stock to be refinanced, (C) such Refinancing
Indebtedness shall have a final stated maturity or redemption date, as
applicable, no earlier than the final stated maturity or redemption date, as
applicable, of the Indebtedness or Disqualified Capital Stock to be so
refinanced, and (D) such Refinancing Indebtedness shall be secured (if secured)
in a manner no more adverse to the Holders of the Notes than the terms of the
Liens (if any) securing such refinanced Indebtedness, including, without
limitation, the amount of Indebtedness secured shall not be increased (except by
the amount of fees, consents, premiums, prepayment penalties and reasonable
expenses incurred in connection with such Refinancing). For purposes of
clarification and greater certainty, if Indebtedness permitted by the terms of
this Indenture (including clauses (a), (b) and (c) of the second paragraph of
"Limitation on Incurrence of Additional Indebtedness and Disqualified Capital
Stock") is repaid, redeemed, defeased, refunded, refinanced, discharged or
otherwise retired for value from the proceeds of Refinancing Indebtedness, the
maximum amount of such Refinancing Indebtedness shall be determined in
accordance with the provisions of this definition, and the amount of such
Refinancing Indebtedness in excess of the amount of such Indebtedness (as
permitted by this definition) shall not reduce the amount of Indebtedness
permitted by the terms of this Indenture (including, without limitation, not
reducing or counting towards the amounts set forth in such clauses (a), (b) and
(c)).
"Related Business" means the business conducted (or proposed to be
conducted, including the activities referred to as being contemplated by the
Company, as described or referred to in this Offering Memorandum) by the Company
as of the Issue Date and any and all businesses that in the good faith judgment
of the Board
80
<PAGE> 86
of Directors of the Company are reasonably related businesses, including
reasonably related extensions thereof.
"Related Party" means (i) with respect to any Excluded Person, (A) any
controlling stockholder, 80% or more owned Subsidiary, or spouse or immediate
family member (in the case of an individual) of such Excluded Person 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 Excluded Person and/or such other
persons referred to in the immediately preceding clause (A), and (ii) only with
respect to GEI (and in addition to the persons described in the foregoing clause
(i)) any partnership or corporation which is managed by or controlled by LGP or
any affiliate thereof.
"Restricted Investment" means, in one or a series of related transactions,
any Investment, other than investments in Cash Equivalents and other Permitted
Investments; provided, however, that a merger of another person with or into the
Company or a Subsidiary Guarantor in accordance with the terms of the Indenture
shall not be deemed to be a Restricted Investment so long as the surviving
entity is the Company or a direct wholly owned Subsidiary Guarantor.
"Restricted Payment" means, with respect to any person, (a) the declaration
or payment of any dividend or other distribution in respect of Equity Interests
of such person or any Subsidiary of such person, (b) any payment on account of
the purchase, redemption or other acquisition or retirement for value of Equity
Interests of such person or any Subsidiary of such person, (c) other than with
the proceeds from the substantially concurrent sale of, or in exchange for,
Refinancing Indebtedness, any purchase, redemption, or other acquisition or
retirement for value of, any payment in respect of any amendment of the terms of
or any defeasance of, any Subordinated Indebtedness, directly or indirectly, by
such person or any Subsidiary of such person prior to the scheduled maturity,
any scheduled repayment of principal, or scheduled sinking fund payment, as the
case may be, of such Indebtedness and (d) any Restricted Investment by such
person; provided, however, that the term "Restricted Payment" does not include
(i) any dividend, distribution or other payment on or with respect to Equity
Interests of the Company to the extent payable solely in shares of Qualified
Capital Stock of the Company; (ii) any dividend, distribution or other payment
to the Company, or to any of the Subsidiary Guarantors, by the Company or any of
its Subsidiaries; (iii) payments made pursuant to the Recapitalization
(including, without limitation, bonuses not to exceed $750,000 in the aggregate
payable to certain members of the Company's senior management at the time of or
promptly after the Recapitalization); (iv) Permitted Investments; or (v) pro
rata dividends and other distributions on Equity Interests of any Subsidiary
Guarantor by such Subsidiary Guarantor.
"Sale and Leaseback Transaction" means any transaction by which the Company
or a Subsidiary Guarantor, directly or indirectly, becomes liable as a lessee or
as a guarantor or other surety with respect to any lease of any property
(whether real or personal or mixed), whether now owned or hereafter acquired
that the Company or any Subsidiary Guarantor has sold or transferred or is to
sell or transfer to any other Person in a substantially concurrent transaction
with such assumption of liability.
"Significant Subsidiary" has the meaning provided under Regulation S-X of
the Securities Act, as in effect on the Issue Date.
"Stated Maturity," when used with respect to any Note, means November 15,
2007.
"Subordinated Indebtedness" means Indebtedness of the Company or a
Subsidiary Guarantor that is subordinated in right of payment by its terms or
the terms of any document or instrument or instrument relating thereto to the
Notes or such Guarantee, as applicable, in any respect or has a final stated
maturity after the Stated Maturity.
"Subsidiary," with respect to any person, means (i) a corporation a
majority of whose Equity Interests with voting power, under ordinary
circumstances, to elect directors is at the time, directly or indirectly, owned
by such person, by such person and one or more Subsidiaries of such person or by
one or more Subsidiaries of such person, (ii) any other person (other than a
corporation) in which such person, one or more Subsidiaries of such person, or
such person and one or more Subsidiaries of such person, directly or indirectly,
at the date of determination thereof has at least majority ownership interest,
or (iii) a partnership in which such person or
81
<PAGE> 87
a Subsidiary of such person is, at the time, a general partner. Notwithstanding
the foregoing, an Unrestricted Subsidiary shall not be a Subsidiary of the
Company or of any Subsidiary of the Company. Unless the context requires
otherwise, Subsidiary means each direct and indirect Subsidiary of the Company.
"Unrestricted Subsidiary" means any subsidiary of the Company that does not
own any Capital Stock of, or own or hold any Lien on any property of, the
Company or any other Subsidiary of the Company and that, at the time of
determination, shall be an Unrestricted Subsidiary (as designated by the Board
of Directors of the Company); provided, that (i) such subsidiary shall not
engage, to any substantial extent, in any line or lines of business activity
other than a Related Business, (ii) neither immediately prior thereto nor after
giving pro forma effect to such designation would there exist a Default or Event
of Default and (iii) immediately after giving pro forma effect thereto, the
Company could incur at least $1.00 of Indebtedness pursuant to the Debt
Incurrence Ratio of the covenant "Limitation on Incurrence of Additional
Indebtedness and Disqualified Capital Stock" (provided, however, that this
clause (iii) will not apply in the case of a newly formed subsidiary being
designated an Unrestricted Subsidiary, with the initial capitalization thereof
to be effected under clause (d) of the definition of Permitted Payments). The
Board of Directors of the Company may designate any Unrestricted Subsidiary to
be a Subsidiary, provided that (i) no Default or Event of Default is existing or
will occur as a consequence thereof and (ii) immediately after giving effect to
such designation, on a pro forma basis, the Company could incur at least $1.00
of Indebtedness pursuant to the Debt Incurrence Ratio of the covenant
"Limitation on Incurrence of Additional Indebtedness and Disqualified Capital
Stock." Each such designation shall be evidenced by filing with the Trustee a
certified copy of the resolution giving effect to such designation and an
Officers' Certificate certifying that such designation complied with the
foregoing conditions.
"U.S. Government Obligations" means direct non-callable obligations of, or
noncallable obligations guaranteed by, the United States of America for the
payment of which obligation or guarantee the full faith and credit of the United
States of America is pledged.
BOOK-ENTRY, DELIVERY AND FORM
The certificates representing the New Notes will be issued in fully
registered form without interest coupons.
Old Notes sold in reliance on Regulation S will initially be represented by
one or more temporary global Notes in definitive, fully registered form without
interest coupons (each a "Regulation S Global Note") and will be deposited with
the Trustee as custodian for, and registered in the name of, a nominee of DTC
for the accounts of Euroclear and Cedel. Prior to the commencement of the
Exchange Offer or the effectiveness of the shelf registration statement with
respect to the Old Notes, if applicable, beneficial interests in the Regulation
S Global Notes may only be held through Euroclear or Cedel, and any resale or
transfer of such interests to U.S. persons shall not be permitted during such
period unless such resale or transfer is made pursuant to Rule 144A or
Regulation S.
Old Notes sold in reliance on Rule 144A and the New Notes will be
represented by one or more permanent global Notes in definitive, fully
registered form without interest coupons (each a "Restricted Global Note" and
together with the Regulation S Global Note, the "Global Notes") and will be
deposited with the Trustee as custodian for, and registered in the name of, a
nominee of DTC.
Ownership of beneficial interests in a Global Note will be limited to
persons who have accounts with DTC ("participants") or persons who hold
interests through participants. Ownership of beneficial interests in a Global
Note will be shown on, and the transfer of that ownership will be effected only
through, records maintained by DTC or its nominee (with respect to interests of
participants) and the records of participants (with respect to interests of
persons other than participants). Qualified institutional buyers may hold their
interests in a Restricted Global Note directly through DTC if they are
participants in such system, or indirectly through organizations which are
participants in such system.
Investors may hold their interests in a Regulation S Global Note directly
through Cedel or Euroclear, if they are participants in such systems, or
indirectly through organizations that are participants in such system.
82
<PAGE> 88
Investors may also hold such interests through organizations other than Cedel or
Euroclear that are participants in the DTC system. Cedel and Euroclear will hold
interests in the Regulation S Global Notes on behalf of their participants
through DTC.
So long as DTC, or its nominee, is the registered owner or holder of a
Global Note, DTC or such nominee, as the case may be, will be considered the
sole owner or Holder represented by such Global Note for all purposes under the
Indenture and the Notes. No beneficial owner of an interest in a Global Note
will be able to transfer that interest except in accordance with DTC's
applicable procedures, in addition to those provided for under the Indenture
and, if applicable, those of Euroclear and Cedel.
Payments of the principal of, and interest on, a Global Note will be made
to DTC or its nominee, as the case may be, as the registered owner thereof. None
of the Company, the Trustee nor any Paying Agent will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of beneficial ownership interests in a Global Note or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal or interest in respect of a Global Note, will credit participants'
accounts with payments in amounts proportionate to their respective beneficial
interests in the principal amount of such Global Note as shown on the records of
DTC or its nominee. The Company also expects that payments by participants to
owners of beneficial interests in such Global Note held through such
participants will be governed by standing instructions and customary practices,
as is now the case with securities held for the accounts of customers registered
in the names of nominees for such customers. Such payments will be the
responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in, accordance with DTC rules and will be settled in same-day funds. Transfers
between participants in Euroclear and Cedel will be effected in the ordinary way
in accordance with their respective rules and operating procedures.
The Company expects that DTC will take any action permitted to be taken by
a holder of Notes (including the presentation of Notes for exchange as described
below) only at the direction of one or more participants to whose account the
DTC interests in a Global Note is credited and only in respect of such portion
of the aggregate principal amount of Notes as to which such participant or
participants has or have given such direction. However, if there is an Event of
Default under the Notes, DTC will exchange the applicable Global Note for
Certificated Notes, which it will distribute to its participants and which may
be legended if required by applicable law.
The Company understands that: DTC is a limited purpose trust company
organized under the laws of the State of New York, a "Banking organization"
within the meaning of New York Banking Law, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the Uniform Commercial
Code and a "Clearing Agency" registered pursuant to the provisions of Section
17A of the Exchange Act. DTC was created to hold securities for its participants
and facilitate the clearance and settlement of securities transactions between
participants through electronic book-entry changes in accounts of its
participants, thereby eliminating the need for physical movement of certificates
and certain other organizations. Indirect access to the DTC system is available
to others such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a participant, either directly or
indirectly ("indirect participants").
Although DTC, Euroclear and Cedel are expected to follow the foregoing
procedures in order to facilitate transfers of interests in a Global Note among
participants of DTC, Euroclear and Cedel, they are under no obligation to
perform or continue to perform such procedures, and such procedures may be
discontinued at any time. None of the Company, the Trustee nor any Paying Agent
will have any responsibility for the performance by DTC, Euroclear or Cedel or
their respective participants or indirect participants of their respective
obligations under the rules and procedures governing their operations.
Certificated Notes. If DTC is at any time unwilling or unable to continue
as a depositary for the Global Notes and a successor depositary is not appointed
by the Company within 90 days, the Company will issue Certificated Notes, in
exchange for the Global Notes. Holders of an interest in a Restricted Global
Note may
83
<PAGE> 89
receive Certificated Notes, which may bear the legend in accordance with the
DTC's rules and procedures in addition to those provided for under the
Indenture.
PLAN OF DISTRIBUTION
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 the New Notes
received in exchange for Old Notes where such Old Notes were acquired as a
result of market-making activities or other trading activities. Each
broker-dealer that receives New Notes for its own account must acknowledge that
it will deliver a prospectus in connection with any resale of such New Notes.
The Company has agreed that, under certain circumstances it will make this
Prospectus, as amended or supplemented, available to any broker-dealer for use
in connection with any such resale for a period of up to 180 days after the
Expiration Date.
The Company will not receive any proceeds from the sale of the New Notes by
broker-dealers. New Notes received by broker-dealers for their own accounts in
connection with 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 Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or at negotiated prices. Any such resale may be
made directly to purchasers or to or through brokers or dealers who may receive
compensation in the forth of commissions or concessions from any such
broker-dealer or the purchasers of any such New Notes. Any broker-dealer that
acquired Old Notes as a result of market making activities (and not directly
from the Company) and that resells New Notes that were received by it pursuant
to the Exchange Offer, and any broker or dealer that participates in a
distribution of such New Notes, may be deemed to be an "underwriter" within the
meaning of the Securities Act, and any profit on any such resale of New Notes
and any commissions or concessions received by any such persons may be deemed to
be underwriting compensation under the Securities Act. The Letter of Transmittal
states that, by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
LEGAL MATTERS
Irell & Manella LLP will pass upon certain legal matters regarding the
legality of the New Notes for the Company. Certain partners of the law firm of
Irell & Manella LLP own an aggregate of 3,174 shares of Common Stock and 1,200
shares of the Parent New Preferred.
EXPERTS
The financial statements of the Company as of December 29, 1996 and
December 31, 1995 and for the three fiscal years ended December 29, 1996
included herein and elsewhere in the Registration Statement have been included
herein and elsewhere in the Prospectus in reliance upon the report of KPMG Peat
Marwick LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
84
<PAGE> 90
UNITED MERCHANDISING CORP.
(REINCORPORATED IN DELAWARE AS BIG 5 CORP.)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
INDEX TO FINANCIAL STATEMENTS............................................................. F-1
REPORT OF KPMG PEAT MARWICK LLP, INDEPENDENT AUDITORS..................................... F-2
FINANCIAL STATEMENTS
Balance Sheets at December 31, 1995 and December 29, 1996............................... F-3
Statements of Operations for the Fiscal Years Ended January 1, 1995, December 31, 1995
and December 29, 1996................................................................ F-4
Statements of Stockholder's Equity for the Fiscal Years Ended January 1, 1995, December
31, 1995 and December 29, 1996....................................................... F-5
Statements of Cash Flows for the Fiscal Years Ended January 1, 1995, December 31, 1995
and December 29, 1996................................................................ F-6
Notes to Financial Statements........................................................... F-7
UNAUDITED CONDENSED FINANCIAL STATEMENTS
Condensed Balance Sheets at December 29, 1996 (audited) and September 28, 1997.......... F-16
Condensed Statements of Operations for the three and nine month periods ended September
29, 1996 and September 28, 1997...................................................... F-17
Condensed Statements of Cash Flows for the three and nine month periods ended September
29, 1996 and September 28, 1997...................................................... F-18
Notes to Unaudited Condensed Financial Statements....................................... F-19
</TABLE>
F-1
<PAGE> 91
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholder
United Merchandising Corp.:
We have audited the accompanying balance sheets of United Merchandising
Corp. as of December 31, 1995 and December 29, 1996 and the related statements
of operations, stockholder's equity and cash flows for each of the years ended
January 1, 1995, December 31, 1995 and December 29, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of United Merchandising Corp.
as of December 31, 1995 and December 29, 1996 and the results of its operations
and its cash flows for each of the years ended January 1, 1995, December 31,
1995 and December 29, 1996 in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Los Angeles, California
February 26, 1997
F-2
<PAGE> 92
UNITED MERCHANDISING CORP.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29,
1995 1996
(DOLLAR AMOUNTS IN
THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 3,198 $ 4,797
Trade and other receivables, net of allowance for doubtful accounts
of $267 and $464, respectively...................................... 3,377 4,054
Merchandise inventories.............................................. 137,512 134,886
Prepaid expenses..................................................... 1,106 1,031
-------- --------
Total current assets....................................... 145,193 144,768
-------- --------
Property and equipment:
Land................................................................. 3,341 186
Buildings and improvements........................................... 13,261 13,776
Furniture and equipment.............................................. 27,937 30,647
Less accumulated depreciation and amortization....................... (12,023) (17,079)
-------- --------
Net property and equipment................................. 32,516 27,530
-------- --------
Deferred income taxes, net................................................ -- 1,700
Leasehold interest, net of accumulated amortization of $10,202 and
$12,117, respectively................................................... 21,130 16,375
Other assets, at cost, less accumulated amortization of $652 and $713,
respectively............................................................ 2,365 1,829
Goodwill, less accumulated amortization of $630 and $878, respectively.... 5,915 5,667
-------- --------
$207,119 $197,869
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable..................................................... $ 42,812 $ 44,239
Accrued expenses..................................................... 27,387 28,368
Income taxes payable................................................. -- 1,733
-------- --------
Total current liabilities.................................. 70,199 74,340
Deferred rent............................................................. 4,252 5,224
Long-term debt............................................................ 103,594 86,450
-------- --------
Total liabilities.......................................... 178,045 166,014
-------- --------
Commitments and contingencies
Stockholder's equity:
Common stock, no par value. Authorized 2,500 shares; issued and
outstanding 1,300 shares............................................ 35,080 35,080
Accumulated deficit.................................................. (6,006) (3,225)
-------- --------
Net stockholder's equity............................................. 29,074 31,855
-------- --------
$207,119 $197,869
======== ========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 93
UNITED MERCHANDISING CORP.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
YEAR ENDED YEAR ENDED DECEMBER
JANUARY 1, DECEMBER 31, 29,
1995 1995 1996
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Net sales...................................................... $ 364,109 $370,126 $404,265
Cost of goods sold, buying and occupancy....................... 244,777 256,583 277,116
-------- -------- --------
Gross profit.................................... 119,332 113,543 127,149
-------- -------- --------
Operating expenses:
Selling and administrative................................ 92,238 95,158 101,053
Depreciation and amortization............................. 9,180 11,991 9,578
-------- -------- --------
Total operating expenses........................ 101,418 107,149 110,631
-------- -------- --------
Operating income................................ 17,914 6,394 16,518
Interest expense............................................... 11,712 12,347 11,482
-------- -------- --------
Income (loss) before income taxes and extraordinary
loss.................................................... 6,202 (5,953) 5,036
Income taxes................................................... 1,903 368 970
-------- -------- --------
Income (loss) before extraordinary loss................... 4,299 (6,321) 4,066
Extraordinary loss from early extinguishment of debt, net of
income tax benefit........................................... (2,855) -- (1,285)
-------- -------- --------
Net income (loss)............................... $ 1,444 $ (6,321) $ 2,781
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 94
UNITED MERCHANDISING CORP.
STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED JANUARY 1, 1995, DECEMBER 31, 1995 AND DECEMBER 29, 1996
<TABLE>
<CAPTION>
RETAINED EARNINGS
(ACCUMULATED
COMMON STOCK DEFICIT)
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C>
Balance at January 2, 1994...................................... $ 34,916 $ (1,129)
Contribution of capital......................................... 185 --
Distribution of capital......................................... (21) --
Net income for the year ended January 1, 1995................... -- 1,444
------ ------
Balance at January 1, 1995...................................... 35,080 315
Net loss for the year ended December 31, 1995................... -- (6,321)
------ ------
Balance at December 31, 1995.................................... 35,080 (6,006)
Net income for the year ended December 29, 1996................. -- 2,781
------ ------
Balance at December 29, 1996.................................... $ 35,080 $ (3,225)
====== ======
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 95
UNITED MERCHANDISING CORP.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 1, DECEMBER 31, DECEMBER 29
1995 1995 1996
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................... $ 1,444 $ (6,321) $ 2,781
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization................... 9,180 11,991 9,578
Amortization of deferred finance charges........ 538 429 621
Deferred tax provision (benefit)................ (178) 368 (1,700)
Extraordinary loss from early extinguishment of
debt.......................................... 4,758 -- 2,222
Change in assets and liabilities:
Merchandise inventories.................... (17,972) 13,539 2,626
Trade accounts receivable, net............. (912) 803 (677)
Prepaid expenses and other assets.......... (198) 122 342
Income taxes............................... 888 (178) 1,733
Accounts payable........................... 17,743 (21,165) 1,427
Accrued expenses........................... (644) (3,412) 845
------- ------- ---------
Net cash provided by (used in)
operating activities................ 14,647 (3,824) 19,798
------- ------- ---------
Cash flows from investing activities:
Purchases of property and equipment.................. (9,153) (6,822) (3,453)
Purchase of assets pending sale and leaseback
(note 12).......................................... -- -- (8,910)
Proceeds from sale of property and equipment......... -- -- 13,902
Acquisition of business.............................. -- (1,000) --
Other assets......................................... (189) 448 --
------- ------- ---------
Net cash provided by (used in)
investing activities................ (9,342) (7,374) 1,539
------- ------- ---------
Cash flows from financing activities:
Net borrowings (repayments) under revolving credit
facilities......................................... 60,000 7,144 (17,144)
Repayments of term loan.............................. (44,000) -- --
Repayment of long-term debt, net..................... (18,550) -- --
Debt issuance costs.................................. (1,060) (416) (1,434)
Debt prepayment premiums............................. (1,491) -- (1,160)
Contribution of capital.............................. 164 -- --
------- ------- ---------
Net cash provided by (used in)
financing activities................ (4,937) 6,728 (19,738)
------- ------- ---------
Net increase (decrease) in cash and
cash equivalents.................... 368 (4,470) 1,599
Cash and cash equivalents at beginning of year............ 7,300 7,668 3,198
------- ------- ---------
Cash and cash equivalents at end of year.................. $ 7,668 $ 3,198 $ 4,797
======= ======= =========
Supplemental disclosures of cash flow information:
Interest paid........................................ $ 11,817 $ 12,300 $ 11,285
Income taxes paid.................................... -- -- --
======= ======= =========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 96
UNITED MERCHANDISING CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND DECEMBER 29, 1996
(DOLLAR AMOUNTS IN THOUSANDS)
(1) BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
The accompanying financial statements represent the financial position and
results of operations of United Merchandising Corp. (the Company). The Company
operates as a specialty sporting goods retailer under the Big 5 Sporting Goods
name carrying a broad range of hardlines, softlines and footwear, operating 196
stores at December 29, 1996 in California, Washington, Oregon, New Mexico,
Arizona, Nevada, Idaho (Western states) and Texas.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reporting Period
The Company reports on a 52-53 week fiscal year ending on the Sunday
nearest December 31. All years presented had a 52-week year.
Revenue Recognition
The Company's revenue is received from retail sales of merchandise through
the Company's stores. Revenue is recognized when merchandise is received by the
customer and is shown net of returns. The costs of distribution center
operations are included in cost of sales, buying and occupancy.
Earnings (Loss) per Share
Earnings (loss) per share data are not presented as they are not meaningful
to the financial statements.
Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Merchandise Inventories
The Company values its merchandise inventories using the lower of average
cost (which approximates the first-in, first-out cost) or market method.
Property and Equipment
Property and equipment are stated at cost and depreciated over the
estimated useful lives or lease terms, using the straight-line method.
The estimated useful lives are 40 years for buildings, 7 years for fixtures
and equipment and the shorter of the lease term or 10 years for leasehold
improvements. Maintenance and repairs are charged to expense as incurred.
Leasehold Interest
Upon acquisition of the Company, certain assets were recorded for the net
fair value of favorable operating lease agreements. The leasehold interest asset
is being amortized over an average of ten years on a straight-line basis. The
unamortized balance attributable to leases terminated since the acquisition has
been reflected as a component of the gain or loss upon disposition of the
underlying properties.
F-7
<PAGE> 97
UNITED MERCHANDISING CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)
Goodwill
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over periods ranging
from 15 to 30 years.
Other Assets
Other assets consist principally of deferred financing costs and such costs
are amortized straight line over the terms of the respective debt.
Self-Insurance Reserves
The Company maintains self-insurance programs for workers' compensation and
general liability risks. The Company is self-insured up to specified
per-occurrence limits and maintains insurance coverage for losses in excess of
specified amounts. Estimated costs under these programs, including incurred but
not reported claims, are recorded as expenses based upon actuarially determined
historical experience and trends of paid and incurred claims.
Preopening Expenses
New store preopening expenses are charged against operations as incurred.
Advertising Expenses
The Company recognizes advertising costs the first time the advertising
takes place. Advertising expenses amounted to $20,423 for the year ended January
1, 1995, $22,621 for the year ended December 31, 1995 and $23,209 for the year
ended December 29, 1996. Advertising expense is included in selling and
administrative.
Income Taxes
The Company accounts for income taxes under the asset and liability method
whereby deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. The realizability of deferred tax assets is
assessed throughout the year and a valuation allowance is established
accordingly.
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from these estimates.
Concentration of Credit Risk
Customer purchases are generally transacted using cash or credit cards. In
certain instances, the Company grants credit to schools and youth-oriented
organizations, under normal trade terms. Trade accounts receivable were
approximately $200 and $355 at December 31, 1995 and December 29, 1996,
respectively. Credit losses have historically been within management's
expectations.
F-8
<PAGE> 98
UNITED MERCHANDISING CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)
Impairment of Long-Lived Assets
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," in the first quarter of
fiscal 1996. The statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
are reported at the lower of the carrying amount or fair value less costs to
sell. Adoption of this statement did not have a material impact on the Company's
financial position, results of operations or liquidity.
Stock Compensation
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," which
permits entities to recognize as expense over the vesting period the fair value
of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also
allows entities to continue to apply the provisions of APB Opinion No. 25 and
provide pro forma net income disclosures for employee stock option grants made
in 1995 and future years as if the fair-value-based method defined in SFAS No.
123 had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and to provide the pro forma disclosure
provisions of SFAS No. 123.
Reclassifications
Certain reclassifications of the prior year financial statements have been
made to conform to the 1996 presentation.
(3) FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value.
Cash and cash equivalents, trade and other receivables, trade accounts
payable and accrued expenses: The carrying amounts approximate the fair values
of these instruments due to their short-term nature.
The fair value of the Company's senior subordinated notes at December 29,
1996 approximated $37,540 based on recent market prices. The carrying amount of
the revolving credit facility reflects the fair value based on current rates
available to the Company for debt of the same remaining maturities. See note 4
for interest rates on outstanding long-term debt.
(4) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29,
1995 1996
<S> <C> <C>
Revolving credit facility....................... $ 67,144 $ 50,000
Senior subordinated debt........................ 36,450 36,450
-------- -------
Total long-term debt.................. $103,594 $ 86,450
======== =======
</TABLE>
Effective March 8, 1996, the Company entered into a credit agreement (the
CIT Credit Agreement) among the Company and the CIT Group, which provided the
Company with a three-year nonamortizing
F-9
<PAGE> 99
UNITED MERCHANDISING CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)
$100,000 revolving debt facility (the CIT Facility). Proceeds from the initial
funding under the CIT Facility were used to repay in full all of the Company's
outstanding obligations under its then existing revolving credit facility with
General Electric Capital Corporation (the GECC Facility).
Pursuant to the refinancing, the Company incurred a charge of $2,222,
consisting of $1,160 in prepayment penalties and $1,062 related to a write-off
of deferred finance costs related to the GECC Facility. The total charge is
reflected as an extraordinary loss from early extinguishment of debt, net of
income taxes of $937, in the statement of operations for the year ended December
29, 1996.
Prior to March 8, 1996, the Company operated under a credit agreement dated
October 20, 1994 as amended among the Company, General Electric Capital
Corporation as Agent and Wells Fargo Bank, which provided the Company with a
five-year nonamortizing $100,000 revolving debt facility. Proceeds from the
initial funding under the GECC Facility were used to repay in full all of the
Company's outstanding obligations under its then existing revolving debt
facility and term debt loan with Union Bank of Switzerland, as agent and lender
(the UBS Facility). Additionally, the GECC Facility allowed the Company to use
up to $22,000 to repurchase the Company's senior subordinated debt (the Senior
Debt). In 1994, the Company had repurchased $18,550 in the principal amount of
the Senior Debt, utilizing $14,550 in borrowings under the GECC Facility. The
Company paid a premium of $1,491 related to the repurchase of Senior Debt during
1994 and recorded a charge of $3,267 reflecting acceleration of the financing
fees related to the retired UBS Facility and Senior Debt which were being
amortized over the respective terms of the two facilities. The total charge of
$4,758 is reflected as an extraordinary loss from early extinguishment of debt,
net of income taxes of $1,903, in the statement of operations for the year ended
January 1, 1995.
The CIT Facility bears interest at various rates based on the adjusted
Eurorate (5.875% at December 29, 1996) plus 2.5% (LIBOR Borrowings) or the prime
lending rate (8.25% at December 29, 1996) plus .75% (Base Rate Borrowings) and
was secured by the trade accounts receivable, merchandise inventory and general
intangible assets (as defined) of the Company. A fee of 3/8% is assessed on the
unused portion of the facility. On December 29, 1996, the Company had $50,000 in
LIBOR Borrowings and Letters of Credit of $4,368 outstanding. The Company's
maximum eligible borrowing available under the facility is limited to 65% of
eligible inventory. Available borrowings on the CIT Facility amounted to $27,632
at December 29, 1996.
The unsecured senior subordinated debt is due 2002 and bears interest at
13.625%. The notes require mandatory sinking fund payments of 25% at September
15, 2000 and 2001. The notes may be redeemed in whole or from time to time in
part at any time on and after September 15, 1997, at the option of the Company,
at the redemption price set forth below with respect to the indicated redemption
date, together with any accrued but unpaid interest to such redemption date.
If redeemed during the 12-month period beginning September 15:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
<S> <C>
1997................................... 105.839%
1998................................... 103.893
1999................................... 101.946
2000 and thereafter.................... 100.000
=======
</TABLE>
The various debt agreements contain restrictions on working capital,
acquisition of treasury stock and payment of cash dividends. In addition, the
agreements restrict liens on assets and the acquisition or sale of subsidiaries.
F-10
<PAGE> 100
UNITED MERCHANDISING CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)
The aggregate mandatory sinking fund requirements and annual maturities of
long-term debt for each of the five years subsequent to December 29, 1996 are as
follows:
<TABLE>
<S> <C>
1997.................................... $ --
1998.................................... --
1999.................................... 50,000
2000.................................... 9,113
2001.................................... 9,113
Thereafter.............................. 18,224
======
</TABLE>
(5) LEASES
The Company currently leases certain stores, distribution facilities,
vehicles and equipment under noncancelable operating leases that expire through
the year 2018. These leases generally contain renewal options for periods
ranging from 5 to 15 years and require the Company to pay all executory costs
such as maintenance and insurance. Certain leases contain options to purchase
the leased assets.
Certain leases contain escalation clauses and provide for contingent
rentals based on percentages of sales. The Company recognizes rental expense on
a straight-line basis over the terms of the underlying leases, without regard to
when rentals are paid. The accrual of the noncash portion of this rental expense
has been included in depreciation and amortization in the accompanying
statements of operations and cash flows and deferred rent in the accompanying
balance sheets.
Rental expense for operating leases consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 1 DECEMBER 31, DECEMBER 29,
1995 1995 1996
<S> <C> <C> <C>
Cash rental payments................................ $ 18,482 21,003 23,670
Noncash rentals..................................... 496 3,344 973
Contingent rentals.................................. 1,275 989 1,038
------- ------- -------
Rental expense............................ $ 20,253 25,336 25,681
======= ======= =======
</TABLE>
Future minimum lease payments (cash rentals) under noncancelable operating
leases (with initial or remaining lease terms in excess of one year) as of
December 29, 1996 are:
<TABLE>
<S> <C>
Year ending:
1997.............................. $ 22,811
1998.............................. 22,478
1999.............................. 21,522
2000.............................. 20,370
2001.............................. 19,822
Thereafter........................ 155,336
--------
$262,339
========
</TABLE>
F-11
<PAGE> 101
UNITED MERCHANDISING CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)
(6) ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29,
1995 1996
<S> <C> <C>
Payroll and related expenses.......................... $ 7,545 $ 8,849
Self-insurance reserves............................... 6,011 4,503
Sales tax............................................. 4,427 4,821
Other................................................. 9,404 10,195
------- -------
$ 27,387 $ 28,368
======= =======
</TABLE>
(7) INCOME TAXES
Income tax expense, excluding tax benefit of extraordinary loss, consists
of the following:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
<S> <C> <C> <C>
1994:
Federal..................................... $ 1,769 $ (151) $ 1,618
State....................................... 312 (27) 285
------ ------- ------
2,081 (178) 1,903
------ ------- ------
1995:
Federal..................................... -- 313 313
State....................................... -- 55 555
------ ------- ------
-- 368 368
------ ------- ------
1996:
Federal..................................... 2,273 (1,445) 828
State....................................... 397 (255) 142
------ ------- ------
$ 2,670 $ (1,700) $ 970
====== ======= ======
</TABLE>
The extraordinary losses in 1994 and 1996 are reported net of tax benefits
of $1,903 and $937, respectively (note 4). Accordingly, the 1996 tax provision
including the tax benefit of the extraordinary loss is $33. The 1994 tax
provision including the tax benefit of the extraordinary loss is zero.
The provision for income taxes differs from the amounts computed by
applying the Federal statutory tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 1, DECEMBER 31, DECEMBER 29,
1995 1995 1996
<S> <C> <C> <C>
Tax expense (benefit) at statutory rate... $ 2,171 $ (2,084) $ 1,763
State taxes, net of Federal benefit....... 364 (363) 307
Increase (decrease) in valuation
allowance, net of IRS adjustment........ 433 2,990 (1,215)
MIS migration fees........................ (1,190) -- --
Other..................................... 125 (175) 115
------- ------- -------
$ 1,903 $ 368 $ 970
======= ======= =======
</TABLE>
F-12
<PAGE> 102
UNITED MERCHANDISING CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)
Deferred tax assets and liabilities consist of the following tax-effected
temporary differences:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29,
1995 1996
<S> <C> <C>
Deferred assets:
Self-insurance reserves................................... $2,050 $1,849
Employee benefits......................................... 1,167 1,577
State taxes............................................... 1,065 73
Net operating loss carryforward........................... 2,427 --
Noncash rentals........................................... 1,488 2,150
Amortization of tangible and intangible assets............ -- 1,292
Other..................................................... 770 1,103
------ ------
Gross deferred tax assets......................... 8,967 8,044
Valuation allowance....................................... (7,475) (4,094)
------ ------
Net deferred tax assets........................... $1,492 $3,950
====== ======
Deferred liabilities:
Basis in fixed assets..................................... $1,252 $2,250
Amortization of tangible and intangible assets............ 240 --
------ ------
Total deferred tax liabilities.................... $1,492 $2,250
====== ======
</TABLE>
In 1996, the Company reduced the valuation allowance to reflect
realizability of its deferred tax assets. In doing so, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversals of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment. At December 29, 1996,
management's assessment indicated that net deferred tax assets of $1,700 were
recoverable. The valuation allowance decrease of $3,381 from the December 31,
1995 balance includes an adjustment for the IRS matter described below.
During 1996, the Company resolved certain audit issues with the IRS which
resulted in the elimination and reclassification of certain temporary
differences. The Company had established a valuation allowance against such
temporary differences in previous years. Accordingly, the impact of resolving
these audit issues was offset in 1996 by a corresponding decrease in the
valuation allowance for those temporary differences eliminated.
For the year ended December 31, 1995, management performed a similar
assessment of the realizability of deferred taxes and concluded that a valuation
allowance for the entire net deferred tax assets was required given the history
of income tax losses experienced by the Company at the time. Accordingly, the
valuation allowance was increased by $2,990 from the January 1, 1995 balance.
(8) EMPLOYEE BENEFIT PLANS
Effective January 4, 1993, the Company established a 401(k) plan to cover
all eligible employees. All employees' contributions may be supplemented by
Company contributions. The Company contributed $1,060 for the year ended January
1, 1995, $667 for the year ended December 31, 1995 and $1,017 for the year ended
December 29, 1996, in employer matching and profit sharing contributions.
Certain employees of the Company participate in a stock option plan of the
parent company's stock. Options are granted by the Board of Directors with
exercise prices equal to the fair market value of the parent company's stock, as
determined by valuation models prepared by the Board. There were no stock
options
F-13
<PAGE> 103
UNITED MERCHANDISING CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)
granted in 1995. For 1996, options to purchase 54,700 shares were granted on
December 31, 1996 at an exercise price of $12 per share. The options vest and
become exercisable in cumulative 20% installments commencing one year from the
date of grant, with full vesting on the fifth anniversary. The plan terminates
on September 25, 2002. Pro forma disclosures as defined by SFAS 123 are not
applicable for the options granted in 1996 as vesting begins in 1997.
The Company has no significant postretirement or postemployment benefits.
(9) RELATED PARTY TRANSACTIONS
The Company received certain administrative support services from a related
party for which the Company pays a negotiated fee based on services provided.
The services were terminated April 1995. These charges totaled $1,099 for the
year ended January 1, 1995 and $61 for the year ended December 31, 1995.
In addition, the Company leases certain property and equipment from a
related party who leases this property and equipment from an outside party.
Charges related to these leases totaled $1,738 for the year ended January 1,
1995 $1,857 for the year ended December 31, 1995 and $1,008 for the year ended
December 29, 1996.
The Company has an agreement to pay $568, plus expenses, annually to an
advisor group of its investor. Certain individuals of the investor advisor group
are members of the Company's Board of Directors. In 1994 and 1996, the Company
paid this advisor group an additional $500 for services related to securing of
the CIT and GECC facilities.
Affiliates of the Company own $250 of the senior subordinated notes.
(10) CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
(11) BUSINESS CONCENTRATIONS
The Company operates specialty sporting goods retail stores located
principally in the Western states of the United States. The retail industry is
impacted by the general economy. Changes in the marketplace may significantly
affect management's estimates and the Company's performance.
(12) SALE LEASEBACK
On March 5, 1996, the Company entered into a sale and leaseback agreement
(the transaction) with regard to its warehouse facility located in Fontana,
California. Prior to this transaction, the Company owned the land associated
with the facility and leased the buildings and improvements. In contemplation of
the transaction, the Company purchased the building and improvements at a
purchase price of $8,910. The transaction was then completed with the sale of
the land, building and improvements at a sale price of $13,900. The gain on the
transaction was insignificant and will be amortized on a straight-line basis
over the related lease term. The net cash proceeds after expenses totaled $4,728
which was used to repay a portion of the GECC Facility (note 4).
Under the leaseback agreement, the Company has committed to lease the
facility for ten years under a noncancelable operating lease. The future minimum
lease payments are reflected in the future minimum lease payments under
noncancelable operating leases (note 5).
F-14
<PAGE> 104
UNITED MERCHANDISING CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)
On October 31, 1996, the Company entered into a sale and leaseback
agreement with regard to its store located in Culver City, California. The sale
amount of the property was $817 resulting in a $214 loss for the Company which
is included in the statements of operations. The Company has committed to lease
the property for 15 years under a noncancelable operating lease. The future
minimum lease payments are reflected in the future minimum lease payments under
noncancelable leases (note 5).
F-15
<PAGE> 105
UNITED MERCHANDISING CORP.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 29, SEPTEMBER 28,
1996 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 4,797 $ 416
Trade and other receivables, net of allowance for doubtful
accounts of $464 and $397, respectively.......................... 4,054 2,232
Merchandise inventories........................................... 134,886 146,513
Prepaid expenses.................................................. 1,031 865
-------- --------
Total current assets.................................... 144,768 150,026
-------- --------
Property and equipment:
Land.............................................................. 186 186
Buildings, improvements, furniture and equipment.................. 44,423 47,064
Less accumulated depreciation and amortization.................... (17,079) (20,487)
-------- --------
Net property and equipment.............................. 27,530 26,763
-------- --------
Deferred income taxes, net............................................. 1,700 4,995
Leasehold interest, net of amortization of $12,117 and $13,441,
respectively......................................................... 16,375 15,051
Other assets, at cost, less accumulated amortization of $713 and
$1,208, respectively................................................. 1,829 1,539
Excess of cost over net assets acquired, less accumulated amortization
of $878 and $1,063, respectively..................................... 5,667 5,482
-------- --------
$197,869 $ 203,856
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable.................................................. $ 44,239 $ 44,453
Accrued expenses.................................................. 30,101 26,015
-------- --------
Total current liabilities............................... 74,340 70,468
Deferred rent.......................................................... 5,224 5,793
Long-term debt......................................................... 86,450 87,226
-------- --------
Total liabilities....................................... 166,014 163,487
-------- --------
Commitments and contingencies
Stockholder's equity
Common stock, no par value. Authorized 2,500 shares; issued and
outstanding 1,300 shares......................................... 35,080 35,103
Retained Earnings (accumulated deficit)........................... (3,225) 5,266
-------- --------
Total stockholder's equity.............................. 31,855 40,369
-------- --------
$197,869 $ 203,856
======== ========
</TABLE>
See accompanying notes to unaudited condensed financial statements.
F-16
<PAGE> 106
UNITED MERCHANDISING CORP.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------------ ------------------------------------
SEPTEMBER 29, 1996 SEPTEMBER 28, 1997 SEPTEMBER 29, 1996 SEPTEMBER 28, 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales......................... $106,523 $117,079 $296,356 $324,177
Cost of goods sold, buying and
occupancy....................... 73,310 80,274 203,420 218,675
------ ------ ------- ------
Gross profit....... 33,213 36,805 92,936 105,502
------ ------ ------- ------
Operating expenses:
Selling and administrative... 25,953 28,532 76,651 82,603
Depreciation and
amortization............... 2,310 2,089 7,109 6,087
------ ------ ------- ------
Total operating
expenses......... 28,263 30,621 83,760 88,690
------ ------ ------- ------
Operating income... 4,950 6,184 9,176 16,812
Interest expense.................. 2,700 2,495 8,589 7,913
------ ------ ------- ------
Income before income taxes
and extraordinary loss..... 2,250 3,689 587 8,899
Income taxes...................... -- 408 -- 408
------ ------ ------- ------
Net income before
extraordinary loss......... 2,250 3,281 587 8,491
Extraordinary loss from early
extinguishment of debt.......... -- -- (2,222) --
------ ------ ------- ------
Net income
(loss)........... $ 2,250 $ 3,281 $ (1,635) $ 8,491
====== ====== ======= ======
</TABLE>
See accompanying notes to unaudited condensed financial statements.
F-17
<PAGE> 107
UNITED MERCHANDISING CORP.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
---------------------------------------
SEPTEMBER 29, 1996 SEPTEMBER 28, 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................... $ (1,635) $ 8,491
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 7,109 6,087
Extraordinary loss from early extinguishment of debt... 2,222 --
Amortization of deferred finance charges............... 454 495
Deferred tax benefit................................... -- (3,295)
Change in assets and liabilities:
Merchandise inventories........................... 1,139 (11,627)
Trade & other receivables......................... 1,855 1,822
Prepaid expenses and other assets................. (153) (54)
Accounts payable.................................. (679) 214
Accrued expenses.................................. (2,785) (4,086)
-------- --------
Net cash (used in) provided by operating
activities................................ 7,527 (1,953)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment......................... (1,555) (3,227)
Purchases of assets held pending sale and leaseback......... (8,910) --
Proceeds from sale of property and equipment................ 13,900 --
-------- --------
Net cash (used in) provided by investing
activities................................ 3,435 (3,227)
-------- --------
Cash flows from financing activities:
Net borrowings under revolving credit facilities............ (8,176) 776
Debt issuance costs......................................... (1,434) --
Debt prepayments............................................ (1,160) --
Other....................................................... -- 23
-------- --------
Net cash provided by (used in) financing
activities................................ (10,770) 799
-------- --------
Net (decrease) increase in cash and cash
equivalents............................... 192 (4,381)
Cash and cash equivalents at beginning of period................. 3,198 4,797
-------- --------
Cash and cash equivalents at end of period....................... $ 3,390 $ 416
======== ========
</TABLE>
See accompanying notes to unaudited condensed financial statements.
F-18
<PAGE> 108
UNITED MERCHANDISING CORP.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
FINANCIAL INFORMATION
1. In the opinion of management of United Merchandising Corp. (the "Company"),
the accompanying unaudited condensed financial statements contain all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly and in accordance with generally accepted accounting
principles the financial position, results of operations and cash flows as of
and for the period ended September 28, 1997.
2. These unaudited condensed financial statements should be read in conjunction
with the Company's 1996 audited financial statements included herein.
3. In October 1997, Big 5 Corporation (the "Parent"), the senior managers of the
Company and the principal stockholder agreed to enter into a Plan of
Recapitalization and Stock Repurchase Agreement (the "Recapitalization"). The
following transactions directly affecting the Company will result from the
Recapitalization: (i) the Company will offer $131.0 million of senior notes;
(ii) the Company will defease and repay its existing senior subordinated
notes (the "Old Notes"); (iii) the Company will amend its revolving credit
facility; and (iv) the Company will dividend approximately $81.6 million to
its Parent.
The Company expects to incur transaction fees of approximately $5.0 million
related to the offering of the $131.0 million of senior notes and $0.3
million related to the amendment of its revolving credit facility. The
Company will incur a write-off of approximately $0.6 million of deferred
financing fees related to the defeasance and repayment of the Old Notes.
4. The Company is being reincorporated in Delaware as Big 5 Corp.
F-19
<PAGE> 109
======================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY BIG 5 CORP. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL, OR THE SOLICITATION OF ANY OFFER TO BUY, ANY SECURITIES OFFERED
HEREBY TO ANY PERSON IN OR BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPRESSION THAT
THERE HAS NOT BEEN A CHANGE IN THE INFORMATION SET FORTH IN THIS PROSPECTUS OR
IN THE AFFAIRS OF BIG 5 CORP. SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. ii
Summary............................... 1
Risk Factors.......................... 11
The Recapitalization.................. 15
Use of Proceeds....................... 15
The Exchange Offer.................... 15
Capitalization........................ 26
Unaudited Pro Forma Condensed
Financial Data...................... 27
Selected Historical Financial Data.... 33
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 35
Business.............................. 41
Management............................ 49
Principal Stockholders................ 53
Certain Relationships and Related
Transactions........................ 54
Financing Arrangements................ 55
Description of the Notes.............. 57
Plan of Distribution.................. 84
Legal Matters......................... 84
Experts............................... 84
Index to Financial Statements......... F-1
</TABLE>
======================================================
======================================================
$131 MILLION
LOGO
BIG 5 CORP.
SERIES B 10 7/8% SENIOR NOTES
DUE 2007
------------------------------
PROSPECTUS
------------------------------
JANUARY 16, 1998
======================================================
<PAGE> 110
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law ("DGCL") provides that
a corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that he is or was a director, officer, employee or agent of the corporation or
is or was serving at its request in such capacity in another corporation or
business association, against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith and in
a manner he reasonably believed to be in or not opposed to the best interests of
the corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
Section 102(b)(7) of the DGCL permits a corporation to provide in its
certificate of incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL,
or (iv) for any transaction from which the director derived an improper personal
benefit.
As permitted by Section 102(b)(7) of the DGCL, the registrant's Restated
Certificate of Incorporation, as amended, includes a provision that limits a
director's personal liability to such registrant or its stockholders for
monetary damages for breaches of his or her fiduciary duty as a director.
Article SEVENTH of the registrant's Restated Certificate of Incorporation, as
amended, provides that no director of the registrant shall be personally liable
to the registrant or its stockholders for monetary damages for breach of
fiduciary duty to the fullest extent permitted by the DGCL.
As permitted by Section 145 of the DGCL, the registrant's Restated
Certificate of Incorporation, as amended, and Bylaws, as amended, provide that,
to the fullest extent permitted by the DGCL, directors, officers and certain
other persons who are made, or are threatened to be made, parties to, or are
involved in, any action, suit or proceeding will be indemnified by the
registrant with respect thereto.
The registrant maintains insurance policies under which its directors and
officers are insured, within the limits and subject to the limitations of the
policies, against expenses in connection with the defense of actions, suits or
proceedings, and certain liabilities that might be imposed as a result of such
actions, suits or proceedings, to which they are parties by reason of being or
having been directors or officers of the registrant.
ITEM 21. EXHIBITS
A list of exhibits included as part of the registration statement is set
forth below:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- --------------------------------------------------------------------------
<S> <C>
3(i)* Restated Certificate of Incorporation of the Company
3(ii)* By-Laws of the Company, as amended October 27, 1997
4.1***** Indenture dated as of November 13, 1997 between the Company and First
Trust National Association, as trustee
4.2***** Form of the Company's Series B 10 7/8% Senior Notes due 2007 (included in
Exhibit 4.1)
5***** Opinion of Irell & Manella LLP (includes consent)
10.1(a)** Employment Agreement between the Company and Robert W. Miller dated as of
January 1, 1993
10.1(b)** Employment Agreement between the Company and Steve G. Miller dated as of
January 1, 1993
</TABLE>
II-1
<PAGE> 111
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- --------------------------------------------------------------------------
<S> <C>
10.1(c)** Sublease between the Company and Thrifty dated as of September 25, 1992
10.2(a)*** Amended and Restated Indemnification Implementation Agreement between the
Company (formerly known as United Merchandising Corp.) and Thrifty Payless
Holdings, Inc. dated as of April 20, 1994
10.2(b)*** Agreement and Release among Pacific Enterprises, Thrifty Payless Holdings,
Inc., Thrifty Payless, Inc., Thrifty and the Company (formerly known as
United Merchandising Corp.) dated as of March 11, 1994
10.3(a)**** Financing Agreement dated March 8, 1996 between The CIT Group/Business
Credit, Inc. and the Company
10.3(b)**** Grant of Security Interest in and Collateral Assignment of Trademarks and
Licenses dated as of March 8, 1996 by the Company in favor of The CIT
Group/Business Credit, Inc.
10.3(c)**** Guarantee dated March 8, 1996 by Big 5 Corporation (now known as Big 5
Holdings Corp.) in favor of The CIT Group/Business Credit, Inc.
10.4(a)**** Agreement on Purchase and Sale among the Company and the State of
Wisconsin dated as of February 13, 1996
10.4(b)**** Lease among the Company (Lessee) and the State of Wisconsin Investment
Board (Lessor) dated as of March 5, 1996
10.5***** Purchase Agreement, dated as of November 13, 1997, by and among the
Company and the Initial Purchasers named therein.
10.6***** Registration Rights Agreement, dated as of November 13, 1997, by and among
the Company and the Initial Purchasers named therein.
10.7***** Management Services Agreement, dated as of November 13, 1997, by and
between the Company, Big 5 Holdings Corp. and Leonard Green & Associates,
L.P.
10.8***** Letter from The CIT Group/Business Credit, Inc. to the Company dated
November 13, 1997, amending the Financing Agreement, dated March 8, 1996
between the Company (formerly known as United Merchandising Corp.) and The
CIT Group/Business Credit, Inc.
23.1 Consent of KPMG Peat Marwick LLP (filed herewith)
23.2***** Consent of Irell & Manella LLP (filed as part of Exhibit 5)
24***** Powers of Attorney of officers and directors of registrant
25***** Statement Regarding Eligibility of Trustee
99.1***** Form of Letter of Transmittal
99.2***** Notice of Guaranteed Delivery
</TABLE>
- ---------------
* Incorporated by reference to the Company's Current Report on Form 8-K
filed November 26, 1997.
** Incorporated by reference to the Company's Registration Statement on Form
S-4 (file no. 33-61096) effective as of June 29, 1993.
*** Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended January 1, 1995.
**** Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
***** Incorporated by reference to the Company's Registration Statement on Form
S-4 (file no. 333-43129) filed with the Securities and Exchange Commission
on December 23, 1997.
II-2
<PAGE> 112
ITEM 22. UNDERTAKINGS
1. The undersigned Registrant hereby undertakes:
(a) (1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or 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 end 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
registration statement; and
(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 of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
(b) 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 information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding
to the request.
(c) 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.
(d) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the registrant's annual report
pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act
of 1934 (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(e) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense
of an 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
II-3
<PAGE> 113
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such issue.
(f) The undersigned registrant hereby undertakes to file an
application for the purpose of determining the eligibility of the trustee
to act under subsection (a) of Section 310 of the Trust Indenture Act in
accordance with the rules and regulations prescribed by the Commission
under Section 305(b)(2) of the Trust Indenture Act.
II-4
<PAGE> 114
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment no. 1 to the registration statement on Form S-4
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Los Angeles, State of California on January 15, 1998.
BIG 5 CORP.,
a Delaware corporation
By: /s/ GARY S. MEADE
------------------------------------
Gary S. Meade
Secretary, Vice President
and General Counsel
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------------ -----------------
<C> <C> <S>
* Chairman of the Board and January 15, 1998
- --------------------------------------------- Chief Executive Officer
Robert W. Miller (Principal Executive Officer)
* President, Chief Operating January 15, 1998
- --------------------------------------------- Officer and Director
Steven G. Miller
* Director January 15, 1998
- ---------------------------------------------
Dr. Michael D. Miller
* Director January 15, 1998
- ---------------------------------------------
John G. Danhakl
* Director January 15, 1998
- ---------------------------------------------
Jonathan A. Seiffer
* Chief Financial Officer January 15, 1998
- --------------------------------------------- (Principal Financial Officer
Charles P. Kirk and Principal Accounting
Officer)
</TABLE>
*By: /s/ GARY S. MEADE
-------------------------------
Gary S. Meade
Attorney-in-fact January 15, 1998
<PAGE> 115
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- --------------------------------------------------------------------------
<S> <C>
3(i)* Restated Certificate of Incorporation of the Company
3(ii)* By-Laws of the Company, as amended October 27, 1997
4.1***** Indenture dated as of November 13, 1997 between the Company and First
Trust National Association, as trustee
4.2***** Form of the Company's Series B 10 7/8% Senior Notes due 2007 (included in
Exhibit 4.1)
5***** Opinion of Irell & Manella LLP (includes consent)
10.1(a)** Employment Agreement between the Company and Robert W. Miller dated as of
January 1, 1993
10.1(b)** Employment Agreement between the Company and Steve G. Miller dated as of
January 1, 1993
10.1(c)** Sublease between the Company and Thrifty dated as of September 25, 1992
10.2(a)*** Amended and Restated Indemnification Implementation Agreement between the
Company (formerly known as United Merchandising Corp.) and Thrifty Payless
Holdings, Inc. dated as of April 20, 1994
10.2(b)*** Agreement and Release among Pacific Enterprises, Thrifty Payless Holdings,
Inc., Thrifty Payless, Inc., Thrifty and the Company (formerly known as
United Merchandising Corp.) dated as of March 11, 1994
10.3(a)**** Financing Agreement dated March 8, 1996 between The CIT Group/Business
Credit, Inc. and the Company
10.3(b)**** Grant of Security Interest in and Collateral Assignment of Trademarks and
Licenses dated as of March 8, 1996 by the Company in favor of The CIT
Group/Business Credit, Inc.
10.3(c)**** Guarantee dated March 8, 1996 by Big 5 Corporation (now known as Big 5
Holdings Corp.) in favor of The CIT Group/Business Credit, Inc.
10.4(a)**** Agreement on Purchase and Sale among the Company and the State of
Wisconsin dated as of February 13, 1996
10.4(b)**** Lease among the Company (Lessee) and the State of Wisconsin Investment
Board (Lessor) dated as of March 5, 1996
10.5***** Purchase Agreement, dated as of November 13, 1997, by and among the
Company and the Initial Purchasers named therein.
10.6***** Registration Rights Agreement, dated as of November 13, 1997, by and among
the Company and the Initial Purchasers named therein.
10.7***** Management Services Agreement, dated as of November 13, 1997, by and
between the Company, Big 5 Holdings Corp. and Leonard Green & Associates,
L.P.
10.8***** Letter from The CIT Group/Business Credit, Inc. to the Company dated
November 13, 1997, amending the Financing Agreement, dated March 8, 1996
between the Company (formerly known as United Merchandising Corp.) and The
CIT Group/Business Credit, Inc.
23.1 Consent of KPMG Peat Marwick LLP (filed herewith)
23.2***** Consent of Irell & Manella LLP (filed as part of Exhibit 5)
24***** Powers of Attorney of officers and directors of registrant
25***** Statement Regarding Eligibility of Trustee
99.1***** Form of Letter of Transmittal
99.2***** Notice of Guaranteed Delivery
</TABLE>
- ---------------
* Incorporated by reference to the Company's Current Report on Form 8-K
filed November 26, 1997.
** Incorporated by reference to the Company's Registration Statement on Form
S-4 (file no. 33-61096) effective as of June 29, 1993.
*** Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended January 1, 1995.
**** Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
***** Incorporated by reference to the Company's Registration Statement on Form
S-4 (file no. 333-43129) filed with the Securities and Exchange Commission
on December 23, 1997.
<PAGE> 1
EXHIBIT 23.1
To the Board of Directors
of Big 5 Corp.:
We consent to the use of our reports included herein and to the reference
to our firm under the heading "Experts" in the prospectus.
/s/ KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
Los Angeles, California
January 13, 1998
