<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 29, 1998
REGISTRATION NO. 333-47991
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
COUNTY SEAT STORES, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
MINNESOTA 5651 41-1272706
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code No.) Identification No.)
</TABLE>
--------------------------
CSS TRADE NAMES, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
MINNESOTA 6794 41-1702797
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code No.) Identification No.)
</TABLE>
--------------------------
469 SEVENTH AVENUE, 11TH FLOOR
NEW YORK, NEW YORK 10018
(212) 714-4800
(Address, including Zip Code, and Telephone Number, including Area Code,
of Registrants' Principal Executive Offices)
--------------------------
BRETT D. FORMAN
EXECUTIVE VICE PRESIDENT
COUNTY SEAT STORES, INC.
469 SEVENTH AVENUE, 11TH FLOOR
NEW YORK, NEW YORK 10018
(212) 714-4800
(Name, Address, including Zip Code, and Telephone Number, including Area Code,
of Agent for Service)
--------------------------
WITH COPIES TO
ROBERT M. MCLAUGHLIN, ESQ.
EATON & VAN WINKLE
600 THIRD AVENUE
NEW YORK, NEW YORK 10016
(212) 867-0606
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER NOTE(1) OFFERING PRICE(1) FEE(2)
<S> <C> <C> <C> <C>
12 3/4 Senior Notes due November 1,
2004................................ $85,000,000 100% $85,000,000 $25,075.00
</TABLE>
(1) Estimated Solely for the purpose of calculating the registration fee
pursuant to Rule 457.
(2) Previously paid with initial filing.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED , 1998
PROSPECTUS
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
OFFER TO EXCHANGE
12 3/4% SENIOR NOTES DUE NOVEMBER 1, 2004
FOR ALL OUTSTANDING 12 3/4% SENIOR NOTES DUE NOVEMBER 1, 2004
OF
COUNTY SEAT STORES, INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME ON
, 1998 UNLESS EXTENDED.
County Seat Stores, Inc., a Minnesota corporation (the "Company"), is hereby
offering (the "Exchange Offer"), upon the terms and subject to the conditions
set forth in this Prospectus and the accompanying Letter of Transmittal (the
"Letter of Transmittal"), to exchange $1,000 principal amount of its 12 3/4%
Senior Notes due November 1, 2004 (the "Exchange Notes"), which exchange has
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), pursuant to a Registration Statement (which term shall encompass any
amendments thereto) of which this Prospectus is a part, for each $1,000
principal amount of its outstanding 12 3/4% Senior Notes due November 1, 2004
(the "Private Notes"), of which $85,000,000 in aggregate principal amount was
issued on October 29, 1997 and is outstanding as of the date hereof. The form
and terms of the Exchange Notes are identical in all material respects to those
of the Private Notes, except for certain transfer restrictions and registration
rights relating to the Private Notes and except for certain interest provisions
related to such registration rights. The Exchange Notes will evidence the same
indebtedness as the Private Notes (which they replace) and will be entitled to
the benefits of the Indenture dated as of October 29, 1997 governing both the
Private Notes and the Exchange Notes (the "Indenture"). The Private Notes and
the Exchange Notes are sometimes referred to herein collectively as the "Notes."
See "The Exchange Offer" and "Description of the Notes."
Interest on the Notes will be payable in cash semi-annually in arrears on
each November 1 and May 1, commencing May 1, 1998. The Notes will mature on
November 1, 2004.
The Exchange Notes will be redeemable, at the option of the Company, in
whole or in part, at any time on or after November 1, 2001, at the redemption
prices set forth herein, plus accrued and unpaid interest, if any, to the date
of redemption. In addition, prior to November 1, 2001, the Company may, subject
to certain conditions, redeem up to one-third of the principal amount of
outstanding Notes with proceeds of one or more offerings (each, a "Primary
Offering") of Capital Stock (as defined herein) at 112.75% of the principal
amount thereof, plus accrued and unpaid interest, if any, to the date of
redemption; provided, however, that at least two-thirds of the original
principal amount of the Notes is outstanding immediately following such
redemption. Upon a Change of Control (as hereinafter defined), the Company is
required to offer to repurchase all the then outstanding Notes at 101% of the
principal amount thereof, plus accrued and unpaid interest, if any, to the date
of repurchase.
The Company will accept for exchange any and all Private Notes that are
validly tendered on or prior to 5:00 p.m., New York City time, on the date the
Exchange Offer expires, which will be , 1998 unless the Exchange
Offer is extended (the "Expiration Date"). In the event that the Exchange Offer
is extended, it will remain in effect for a maximum of 90 business days,
including all extensions. Tenders of Private Notes may be withdrawn at any time
prior to 5:00 p.m., New York City time, on the Expiration Date. The Exchange
Offer is not conditioned upon any minimum principal amount of Private Notes
being tendered for exchange. However, the Exchange Offer is subject to certain
conditions which may be waived by the Company and to the terms and provisions of
the Registration Rights Agreement (as defined herein). See "The Exchange Offer."
The Company has agreed to pay the expenses of the Exchange Offer.
The Exchange Notes will be senior unsecured indebtedness of the Company,
except to the extent collateralized by a first priority security interest in a
security account (see "Description of Notes--Security Account"). The Notes will
rank senior in right of payment to all subordinated indebtedness of the Company
and pari-passu in right of payment with all senior indebtedness of the Company.
The Notes will be effectively subordinated to secured indebtedness of the
Company, including any indebtedness outstanding under the Senior Credit Facility
(as defined herein), in each case, to the extent of the assets securing such
indebtedness.
The Company filed a petition for reorganization relief under Chapter 11 of
the Bankruptcy Code on October 17, 1996. The Exchange Offer is being made
pursuant to a Registration Rights Agreement (as hereinafter defined) covering,
inter alia, the Private Notes issued in connection with the Company's Plan of
Reorganization (as defined herein), which was confirmed by the Bankruptcy Court
(as defined herein) on October 1, 1997. As of November 1, 1997, upon
consummation of the Plan of Reorganization, the Company had approximately $99.0
million of indebtedness outstanding (excluding approximately $37.0 million of
letters of credit and bankers' acceptances), including approximately $12.3
million of secured indebtedness under the Senior Credit Facility and
approximately $85.0 million principal amount of indebtedness under the Private
Notes.
SEE "RISK FACTORS", COMMENCING ON PAGE , FOR A DISCUSSION OF CERTAIN
FACTORS THAT INVESTORS SHOULD CONSIDER IN CONNECTION WITH THE EXCHANGE OFFER AND
AN INVESTMENT IN THE EXCHANGE NOTES.
---------------------
THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
--------------------------
The date of this Prospectus is , 1998
<PAGE>
NOTICE TO INVESTORS
Based on interpretations by the staff of the Securities and Exchange
Commission (the "Commission") set forth in no-action letters issued to third
parties, the Company believes that the Exchange Notes issued pursuant to the
Exchange Offer in exchange for Private Notes may be offered for resale, resold
and otherwise transferred by a holder thereof without compliance with the
registration and prospectus delivery provisions of the Securities Act, PROVIDED
that the holder is acquiring the Exchange Notes in the ordinary course of its
business, is not participating and has no arrangement or understanding with any
person to participate in the distribution of the Exchange Notes and is not an
"affiliate" of the Company within the meaning of Rule 405 of the Securities Act.
Holders of Private Notes wishing to accept the Exchange Offer must represent to
the Company that such conditions have been met. Each broker-dealer who holds
Private Notes acquired for its own account as a result of market-making or other
trading activities and who receives Exchange Notes for its own account in
exchange for such Private Notes pursuant to the Exchange Offer must acknowledge
that it will deliver a prospectus in connection with any resale of such Exchange
Notes. The Company believes that none of the registered holders of the Private
Notes is an "affiliate" (as such term is defined in Rule 405 under the
Securities Act) of the Company.
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 Exchange Notes received
in exchange for Private Notes acquired by such broker-dealer as a result of
market-making or other trading activities. The Letter of Transmittal states that
by acknowledging that it will deliver a prospectus in connection with any resale
of such Exchange Notes, and by delivering a prospectus, a broker-dealer will not
be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. The Company has agreed to make this Prospectus (as it may be
amended or supplemented) available to any such broker-dealer that requests
copies of such Prospectus in the Letter of Transmittal for use in connection
with any such resale for a period of time as is necessary for such persons to
comply with the prospectus delivery requirements of the Securities Act in order
to resell the Exchange Notes (as defined herein). See "Plan of Distribution."
Prior to the Exchange Offer, there has been no public market for the Private
Notes or the Exchange Notes. There can be no assurance as to the liquidity of
any market that may develop for the Exchange Notes, the ability of holders to
sell the Exchange Notes, or the price at which holders would be able to sell the
Exchange Notes. The Company does not intend to apply for listing of the Exchange
Notes for trading on any securities exchange or for inclusion of the Exchange
Notes in any automated quotation system. The National Association of Securities
Dealers, Inc. ("NASD") has designated the Private Notes as securities eligible
for trading in the Private Offerings, Resales and Trading through Automatic
Linkages ("PORTAL") market of the NASD (see "Price Range of the Private Notes")
and the Company has been advised that Jefferies & Company, Inc. has heretofore
acted as market maker for the Private Notes. The Company has been advised by the
aforesaid market maker that it currently intends to make a market in the
Exchange Notes. Future trading prices of the Exchange Notes will depend on many
factors, including among other things, prevailing interest rates, the Company's
operating results and the market for similar securities. Historically, the
market for securities similar to the Exchange Notes, including non-investment
grade debt, has been subject to disruptions that have caused substantial
volatility in the prices of such securities. There can be no assurance that any
market for the Exchange Notes, if such market develops, will not be subject to
similar disruptions. See "Risk Factors--Lack of Public Market for Securities."
The Company will not receive any proceeds from, and has agreed to bear the
expenses of, the Exchange Offer. Tenders of Private Notes pursuant to the
Exchange Offer may be withdrawn at any time prior to the Expiration Date. No
underwriter is being used in connection with the Exchange Offer.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF PRIVATE NOTES IN ANY JURISDICTION IN
WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE EXCHANGE ACT.
DISCUSSIONS CONTAINING SUCH FORWARD-LOOKING STATEMENTS MAY BE FOUND IN
"SUMMARY," "RECENT DEVELOPMENTS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS," AS WELL AS WITHIN
THIS PROSPECTUS GENERALLY AND IN DOCUMENTS INCORPORATED HEREIN BY REFERENCE. IN
ADDITION, WHEN USED IN THIS PROSPECTUS THE WORDS "BELIEVES," "ANTICIPATES,"
"EXPECTS," "MAY," "WILL," "SHOULD," AND SIMILAR EXPRESSIONS OR THE NEGATIVE
THEREOF ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS ARE
SUBJECT TO A NUMBER OF KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES.
ACTUAL RESULTS IN THE FUTURE COULD DIFFER MATERIALLY FROM THOSE DESCRIBED IN
OR IMPLIED BY THE FORWARD-LOOKING STATEMENTS, AS A RESULT OF MANY FACTORS
OUTSIDE THE CONTROL OF THE COMPANY, INCLUDING: CONTINUING SUCCESS WITH, AND
MARKET ACCEPTANCE OF, FUNDAMENTAL CHANGES IN THE COMPANY'S MERCHANDISING
STRATEGY DESCRIBED HEREIN; FLUCTUATIONS IN THE COST OF RAW MATERIALS AND
MERCHANDISE USED OR PURCHASED BY THE COMPANY; DEPENDENCE ON THIRD PARTY
SUPPLIERS; CHANGES IN CONSUMER PREFERENCES, IN THE ADVERTISING MARKET FOR THE
COMPANY'S PRODUCTS, IN THE APPAREL INDUSTRY OR MARKET GENERALLY OR THAT SEGMENT
OF WHICH THE COMPANY SPECIFICALLY TARGETS; CHANGES IN THE FINANCIAL CONDITION OF
THE COMPANY'S CUSTOMERS, IN THE GENERAL CONDITION OF THE UNITED STATES ECONOMY,
IN THE AVAILABILITY OF KEY PERSONNEL, IN FOREIGN CURRENCY EXCHANGE RATES, IN
INDUSTRY CAPACITY, AND IN BRAND AWARENESS; AND THE OTHER MATTERS SET FORTH IN
THIS PROSPECTUS AND DESCRIBED FROM TIME TO TIME IN THE COMPANY'S ANNUAL OR
QUARTERLY REPORTS FILED WITH THE COMMISSION.
CONSEQUENTLY, SUCH FORWARD-LOOKING STATEMENTS SHOULD BE VIEWED SOLELY AS THE
COMPANY'S CURRENT PLANS, ESTIMATES AND BELIEFS. READERS ARE CAUTIONED NOT TO
PLACE UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF
THE DATE HEREOF OR THEREOF. THE COMPANY DOES NOT UNDERTAKE AND SPECIFICALLY
DECLINES ANY OBLIGATION TO PUBLICLY RELEASE ANY REVISIONS TO SUCH
FORWARD-LOOKING STATEMENTS TO REFLECT ANY FUTURE EVENTS OR CIRCUMSTANCES AFTER
THE DATE OF SUCH STATEMENTS OR TO REFLECT THE OCCURRENCE OF ANTICIPATED OR
UNANTICIPATED EVENTS.
AVAILABLE INFORMATION
The Company is filing concurrently a Registration Statement on Form S-4 (of
which this Prospectus forms part) and a Registration Statement on Form S-1
covering its common stock. The Company has also made a filing to register the
Common Stock under the Exchange Act. When the Commission declares effective any
of (i) the Registration Statement on Form S-1, (ii) the Company's Registration
Statement on Form S-4 or (iii) the registration of the Common Stock under the
Exchange Act, the Company will be subject to the informational requirements of
the Exchange Act, and, in accordance therewith, will be required to file
reports, proxy statements and other information with the Commission. Such
reports, proxy statements and other information can be inspected and copied at
the Public Reference Section of the Commission at Room 1024, 450 Fifth Street,
N. W., Washington, D.C. 20549, and at the Commission's regional offices at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661
and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of the
reports, proxy statements and other information can be obtained from the Public
Reference Section of the Commission, Washington, D.C. 20549, at prescribed
rates. In addition, all reports filed by the Company via the Commission's
ii
<PAGE>
Electronic Data Gathering and Retrieval System (EDGAR) can be obtained from the
Commission's Internet Web Site located at http:\\www.sec.gov.
The Company has filed with the Commission a Registration Statement (which
term shall encompass any amendments and exhibits thereto) under the Securities
Act with respect of the Notes offered hereby. This Prospectus, which forms a
part of such Registration Statement, does not contain all the information set
forth in such Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. Statements made in
this Prospectus as to the contents of any contract, agreement or other document
referred to are not necessarily complete; with respect to each such contract,
agreement or other document filed as an exhibit to such Registration Statement,
reference is made to the exhibit for a more complete description of the matter
involved, and each such statement shall be deemed qualified in its entirety by
such reference. Any interested parties may inspect such Registration Statement,
without charge, at the public reference facilities maintained by the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549, and may obtain copies of all
or any part of it from the Commission upon payment of the fees prescribed by the
Commission. Neither the delivery of this Prospectus or any Prospectus Supplement
nor any sales made hereunder or thereunder shall under any circumstances create
any implication that the information contained herein or therein is correct as
of any time subsequent to the date hereof or thereof or that there has been no
change in the affairs of the Company since the date hereof or thereof.
The Company was incorporated in Minnesota in 1976. The Company's principal
executive offices are located at 469 Seventh Avenue, 11th Floor, New York, New
York 10018.
iii
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL
STATEMENTS, INCLUDING THE NOTES THERETO, INCLUDED ELSEWHERE IN THIS PROSPECTUS.
UNLESS OTHERWISE INDICATED OR THE CONTEXT CLEARLY IMPLIES OTHERWISE, ALL
REFERENCES IN THIS PROSPECTUS TO THE "COMPANY" REFER TO COUNTY SEAT STORES, INC.
AND ITS SUBSIDIARIES. THE COMPANY'S PLAN OF REORGANIZATION WAS CONSUMMATED ON
OCTOBER 29, 1997 (THE "PLAN" OR "PLAN OF REORGANIZATION"). THE EFFECTS OF THE
PLAN HAVE BEEN ACCOUNTED FOR HEREIN IN THE COMPANY'S BALANCE SHEET DATED AS OF
NOVEMBER 1, 1997 USING THE PRINCIPLES OF "FRESH START" ACCOUNTING AS REQUIRED BY
THE AICPA, STATEMENT OF POSITION 90-7, PURSUANT TO WHICH, IN GENERAL, THE
COMPANY'S ASSETS AND LIABILITIES WERE REVALUED. THE TERM "PREDECESSOR COMPANY"
REFERS TO THE COMPANY PRIOR TO THE CONSUMMATION OF THE PLAN OF REORGANIZATION
AND THE TERM "REORGANIZED COMPANY" REFERS TO THE COMPANY AFTER THE PLAN OF
REORGANIZATION WAS CONSUMMATED. UNLESS OTHERWISE INDICATED OR THE CONTEXT
OTHERWISE REQUIRES, REFERENCES TO 1997, 1996, 1995, 1994, 1993, AND 1992 RELATE
TO THE COMPANY'S FISCAL YEARS ENDED ON JANUARY 31, 1998, FEBRUARY 1, 1997,
FEBRUARY 3, 1996, JANUARY 28, 1995, JANUARY 29, 1994, AND JANUARY 30, 1993,
RESPECTIVELY. EACH OF THESE FISCAL YEARS INCLUDES 52 WEEKS, EXCEPT FOR THE YEAR
ENDED FEBRUARY 3, 1996, WHICH INCLUDES 53 WEEKS. UNLESS OTHERWISE INDICATED OR
THE CONTEXT OTHERWISE REQUIRES, THE INFORMATION CONTAINED IN THIS PROSPECTUS
GIVES EFFECT TO THE OFFERING OF PRIVATE NOTES (THE "PRIVATE NOTE OFFERING") (AND
THE APPLICATION OF THE PROCEEDS THEREFROM) AND THE COMPANY'S PLAN OF
REORGANIZATION, PURSUANT TO WHICH THE COMPANY EMERGED FROM CHAPTER 11
CONCURRENTLY WITH THE CLOSING OF THE PRIVATE NOTE OFFERING (THE DATE OF THE
EFFECTIVENESS OF THE PLAN OF REORGANIZATION AND THE CLOSING OF THE PRIVATE NOTE
OFFERING BEING HEREIN REFERRED TO AS THE "EFFECTIVE DATE"). "PRO FORMA" RESULTS
OF OPERATIONS HAVE BEEN DESCRIBED IN THE COMPANY'S PRO FORMA CONSOLIDATED
STATEMENT OF OPERATIONS INCLUDED HEREIN, GIVING EFFECT TO (I) CONSUMMATING THE
PRIVATE NOTE OFFERING AND ENTERING INTO THE SENIOR CREDIT FACILITY, (II)
CONSUMMATING THE PLAN OF REORGANIZATION, (III) CLOSING 341 STORES, (IV)
OBTAINING RENT CONCESSIONS ON EXISTING STORES, (V) CONSOLIDATING CERTAIN OF THE
COMPANY'S CORPORATE OFFICES, AND (VI) APPLYING FRESH START ACCOUNTING IN
ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ("GAAP") AS IF EACH HAD
OCCURRED ON FEBRUARY 4, 1996 (WITH RESPECT TO THE PRO FORMA 1996 RESULTS) AND
FEBRUARY 2, 1997 (WITH RESPECT TO PRO FORMA 1997 RESULTS). REFERENCES TO THE 413
STORES OPERATED BY THE COMPANY GIVE EFFECT TO THE CLOSING OF 67 STORES BETWEEN
THE EFFECTIVE DATE AND THE END OF 1997. 375 OF THE COMPANY'S STORES ARE COUNTY
SEAT STORES, 14 ARE COUNTY SEAT OUTLET STORES, 22 ARE LEVI'S OUTLET STORES, AND
2 ARE OLD FARMER'S ALMANAC GENERAL STORES.
THE COMPANY
The Company is among the nation's largest mall-based specialty retailers of
casual apparel, operating 413 stores in 41 states in the midwestern, southern,
and eastern regions of the United States. Under the direction of a new
management team, the Company's merchandise mix has recently been updated to
consist of casual shirts, sweaters, knit tops, khakis, jeans, dresses and
accessories for men, women, and teens. The Company's products are now primarily
manufactured under private label, which, in the Company's view, offers customers
quality comparable to branded merchandise at significantly lower prices and
generates higher gross margins than the Company has historically achieved. For
the year ended January 31, 1998, the Company generated Pro Forma EBITDA of
approximately $20.9 million. As described below, the Company has made several
fundamental changes in its merchandising strategy.
During the period from 1992 to 1994, the Company expanded from 605 stores,
generating net sales of $458.9 million, EBITDA of $42.9 million, and an EBITDA
margin of 9.3%, to 701 stores, generating net sales of $588.3 million, EBITDA of
$48.2 million, and an EBITDA margin of 8.2%. However, by 1995 the Company's
EBITDA margin declined to 5.6% primarily due, in the Company's view, to the
following: (i) the Company, in an attempt to further its expansion strategy,
opened stores without sufficient regard to the profitability of each location;
(ii) in response to increased price competition on Levi's merchandise, the
Company unsuccessfully expanded its offering of branded apparel in the face of
stiff competition from mall-based department stores; (iii) the Company failed to
competitively source merchandise for its private-label program; and (iv) apparel
retailers generally experienced weak sales. By 1996, in the wake of declining
sales and deteriorating EBITDA margins, the Company was unable to meet scheduled
interest payment obligations on its then outstanding subordinated indebtedness.
As a result of the foregoing, in
1
<PAGE>
October 1996, the Company filed a petition (the "Chapter 11 Filing") for
reorganization relief under Chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Code") with the United States Bankruptcy Court for the District of
Delaware (the "Bankruptcy Court").
In December 1996, the Company retained a new management team led by Sam
Forman, the Company's president, chief executive officer, and chairman of the
board of directors. In January and February 1997, the new management team
developed a business plan designed to enhance the Company's profitability and
increase gross margins by reducing costs, implementing a new merchandising
strategy that primarily emphasizes switching from branded to private label
apparel and offering more tops than bottoms, and capitalizing on the Company's
nationally recognized brand name and large store base.
Mr. Forman has over forty years of retailing and manufacturing experience in
the apparel industry and has been an innovator in manufacturing and retailing
value-priced private-label apparel, the cornerstone of the Company's new
merchandising strategy. Mr. Forman has implemented successful business
strategies for apparel retailers by maximizing profitability through direct
sourcing, value-oriented merchandising programs, and internal cost controls.
Most recently, Mr. Forman was president and chief operating officer of American
Eagle Outfitters, Inc. ("American Eagle"), a mall-based specialty retailer.
BUSINESS STRATEGY
The new management team has implemented a business strategy designed to
re-establish the Company as a leading national retailer of high-quality,
value-priced casual apparel and to restore its profitability and EBITDA to
historical levels. The principal elements of this business strategy are similar
to those implemented by Mr. Forman at American Eagle and include: (i) reducing
costs and closing unprofitable stores, (ii) implementing a new merchandising
strategy, and (iii) initiating a controlled expansion program.
PHASE ONE: COST REDUCTIONS
The Company has continued to implement a comprehensive cost control program
during the year ended January 31, 1998, that includes five key components: (i)
closing approximately 330 unprofitable stores (137 of which closed in 1997),
which increased Pro Forma EBITDA before special charges by approximately $15.2
million, (ii) obtaining rent concessions on existing stores which would have
decreased rent expense by approximately $3.6 million for the Pre-Emergence
Period, (iii) reducing selling, general and administrative expenses through
personnel reductions associated with closed stores and corporate consolidations,
which would have increased EBITDA before special charges by approximately $1.8
million for the Pro Forma Pre-Emergence Period compared to the comparable
nine-month period for 1996, (iv) consolidating its corporate infrastructure by
closing its Dallas and deciding to close the Minneapolis corporate offices,
which the Company expects to result in approximately $0.3 million in annual cost
savings, and (v) establishing a new corporate "culture" focused on cost
controls.
PHASE TWO: NEW MERCHANDISING STRATEGY
Prior to December 1996, the Company sourced products primarily from Levi
Strauss and other branded apparel manufacturers. As the Company lowered retail
prices on branded jeans and other branded apparel to meet those offered by its
competitors, its profitability deteriorated. Utilizing its extensive apparel
manufacturing background and significant contacts with domestic and
international vendors, the Company's new management team has initiated a
merchandising strategy focused on (i) competitively sourcing private-label
rather than branded merchandise, (ii) offering high-quality, private-label
merchandise at value prices, and (iii) improving the Company's product mix by
expanding the offering of women's apparel and increasing the ratio of tops to
bottoms.
The new management team has aggressively sought to reduce merchandise unit
costs to increase gross margins and enable the Company to offer lower retail
prices consistent with its value-priced strategy. By reducing merchandise unit
costs, the Company has been able to lower retail prices and reposition itself as
a value-priced, private-label retailer, while improving gross margins. For
example, for the year ended January 31, 1998, the average retail price per unit
at the COUNTY SEAT stores was $14.17 compared to $19.78 for the year ended
February 1, 1997. For the year ended January 31, 1998, the average cost per unit
at the
2
<PAGE>
COUNTY SEAT stores was $7.30 compared to $11.40 for the year ended February 1,
1997. For the year ended January 31, 1998, the retail gross margin before
special charge at the COUNTY SEAT stores was 46.9% compared to 40.0% for the
year ended February 1, 1997. The Company's new merchandising strategy has
improved unit sales volume. For the year ended January 31, 1998, merchandise
sales at the COUNTY SEAT stores totaled 20.8 million units compared to 17.7
million units for the 12 months ended February 1, 1997. In addition to its
commitment to competitive sourcing, the Company has been focusing on emphasizing
tops relative to bottoms and on expanding its women's apparel offering. By
placing more emphasis on women's wear and on tops, the Company expects to
continue to improve unit sales and profitability.
The new management team initiated its sourcing plan and other elements of
its merchandising strategy shortly after its arrival in December 1996. Although
the Company has experienced improved operating results as the new management
team began implementing the business strategy, the effects of the merchandising
strategy are not fully reflected in the operating results for the year ending
January 31, 1998 due to various factors, including (i) the inability to cancel
previously ordered merchandise, (ii) long lead times (between 120 and 150 days)
required for overseas merchandise deliveries, and (iii) the need to take
significant markdowns on prior management's merchandise, particularly in the
first quarter of 1997. Additionally, management recorded in the third quarter of
1997 a special charge in the amount of $12.0 million for excess markdowns
relating to closed stores. The table below shows the actual improvements in the
Company's performance with respect to unit sales and retail gross margin
resulting from the implementation of the new merchandising strategy.
<TABLE>
<CAPTION>
YEAR ENDED
------------------------
<S> <C> <C>
JANUARY 31, FEBRUARY 1,
1998(1) 1997(1)
----------- -----------
Units sold (in millions) (1)............................................................ 20.8 17.7
Average selling price per unit (1)...................................................... $ 14.17 $ 19.78
Average cost per unit (1)............................................................... $ 7.30 $ 11.40
Retail gross profit before special charge (2) ($ in millions)........................... $ 185.1 $ 215.3
Retail gross profit after special charge (2) ($ in millions)............................ $ 173.1 $ 215.3
Retail gross profit before special charge (2)........................................... 46.9% 40.0%
Retail gross profit after special charge(2)............................................. 43.9% 40.0%
</TABLE>
- ------------------------
(1) Represents only results of the 375 County Seat Stores open at the end of
1997.
(2) Retail gross profit is presented before and after a special charge to
liquidate excess inventory. The special charge of approximately $12.0
million was recorded within cost of goods sold and relates to the
liquidation of excess inventory from purchase commitments in early 1997 for
Fall 1997 merchandise based upon a chain of over 500 stores, of which 137
were closed by the time the merchandise was received (See Note 8 to the
consolidated financial statements at January 31, 1998, for a discussion of
the special charge).
PHASE THREE: CONTROLLED GROWTH
Upon the successful implementation of the Company's merchandising strategy,
the Company expects to commence a controlled program of opening between 15 to 20
new stores annually as well as to deploy capital expenditures toward the
remodeling of existing stores. Key factors to be considered prior to opening any
new store include store location, mall tenant mix, and mall sales productivity.
PLAN OF REORGANIZATION
On October 29, 1997, the Plan of Reorganization was consummated. As part of
the Plan, the Company issued and sold in a private placement 85,000 Units, each
unit consisting of $1,000 principal amount of Private Notes and one Series A
Warrant to purchase 26.8908 shares of the Company's common stock, par value
$0.01 per share (Senior Debt). See "Plan of Reorganization."
3
<PAGE>
THE EXCHANGE OFFER
The Exchange Offer applies to $85,000,000 aggregate principal amount of the
Private Notes. The form and terms of the Exchange Notes are identical in all
material respects to the form and terms of the Private Notes except that the
exchange will have been registered under the Securities Act, and, therefore, the
Exchange Notes will not bear legends restricting the transfer thereof and
holders of the Exchange Notes will not be entitled to any of the registration
rights of holders of the Private Notes under the Registration Rights Agreement,
which rights will terminate upon consummation of the Exchange Offer. The
Exchange Notes will evidence the same indebtedness as the Private Notes (which
they replace) and will be issued under, and be entitled to the benefits of, the
Indenture. For further information and for definitions of certain capitalized
terms used below, see "Description of the Notes."
<TABLE>
<S> <C>
The Exchange Offer.................. The Company is hereby offering to exchange $1,000
principal amount of Exchange Notes for each $1,000
principal amount of Private Notes that are properly
tendered and accepted. The Company will issue
Exchange Notes on or as promptly as practicable after
the Expiration Date. As of the date hereof, there is
$85,000,000 aggregate principal amount of Private
Notes outstanding. The terms of the Exchange Notes
and the Private Notes are identical, except that the
Exchange Notes have been registered under the
Securities Act and, therefore, will not bear legends
restricting their transfer. See "The Exchange Offer."
Resale of the Exchange Notes........ Based on interpretations by the staff of the
Commission set forth in no-action letters issued to
third parties, the Company believes that the Exchange
Notes issued pursuant to the Exchange Offer in
exchange for Private Notes may be offered for resale,
resold and otherwise transferred by a holder thereof
without compliance with the registration and
prospectus delivery provisions of the Securities Act,
PROVIDED that the holder is acquiring Exchange Notes
in the ordinary course of its business, is not
participating and has no arrangement or understanding
with any person to participate in the distribution of
the Exchange Notes and is not an "affiliate" of the
Company within the meaning of Rule 405 under the
Securities Act. Each broker-dealer who holds Private
Notes acquired for its own account as a result of
market-making or other trading activities and who
receives Exchange Notes pursuant to the Exchange
Offer for its own account in exchange therefor must
acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes.
This Prospectus, as it may be amended or supplemented
from time to time, may be used by a broker-dealer in
connection with resales of Exchange Notes received in
exchange for Private Notes acquired by such
broker-dealer as a result of market-making activities
or other trading activities. The Letter of
Transmittal that accompanies this Prospectus 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. Any
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
holder of Private Notes who tenders in the Exchange
Offer with the intention to participate, or for the
purpose of participating, in a distribution of the
Exchange Notes could not rely on the above-referenced
position of the staff of the Commission and, in the
absence of an exemption therefrom, would have to
comply with the registration and prospectus delivery
requirements of the Securities Act in connection with
any resale transaction. Failure to comply with such
requirements in such instance could result in such
holder incurring liability under the Securities Act
for which the holder is not indemnified by the
Company. See "The Exchange Offer--Resale of the
Exchange Notes."
Registration Rights Agreement....... The Private Notes were sold by the Company on October
29, 1997 to Jefferies & Company, Inc. (the "Initial
Purchaser") pursuant to a Purchase Agreement, dated
October 23, 1997, by and among the Company and the
Initial Purchaser (the "Purchase Agreement").
Pursuant to the Purchase Agreement, the Company and
the Initial Purchaser entered into a Registration
Rights Agreement dated as of October 29, 1997 (the
"Registration Rights Agreement"), which grants the
holders of the Private Notes certain exchange and
registration rights. The Exchange Offer is intended
to satisfy such rights, which will terminate upon the
consummation of the Exchange Offer. The holders of
the Exchange Notes will not be entitled to any
exchange or registration rights with respect to the
Exchange Notes. See "The Exchange Offer-- Termination
of Certain Rights." The Company will not receive any
proceeds from, and has agreed to bear the expenses
of, the Exchange Offer.
Expiration Date..................... The Exchange Offer will expire at 5:00 p.m., New York
City time, on , 1998, unless the Exchange
Offer is extended by the Company in its sole
discretion, in which case the term "Expiration Date"
shall mean the latest date and time to which the
Exchange Offer is extended. See "The Exchange
Offer--Expiration Date; Extensions; Amendments."
Procedures for Tendering Private
Notes............................. Each holder of Private Notes wishing to accept the
Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein and
therein, and mail or otherwise deliver such Letter of
Transmittal, or such facsimile, together with such
Private Notes and any other required documentation to
First Trust National Association, as exchange agent
(the "Exchange Agent"), at the address set forth
herein. By executing the Letter of Transmittal, the
holder will represent to and agree with the Company
that, among other things, (i) the Exchange Notes to
be acquired by such holder of Private Notes in
connection with the Exchange Offer are being acquired
by such holder in the ordinary course of its
business,
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
(ii) such holder has no arrangement or understanding
with any person to participate in a distribution of
the Exchange Notes, and (iii) such holder is not an
"affiliate," as defined in Rule 405 under the
Securities Act, of the Company. If the holder is a
broker-dealer that will receive Exchange Notes for
its own account in exchange for Private Notes that
were acquired as a result of market-making or other
trading activities, such holder will be required to
acknowledge in the Letter of Transmittal that such
holder will deliver a prospectus in connection with
any resale of such Exchange Notes; however, by so
acknowledging and by delivering a prospectus, such
holder will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities
Act. See "The Exchange Offer--Procedures for
Tendering."
Special Procedures for Beneficial
Owners............................ Any beneficial owner whose Private Notes are held
through a broker, dealer, commercial bank, trust
company or other nominee and who wishes to tender
such Private Notes in the Exchange Offer should
contact such intermediary promptly and instruct such
intermediary to tender on such beneficial owner's
behalf. See "The Exchange Offer--Procedures for
Tendering."
Guaranteed Delivery Procedures...... Holders of Private Notes who wish to tender their
Private Notes and whose Private Notes are not
immediately available or who cannot deliver their
Private Notes, the Letter of Transmittal or any other
documentation required by the Letter of Transmittal
to the Exchange Agent prior to the Expiration Date
must tender their Private Notes according to the
guaranteed delivery procedures set forth under "The
Exchange Offer--Guaranteed Delivery Procedures."
Acceptance of the Private Notes and
Delivery of the Exchange Notes.... Subject to the satisfaction or waiver of the
conditions to the Exchange Offer, the Company will
accept for exchange any and all Private Notes that
are properly tendered in the Exchange Offer prior to
the Expiration Date. The Exchange Notes issued
pursuant to the Exchange Offer will be delivered on
the earliest practicable date following the
Expiration Date. See "The Exchange Offer--Terms of
the Exchange Offer."
Withdrawal Rights................... Tenders of Private Notes may be withdrawn at any time
prior to the Expiration Date. See "The Exchange
Offer-- Withdrawal of Tenders."
Certain Federal Income Tax
Considerations.................... For a discussion of certain federal income tax
considerations relating to the exchange of the
Exchange Notes for the Private Notes, see "Certain
United States Federal Income Tax Considerations."
Exchange Agent...................... First Trust National Association is serving as the
Exchange Agent in connection with the Exchange Offer.
First Trust
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
National Association also serves as Trustee under the
Indenture and as Security Agent under the Security
Agreement.
Consequences of Failure to Private Notes that are not tendered or that are not
Exchange.......................... properly tendered will, following the completion of
the Exchange Offer, continue to be subject to the
existing restrictions upon transfer thereof under the
Securities Act and, upon consummation of the Exchange
Offer, certain registration rights under the
Registration Rights Agreement will terminate. Such
Private Notes will, following consummation of the
Exchange Offer, bear interest at the same rate as the
Exchange Notes. The liquidity of the market for a
Holder's Private Notes could be adversely affected
upon completion of the Exchange Offer if such Holder
does not participate in the Exchange Offer. See "Risk
Factors--Failure to Exchange Private Notes."
</TABLE>
7
<PAGE>
THE EXCHANGE NOTES
<TABLE>
<S> <C>
Notes Offered....................... $85,000,000 aggregate principal amount of 12 3/4%
Senior Notes due 2004, Series B.
Maturity............................ November 1, 2004.
Interest Rate and Payment Dates..... The Exchange Notes will bear interest at a rate of
12 3/4% per annum, payable in cash semi-annually in
arrears on each November 1 and May 1, commencing May
1, 1998.
Security Agreement.................. The Company initially placed $15.5 million of the net
proceeds realized from the sale of the Private Notes
into the Security Account to be held by the Security
Agent for the benefit of the holders of the Notes.
Such funds, together with the proceeds from the
investment thereof, will be utilized to pay interest
on the Notes to May 1, 1999. Upon consummation of the
Exchange Offer, holders of the Exchange Notes shall
be entitled to the benefits of the Security Agreement
and the Security Account. Pending disbursement of
funds from the Security Account, the funds in the
Security Account will be invested in Pledged
Securities (as defined herein). See "Description of
the Notes--Security Account."
Optional Redemption................. The Notes will be redeemable at the option of the
Company, in whole or in part, at any time on or after
November 1, 2001, at 106.3750% of the principal
amount thereof, plus accrued and unpaid interest, if
any, declining ratably to 100% of the principal
amount thereof, plus accrued and unpaid interest, if
any, on or after November 1, 2003. In addition, at
any time prior to November 1, 2001, the Company may
redeem up to one-third of the principal amount of
outstanding Notes with the proceeds of one or more
Primary Offerings at 112.75% of the principal amount
thereof, plus accrued and unpaid interest, if any, to
the redemption date; provided, however, that at least
two-thirds of the original principal amount of the
Notes are outstanding immediately following such
redemption. See "Description of the Notes-- Optional
Redemption."
Mandatory Redemption................ None.
Ranking............................. The Notes will be senior unsecured indebtedness of
the Company, except to the extent collateralized by a
first priority security interest in the Security
Account. The Notes will also rank PARI PASSU in right
of payment with all senior indebtedness of the
Company and will be senior in right of payment to all
subordinated indebtedness of the Company. Except to
the extent collateralized by a first priority
security interest in the Security Account, the Notes
will be effectively subordinated to secured
indebtedness of the Company, including indebtedness
outstanding under the Senior Credit Facility, to the
extent of the assets securing such
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
indebtedness. As of January 31, 1998, the Company had
$88.6 million of indebtedness outstanding
(presentation of this amount differs from that of the
consolidated balance sheet at January 31, 1998 as a
result of the recognition of $7.6 million of Series A
Warrants attached to the debt, which is presented as
a discount to the Senior Notes in accordance with
generally accepted accounting principles), $1.1
million of which was secured indebtedness. See "Risk
Factors-- Substantial Leverage and Ability to Service
Debt."
Change of Control................... Upon a Change of Control (as defined herein), the
Company will be required to make an offer to
repurchase all outstanding Notes at a purchase price
equal to 101% of the aggregate principal amount
thereof, together with accrued and unpaid interest,
if any, to the date of repurchase. See "Description
of the Notes--Repurchase upon Change of Control."
Certain Covenants................... The indenture governing the Notes (the "Indenture")
will, among other things, restrict the ability of the
Company to incur additional indebtedness, create
liens, engage in sale-leaseback transactions, pay
dividends or make distributions in respect of its
capital stock, make investments or certain other
restricted payments, sell assets or stock of
subsidiaries, enter into transactions with
shareholders or affiliates, or effect a consolidation
or merger. These limitations will, however, be
subject to important qualifications and exceptions.
See "Description of the Notes--Certain Covenants."
</TABLE>
RISK FACTORS
AN INVESTMENT IN THE EXCHANGE NOTES INVOLVES CERTAIN RISKS THAT A POTENTIAL
INVESTOR SHOULD CAREFULLY EVALUATE PRIOR TO MAKING AN EXCHANGE OF PRIVATE NOTES
FOR THE EXCHANGE NOTES. SEE "RISK FACTORS," IMMEDIATELY FOLLOWING THIS SUMMARY,
FOR A DISCUSSION OF CERTAIN FACTORS TO BE CONSIDERED IN EVALUATING THE COMPANY,
ITS BUSINESS, AND AN INVESTMENT IN THE NOTES.
9
<PAGE>
SUMMARY PRO FORMA FINANCIAL DATA
The following table presents summary Pro Forma financial data for the
Company. The summary Pro Forma data for the Company include the effects of (i)
consummating the Private Note Offering and entering into the Senior Credit
Facility, (ii) consummating the Plan of Reorganization, (iii) closing 341
stores, (iv) obtaining rent concessions on existing stores, (v) consolidating
certain of the Company's corporate offices, and (vi) applying Fresh Start
Accounting under generally accepted accounting principles ("GAAP") as if each
had occurred on February 4, 1996 and February 2, 1997 with respect to the Pro
Forma for 1996 and 1997, respectively. The information set forth below should be
read in conjunction with the discussion under "Pro Forma Consolidated Statement
of Operations." See the Company's Pro Forma Consolidated Statement of
Operations, "Management's Discussion and Analysis of Financial Condition and
Results of Operations-- Changes in Method of Accounting," "Selected Historical
Financial Data."
COUNTY SEAT STORES, INC. AND SUBSIDIARY
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE 52 WEEKS ENDED FEBRUARY 1, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA AS
HISTORICAL ADJUSTMENTS ADJUSTED
---------- ----------- ----------
<S> <C> <C> <C>
Net sales................................................................. $ 538,260 $(156,741)(a) $ 381,519
Cost of sales, including buying and occupancy............................. 416,389 (132,651)(a) 283,738
---------- ----------- ----------
Gross profit............................................................ 121,871 (24,090) 97,781
Selling, general and administrative expenses.............................. 126,561 (39,118)(a) 82,243
(300)(b)
(4,900)(c)
Depreciation and amortization............................................. 11,051 (3,444)(d) 11,882
4,275(e)
Reorganization costs...................................................... 43,752 (43,752)(f) --
Interest expense, net..................................................... 15,445 (2,557)(g) 12,888
---------- ----------- ----------
Loss before income taxes and extraordinary item......................... (74,938) 65,706 (9,232)
Income taxes (benefit).................................................... (762) -- (762)
---------- ----------- ----------
Loss before extraordinary item.......................................... $ (74,176) $ 65,706 $ (8,470)
---------- ----------- ----------
---------- ----------- ----------
Other Data:
EBITDA(h)............................................................... $ (4,690) $ 15,538
---------- ----------
---------- ----------
</TABLE>
- ------------------------
(a) Reflects the elimination of results related to the 341 closed or decided to
be closed stores from the beginning of 1996 through the end of 1997 and the
consolidation of certain regional offices.
(b) Reflects the planned closing of the Dallas and the Minneapolis corporate
offices and the opening of the Company's new corporate headquarters in New
York.
(c) Reflects the adjustment to rent expense to reflect leases modified pursuant
to the Plan of Reorganization.
(d) Reflects the reduction in depreciation expense related to property and
equipment of closed stores and the write-off of assets recorded as a
component of reorganization costs associated with closed stores, assuming
closure occurred February 4, 1996.
(e) Reflects the amortization of the Reorganization Value in Excess of Amounts
Allocated to Identified Assets, over a 15 year period, assuming fresh start
accounting was recorded as of February 4, 1996.
10
<PAGE>
(f) Reflects the elimination of the provision for reorganization costs
associated with store closures and professional fees and other expenses
associated with the Chapter 11 case, assuming the Plan of Reorganization was
implemented on February 4, 1996.
(g) Reflects the adjustment to interest expenses, amortization of debt issuance
costs, and amortization of the debt discount to reflect restructured
capitalization of the Company related to the Private Note Offering and the
Senior Credit Facility.
(h) EBITDA represents income (loss) before interest, income taxes, depreciation
and amortization and reorganization costs. EBITDA is presented here to
provide additional information about the Company's operations. EBITDA is not
a measure of financial performance in accordance with GAAP and should not be
considered as an alternative to (i) net income (loss) as a measure of
performance (or any other measure of performance under GAAP) or (ii) cash
flows from operating, investing, or financing activities as an indicator of
cash flow or as a measure of liquidity.
COUNTY SEAT STORES, INC. AND SUBSIDIARY
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE 52 WEEKS ENDED JANUARY 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA AS
HISTORICAL ADJUSTMENTS ADJUSTED
---------- ----------- ----------
<S> <C> <C> <C>
Net sales................................................................. $ 394,584 $ (52,360)(a) $ 342,224
Cost of sales, including buying and occupancy............................. 276,180 (41,926)(a) 234,254
Cost of sales, special charge............................................. 11,975 (11,975) --
---------- ----------- ----------
Gross profit.......................................................... 106,429 1,541 107,970
Selling, general and administrative expenses.............................. 100,654 (9,732)(a) 87,022
(300)(b)
(3,600)(c)
Depreciation and amortization............................................. 9,091 (4,403)(d) 8,963
4,275(e)
Reorganization costs...................................................... 38,405 (38,405)(f) --
Interest expense, net..................................................... 7,312 6,072(g) 13,384
---------- ----------- ----------
Loss before income taxes.............................................. (49,033) 47,634 (1,399)
Income taxes (benefit).................................................... 4,100 (4,100) --
---------- ----------- ----------
Net loss.............................................................. $ (53,133) $ 51,734 $ (1,399)
---------- ----------- ----------
---------- ----------- ----------
Other Data:
EBITDA (h).............................................................. $ 5,775 $ 20,948
---------- ----------
---------- ----------
</TABLE>
- ------------------------
(a) Reflects the elimination of results related to the 137 closed or decided to
be closed stores during the 52-week period and the consolidation of certain
regional offices.
(b) Reflects the planned closing of the Dallas and the Minneapolis corporate
offices and the opening of the Company's new corporate headquarters in New
York.
(c) Reflects the adjustment to rent expense to reflect leases modified pursuant
to the Plan of Reorganization.
(d) Reflects the reduction in depreciation expense related to property and
equipment of closed stores and the write-off of assets recorded as a
component of reorganization costs associated with closed stores, assuming
closure occurred February 2, 1997.
11
<PAGE>
(e) Reflects the amortization of the Reorganization Value in Excess of Amounts
Allocated to Identified Assets, over a 15 year period, assuming fresh start
accounting was recorded as of February 2, 1997.
(f) Reflects the elimination of the provision for reorganization costs
associated with store closures and professional fees and other expenses
associated with the Chapter 11 case, assuming the Plan of Reorganization was
implemented on February 2, 1997.
(g) Reflects the adjustment to interest expense, amortization of debt issuance
costs, and amortization of the debt discount, to reflect restructured
capitalization of the Company related to the Private Note Offering and the
Senior Credit Facility.
(h) EBITDA represents income (loss) before interest, income taxes, depreciation
and amortization and reorganization costs. EBITDA is presented here to
provide additional information about the Company's operations. EBITDA is not
a measure of financial performance in accordance with GAAP and should not be
considered as an alternative to (i) net income (loss) as a measure of
performance (or any other measure of performance under GAAP) or (ii) cash
flows from operating, investing, or financing activities as an indicator of
cash flows or as a measure of liquidity.
12
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA
The following table presents summary historical financial data for the
Company. The historical financial data of the Company for each of the fiscal
years in the three-year period ended February 1, 1997 and the 39 weeks ended
November 1, 1997 and the 13 weeks ended January 31, 1998 have been derived from
the historical audited consolidated financial statements of the Company. From
October 17, 1996 until October 29, 1997 the Company operated as a
debtor-in-possession under Chapter 11 of the Bankruptcy Code, which caused the
Company to incur certain bankruptcy-related expenses. As a result, the Company
does not believe that its historical results of operations are necessarily
indicative of its results of operations as an ongoing entity after the
consummation of the Plan of Reorganization. The information set forth below
should be read in conjunction with the discussion under "Selected Historical
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Risk Factors--Risks Related to Projections," the
Company's Audited and Unaudited Consolidated Financial Statements, and the
Company's Unaudited Pro Forma Statements of Operations.
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
--------------------------------------------
39 13
WEEKS WEEKS
ENDED ENDED
NOVEMBER JANUARY
1994 1995 1996 1, 1997 31, 1998
--------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
<CAPTION>
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.................................................. $ 588.3 $ 619.2 $ 538.3 $ 277.1 $ 117.4
Gross profit before special charge(1)...................... 167.8 167.2 121.9 74.3 44.1
Gross profit after special charge(1)....................... 167.8 167.2 121.9 62.3 44.1
Income (loss) from operations(2)........................... 31.5 21.3 (15.7) (15.3) 11.9
Reorganization expense..................................... 43.8 38.4 --
Store Data:
Number of stores at end of period.......................... 701 745 537 413 413
Increase (decrease) in same store sales.................... 7.4% (4.0)% (8.7)% (12.2)% (3.4)%
Other Data:
Gross profit % before special charge(1).................... 28.5% 27.0% 22.6% 26.8% 37.5%
Gross profit % after special charge(1)..................... 28.5% 27.0% 22.6% 22.5% 37.5%
Total capital expenditures................................. $ 14.8 $ 13.1 $ 1.8 $ 1.4 $ 3.7
Depreciation and amortization.............................. 16.7 13.2 11.1 6.1 3.0
EBITDA before special charge(1)(3)......................... 48.2 34.5 (4.7) 2.9 14.9
EBITDA after special charge(1)(3).......................... 48.2 34.5 (4.7) (9.1) 14.9
BALANCE SHEET DATA:
Cash and cash equivalents (excludes restricted cash in the
Security Account)........................................ $ 22.2
Restricted Cash in Security Account........................ 17.2
Inventories................................................ 55.8
Total assets............................................... 209.1
Total long-term debt (including current maturities)........ 88.6(4)
Total shareholders' equity................................. 82.6
</TABLE>
13
<PAGE>
- ------------------------
(1) Gross profit and EBITDA are presented before and after a special charge to
liquidate excess inventory. The special charge of approximately $12.0
million was recorded within cost of goods sold during the 3rd quarter of
1997 and relates to the liquidation of excess inventory from purchase
commitments in early 1997 for 1997 Fall merchandise based upon a chain of
over 500 stores, of which 137 stores were closed by the time the merchandise
was received. See Note 8 to the consolidated financial statements at January
31, 1998, for a discussion of the special charge.
(2) Income (loss) from operations does not give effect to the $80.2 million
write-off of certain long-lived assets in 1995 and reorganization costs of
$38.4 million and $43.8 million, 1997 and 1996, respectively.
(3) EBITDA represents income (loss) before interest, income taxes, depreciation
and amortization, write-off of certain long-lived assets, and reorganization
costs. EBITDA is presented here to provide additional information about the
Company's operations. EBITDA is not a measure of financial performance under
Generally Accepted Accounting Principles (GAAP) and should not be considered
as an alternative to (i) net income (loss) as a measure of performance (or
any other measure of performance in accordance with GAAP) or (ii) cash flows
from operating, investing, or financing activities as an indicator of cash
flows or as a measure of liquidity. EBITDA is presented before and after
special charge.
(4) Total long-term debt (including current maturities) consists of $85.0
million of Senior Debt, $2.5 million of current maturities of long-term debt
and $1.1 million of non-current tax notes payable (as provided for in the
Plan of Reorganization, the Company is paying tax claims over a period not
to exceed six years from November 29, 1997). The presentation of Senior Debt
differs from the Consolidated Balance Sheet at January 31, 1998 as a result
of the recognition of $7.4 million (which is net of amortization) of Series
A Warrants attached to the debt that are presented as a discount to the
Senior Debt in accordance with GAAP.
14
<PAGE>
RISK FACTORS
THE RISK FACTORS SET FORTH BELOW, AS WELL AS THE OTHER INFORMATION APPEARING
IN THIS PROSPECTUS SHOULD BE CAREFULLY CONSIDERED BEFORE DECIDING TO SURRENDER
THE PRIVATE NOTES IN EXCHANGE FOR EXCHANGE NOTES PURSUANT TO THE EXCHANGE OFFER.
CERTAIN STATEMENTS IN THIS PROSPECTUS, INCLUDING STATEMENTS RELATING TO THE
COMPANY'S EXPECTED OPERATIONS AND FINANCING ACTIVITIES, ARE FORWARD-LOOKING
STATEMENTS THAT INVOLVE CERTAIN RISKS AND UNCERTAINTIES. THESE FORWARD-LOOKING
STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, (I) CONTINUING SUCCESS WITH, AND
MARKET ACCEPTANCE OF, FUNDAMENTAL CHANGES IN THE COMPANY'S MERCHANDISING
STRATEGY DESCRIBED HEREIN; (II) CHANGES IN CONSUMER PREFERENCES, IN THE
ADVERTISING MARKET FOR THE COMPANY'S PRODUCTS, IN THE APPAREL INDUSTRY OR MARKET
GENERALLY OR THAT SEGMENT OF WHICH THE COMPANY SPECIFICALLY TARGETS; (III)
CHANGES IN THE FINANCIAL CONDITION OF THE COMPANY'S CUSTOMERS, IN THE GENERAL
CONDITION OF THE UNITED STATES ECONOMY, IN THE AVAILABILITY OF KEY PERSONNEL, IN
FOREIGN CURRENCY EXCHANGE RATES, IN INDUSTRY CAPACITY, AND IN BRAND AWARENESS;
AND THE OTHER MATTERS SET FORTH IN THIS PROSPECTUS AND DESCRIBED FROM TIME TO
TIME IN THE COMPANY'S ANNUAL OR QUARTERLY REPORTS FILED WITH THE COMMISSION. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS ANTICIPATED IN
THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF NUMEROUS FACTORS, INCLUDING, BUT
NOT LIMITED TO, THOSE REFERRED TO ABOVE AND, AMONG OTHERS, THOSE DISCUSSED IN
"RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS," AND "BUSINESS."
SUBSTANTIAL LEVERAGE AND ABILITY TO SERVICE DEBT
Since the consummation of the Private Note Offering, the Senior Credit
Facility and the Plan of Reorganization, the Company has remained highly
leveraged and has indebtedness that is substantial in relation to shareholders'
equity. As of January 31, 1998, the Company has an aggregate of $88.6 million of
outstanding indebtedness (excluding approximately $17.5 million of letters of
credit and bankers' acceptances). The presentation of total debt differs from
the Consolidated Balance Sheet at January 31, 1998 as a result of the
recognition of $7.4 million (which is net of amortization) of Series A Warrants
attached to the Senior Debt that are presented as a discount to the Senior Debt
in accordance with GAAP.
The Company's high leverage could have important consequences to the holders
of the Notes, including the following: (i) the Company's ability to obtain
additional financing for working capital, capital expenditures, acquisitions, or
general corporate or other purposes may be impaired in the future; (ii) a
substantial portion of the Company's cash flow from operations must be dedicated
to the payment of principal and interest on its indebtedness, thereby reducing
the funds available to the Company for other purposes; (iii) the Company may be
substantially more leveraged than certain of its competitors and therefore may
be at a competitive disadvantage; and (iv) the Company's ability to adjust
rapidly to changing market conditions may be hindered and could make the Company
more vulnerable in the event of a downturn in its business or general economic
conditions.
The Company's ability to make scheduled payments of principal and interest
or to refinance its obligations with respect to its indebtedness will depend on
its financial and operating performance, which, in turn, will be subject to
prevailing economic conditions and to certain financial, business, and other
factors beyond its control. For the year ended February 1, 1997 and the year
ended January 31, 1998, the Company had net losses of $76.9 million and $53.1
million, respectively. If the Company's cash flow and capital resources are
insufficient to fund its debt service obligations, the Company may be forced to
reduce or delay planned expansion and capital expenditures, sell assets, obtain
additional equity capital, or restructure its indebtedness. There can be no
assurance that the Company's operating results, cash flow, and capital resources
will be sufficient for payment of its indebtedness in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
If the Company is unable to generate sufficient cash flow or otherwise
obtain funds necessary to make required payments on its indebtedness or if the
Company otherwise fails to comply with the various covenants in agreements
governing its indebtedness, the Company will be in default under the terms
15
<PAGE>
thereof, which would permit the holders of such indebtedness to accelerate the
maturity of such indebtedness and could cause defaults under other indebtedness
of the Company or result in the bankruptcy of the Company. Such defaults or any
bankruptcy of the Company resulting therefrom could delay or preclude payment of
principal of, or interest on, the Notes. There can be no assurance that, upon
any such default or bankruptcy, the assets of the Company would be sufficient to
repay the Notes. See "--Subordination of the Notes" and "--Original Issue
Discount Consequences."
SUBORDINATION OF THE NOTES
The Notes will be effectively subordinated to the Senior Credit Facility to
the extent of the assets securing such facility. The Senior Credit Facility will
be secured by substantially all the Company's assets, with the exception of the
funds and Pledged Securities in the Security Account. In the case of an Event of
Default (as defined in the Indenture) or a bankruptcy or insolvency proceeding
involving the Company, the holders of the Notes would be unsecured creditors of
the Company. The Senior Credit Facility will also be cross-defaulted to the
Notes, so that any Default (as defined herein) or Event of Default under the
Indenture will also result in an event of default under the Senior Credit
Facility.
Accordingly, the ability of the Company to repay the Notes following an
Event of Default or a bankruptcy or insolvency proceeding involving the Company
or an event of default under the Senior Credit Facility will, in all likelihood,
be subject to the prior repayment of the Company's indebtedness under the Senior
Credit Facility. There can be no assurance that the assets of the Company would
be sufficient to repay the Notes following any such event, particularly if the
proceeds of such assets are first applied to satisfy the Company's obligations
under the Senior Credit Facility.
SUCCESSFUL EXECUTION OF BUSINESS STRATEGY
The Company is currently implementing a new business strategy, which
consists of a number of cost-cutting and revenue-enhancing initiatives including
a change in merchandising strategy to focus on private-label apparel. There can
be no assurance that the merchandising, operating and other business strategies
implemented by the Company's new management team will continue to be successful
or that the Company will continue to increase revenue, improve its operations,
and remain profitable. Moreover, if the implementation of the new business
strategy is not successful and the Company is unable to generate sufficient
operating funds to pay interest on the Notes and other indebtedness of the
Company, including indebtedness under the Senior Credit Facility, there can be
no assurance that alternative sources of financing will be available to the
Company or, if available, that such financing will be on commercially reasonable
terms. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Overview" and "Business."
NONCOMPARABILITY OF FINANCIAL INFORMATION
Information reflecting the results of operations and financial condition of
the Company subsequent to the Chapter 11 Filing are not comparable to prior
periods due to (i) store closings undertaken during the Company's
reorganization; (ii) the replacement of the management team and the
restructuring of the Company's store operations and general and administrative
activities; (iii) the Company's Chapter 11 case, including the costs and
expenses relating thereto, and the effect of the settlement of certain related
liabilities; and (iv) the application of Fresh Start Accounting, pursuant to
which the Company's assets are stated at "reorganization value," which is
defined as the value of the entity (before considering liabilities) on a
going-concern basis following the reorganization and represents an estimate of
the amount a willing buyer would pay for the assets of the Company immediately
after the reorganization. In addition, because the Company has been in a
restructuring phase and has continued to incur costs and expenses relating to
its Chapter 11 case, the results of operations since October 1996 may not be
indicative of the Company's future performance. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
16
<PAGE>
RESTRICTIVE DEBT COVENANTS
The Indenture contains a number of covenants that will impose significant
operating and financial restrictions on the Company and its subsidiary. Such
restrictions affect, and in many respects significantly limit or prohibit, among
other things, the ability of the Company and its subsidiary to incur additional
indebtedness, pay dividends, repay other indebtedness prior to stated
maturities, create liens on assets, make investments or acquisitions, engage in
mergers or consolidations, or engage in certain transactions with affiliates.
These restrictions could limit the ability of the Company in the future to
effect financings, make needed capital expenditures, withstand a downturn in the
Company's business or the economy in general, or otherwise conduct necessary
corporate activities. A failure by the Company or its subsidiary to comply with
these restrictions could lead to a default under the terms of the Indenture and
the Notes, notwithstanding the ability of the Company to meet its debt service
obligations. Upon the occurrence of an Event of Default, the holders of the
Notes could elect to declare all such indebtedness, together with accrued and
unpaid interest thereon, to be immediately due and payable, and there can be no
assurance that the Company would be able to make such payments or borrow
sufficient funds from alternative sources to make any such payments. Even if
additional financing could be obtained, there can be no assurance that it would
be obtainable on commercially reasonable terms. See "Description of Notes."
In addition, the Senior Credit Facility contains covenants that are more
restrictive than those contained in the Indenture. Such covenants include
covenants related to the financial performance of the Company. The Company's
ability to comply with such covenants may be affected by events beyond its
control. There can be no assurance that the Company will be able to comply with
such covenants. A breach of any of the covenants under the Senior Credit
Facility could result in an event of default under the Senior Credit Facility.
Upon the occurrence of an event of default under the Senior Credit Facility, the
lenders under the Senior Credit Facility could elect to declare all obligations
to be immediately due and payable and terminate all commitments under the Senior
Credit Facility. If the lenders under the Senior Credit Facility took such
action, it would result in an Event of Default under the Indenture.
If the Company were unable to pay such amounts, the lenders under the Senior
Credit Facility could foreclose on the collateral securing the Company's
obligations thereunder. Such collateral consists of substantially all assets of
the Company. The Notes are unsecured and are effectively subordinated to the
Senior Credit Facility to the extent of the assets securing such facility. See
"Subordination of Notes" and "Description of Certain Indebtedness--Senior Credit
Facility."
REPURCHASE OF NOTES UPON A CHANGE OF CONTROL
If a Change of Control occurs, the Company must offer to purchase the Notes
at a purchase price equal to 101% of the principal amount thereof plus accrued
and unpaid interest, if any, to the date of repurchase. See "Description of
Notes--Repurchase upon Change of Control" and "--Certain Definitions." In
addition, if the Company merges or consolidates with or into, or sells all or
substantially all of its assets to, a person or entity that does not have
publicly-traded common equity for which the Series A Warrants become
exercisable, and the consideration for such transaction is not all cash, the
Company must offer to repurchase (a "Repurchase Offer") all the Series A
Warrants at the value of the common stock issuable upon exercise thereof less
the exercise price. If the Company must make a Repurchase Offer or an offer to
purchase the Notes upon a Change of Control, there can be no assurance that it
would have sufficient funds available to purchase any Notes or Series A Warrants
tendered. The Company would, then, likely be required to refinance the Notes and
borrow to repurchase the Series A Warrants. There can be no assurance that the
Company would be able to accomplish such refinancing or borrowing or, if such
refinancing or borrowing were to occur, that it would be accomplished on
commercially reasonable terms.
DEPENDENCE ON KEY PERSONNEL
The Company's success will be highly dependent upon the new management team,
including Mr. Sam Forman. The loss of Mr. Forman's services could have a
material adverse effect upon the implementation
17
<PAGE>
of the Company's business strategy and on the Company in general. Mr. Forman has
the right to terminate his employment agreement with the Company at any time on
sixty days' notice; however, unless such termination results from certain
specified actions or events, any unvested Series C Warrants (as defined herein)
distributed to Mr. Forman will not vest unless they have already vested, and Mr.
Forman will be prevented from being employed by competitors of the Company
(other than Forman Enterprises, Inc.) for a period of one year. See
"Management--Forman Employment Agreement."
The Company's success also depends upon other senior executives. No other
person employed by the Company is subject to an employment agreement. While the
Company believes that no other executive is as important to the success of the
Company as Mr. Forman, the loss of the services of a significant number of
senior executives could have a material adverse effect on the Company.
Certain important merchandising and sourcing activities of the Company are
performed by consultants who are employees and owners of Forman Enterprises,
Inc. ("Forman Enterprises"), which operates factory outlet stores that sell
casual apparel. Seventy percent of the common stock of Forman Enterprises is
owned by Mr. Forman and his family. The loss of the services of such consultants
could have an adverse effect on the Company. See "Certain Relationships."
COMPETITIVE NATURE OF THE COMPANY'S INDUSTRY
The retail apparel industry is highly competitive with price, selection,
quality, service, location, and store environment the principal competitive
factors. While the Company believes it is able to compete favorably as to each
of these factors, the Company believes it competes mainly on the basis of price,
merchandise selection, and customer service. Furthermore, the Company's success
largely depends upon its ability to gauge accurately the tastes of its customers
and provide merchandise that satisfies customer demand. Misjudgment of such
tastes could have a material and adverse effect on the Company's operations,
cash flows, and financial condition, it could also result in overstocked
inventory or lower profits due to markdowns. The Company competes with many
national and local retail stores, specialty apparel chains, department stores,
and mail order merchandisers. The Company also competes in certain locations
with retail and outlet stores operated by one of its suppliers, Levi Strauss &
Co. ("Levi Strauss"). Many of the Company's competitors have greater financial
and marketing resources than the Company. In addition, many of the Company's
competitors offer private-label merchandise that is comparable to the Company's
private-label merchandise.
IDENTIFYING CUSTOMER PREFERENCES
The Company's future success depends, in part, upon its ability to
anticipate and respond to customer preferences in a timely manner. Changes in
customer preferences for style, seasonal adaptation, adverse weather conditions,
or other reasons, if unsuccessfully identified, forecasted, or responded to by
the Company, could, among other things, lead to lower sales, excess inventories,
and higher markdowns. Those in turn could have a material adverse effect on the
Company's results of operations and financial condition.
IMPACT OF ECONOMIC CONDITIONS
Certain economic conditions affect the level of consumer spending on
merchandise offered by the Company, including, among others, business
conditions, interest rates, taxation, and consumer confidence in future economic
conditions. If the demand for apparel and related merchandise were to decline,
the Company's business and results of operations would be materially and
adversely affected. The Company's stores rely principally on mall traffic for
customers. Therefore, the Company depends upon the continued popularity of malls
as a shopping destination and the ability of mall anchor tenants and other
attractions to generate customer traffic for its stores. In addition, a
significant number of the Company's stores are concentrated in the midwest,
southern, and eastern regions of the United States. A decrease in mall traffic
18
<PAGE>
or a decline in economic conditions in the markets where the Company's stores
are located would materially and adversely affect the Company's growth, net
sales, results of operations, and profitability.
SEASONALITY
The Company, like most retailers, has a seasonal pattern of sales and
earnings. The Company has two major selling seasons: (i) back-to-school in the
third quarter and (ii) Christmas in the fourth quarter. Historically,
substantially all the Company's income from operations has been generated during
the third and fourth quarters. In addition, as is the case with other retailers,
the results of the Company's operations are subject to changes in consumer
demand associated with general economic conditions and to changes in consumer
preferences. The Company's results of operations may also fluctuate from quarter
to quarter in the future as a result of the amount and timing of sales
contributed by new stores and the integration of new stores into the operations
of the Company as well as other factors. An increase in the number of the
Company's stores can significantly affect results of operations on a
quarter-to-quarter basis.
INFORMATION SYSTEMS AND CONTROL PROCEDURES
Since the Chapter 11 Filing, the Company has taken steps to improve and,
where applicable, replace its management information systems to provide enhanced
support to all operating areas and currently anticipates aggregate expenditures
for hardware, software, labor, and compliance with year 2000 requirements of
approximately $6 million between 1997 and 1998. See "Business --Information
Systems." While the Company expects to continue to upgrade its management
information systems, there can be no assurance that the Company can successfully
implement such enhancements or that such enhancements will support the Company's
planned expansion strategy, or, if such upgrades and enhancements are not
successfully implemented, that the Company's current systems will continue to
support adequately its information requirements.
Moreover, while the Company believes its current management information
systems are generally adequate to support the Company's business operations,
certain deficiencies relating to the age and design of the systems, including,
without limitation, difficulties in planning, forecasting, allocating and
measuring performance through an integrated financial system, may adversely
affect the business operations of the Company in the near and long-term. There
can be no assurance that the Company's efforts to improve upon and enhance its
present management information systems will resolve or eliminate any such
existing or potential deficiencies.
As noted above, the Company has implemented a program designed to ensure
that all the Company's software will manage and manipulate data involving the
transition of dates from 1999 to 2000 without functional or data abnormality and
without inaccurate results related to such dates. Any failure on the part of the
Company to ensure that any such software complies with year 2000 requirements
could have a material adverse effect on the business, financial condition, and
results of operations of the Company.
RELIANCE ON KEY VENDORS
The Company's business is dependent upon its ability to purchase current
season apparel at competitive prices. The Company currently purchases inventory
primarily from foreign manufacturers and Levi Strauss. The Company owns no
manufacturing facilities.
Merchandise purchased from Levi Strauss represented approximately 30% of
total sales in 1996 and 24% for the year ended January 31, 1998. The Company
operates 22 Levi's Outlet stores pursuant to a license agreement with Levi
Strauss, which license agreement requires the Company to sell only merchandise
manufactured by Levi Strauss in the Levi's Outlet stores. The Company's license
agreement with Levi Strauss is scheduled to expire on July 31, 2000, although
individual stores may continue to operate under the license until the expiration
of each such store's lease. There can be no assurance that the Levi Strauss
license for the Levi's Outlets will be renewed. A change in the Company's
relationship with Levi Strauss could have a material adverse effect on the
Company's business.
19
<PAGE>
The Company has no long-term contracts with suppliers and transacts business
principally on an order-by-order basis. Although the Company's relationship with
its key vendors is satisfactory, there can be no assurance that the Company will
be able to acquire merchandise from such vendors on favorable terms in the
future.
Purchasing merchandise from foreign suppliers subjects the Company to the
general risks of doing business abroad. These risks include cancellations or
delays in shipments, work stoppages, increases in import duties and tariffs,
changes in foreign exchange rates, changes in foreign laws and regulations, and
political instability. The Company believes that the loss of one or more of
these foreign suppliers would not have a long-term material adverse effect on
the Company, because merchandise purchased from foreign suppliers can be
obtained from other sources. However, the loss of certain foreign suppliers
could, in the short term, adversely affect the Company's business until
alternative arrangements can be secured. Trade terms are negotiated with each
vendor and may be modified from time to time. Substantially all the Company's
foreign purchases are currently paid for in U.S. dollars.
NEW STORES AND REMODELING EXISTING STORES
The Company intends to commence a controlled program of opening 15 to 20 new
stores annually as well as to deploy capital expenditures toward the remodeling
of existing stores. Accomplishing the Company's expansion goals will depend upon
a number of factors, including the identification of new markets in which the
Company can successfully compete, the ability to obtain suitably sized locations
for new stores at acceptable costs, the hiring and training of qualified
personnel, particularly at the store management level, the integration of new
stores into existing operations, the expansion of the Company's buying and
inventory capabilities and the availability of capital. There can be no
assurance that the Company will be able to achieve its store expansion goals,
manage growth effectively, successfully integrate planned new stores into the
Company's operations, or operate new stores profitably. Nor can there be any
assurance that remodeled stores will provide a satisfactory return on investment
through increased sales or otherwise.
FRAUDULENT CONVEYANCE
If a court, in a lawsuit brought by an unpaid creditor of the Company or a
representative of creditors, such as a trustee in bankruptcy, or the Company as
a debtor-in-possession, were to find under relevant federal or state fraudulent
conveyance statutes that the Company did not receive fair consideration or
reasonably equivalent value for incurring debt, including the Notes, and that,
at the time of such incurrence, the Company (i) was insolvent; (ii) was rendered
insolvent by reason of such incurrence; (iii) was engaged in a business or
transaction for which the assets remaining with the Company constituted
unreasonably small capital; or (iv) intended to incur, or believed that it would
incur, debts beyond its ability to pay such debts as they matured, such court
could void the Company's obligations under the Notes, subordinate the Notes to
other indebtedness of the Company, or take other action detrimental to the
holders of the Notes.
The measure of insolvency for these purposes would vary depending upon the
law of the jurisdiction being applied. Generally, however, a Company would be
considered insolvent for these purposes if the sum of such Company's liabilities
(including a fair estimate of the likely amount payable in respect of contingent
liabilities) were greater than the fair saleable value of all such Company's
property, or if the present fair saleable value of such Company's assets were
less than the amount that would be required to pay its probable liability on its
existing debts as they became absolute and matured. Moreover, regardless of
solvency or the adequacy of consideration, a court could void the Company's
obligations under the Notes, subordinate the Notes to other indebtedness of the
Company, or take other action detrimental to the holders of the Notes if such
court determined that the incurrence of debt, including the Notes, was made with
the actual intent to hinder, delay, or defraud creditors.
20
<PAGE>
The Company believes that the indebtedness represented by the Notes is being
incurred for proper purposes and in good faith without any intent to hinder,
delay, or defraud creditors, that the Company is receiving reasonably equivalent
value or fair consideration for incurring such indebtedness, that the Company is
and, after giving effect to the issuance of the Notes and the use of proceeds
therefrom, will continue to be, solvent under the applicable standards, and that
it has and will have sufficient capital for carrying on its businesses and will
be able to pay its debts as they mature.
LIMITATION ON USE OF NET OPERATING LOSSES AND BUILT-IN LOSSES
Under the Internal Revenue Code of 1986, as amended (the "Code"), the
utilization of net operating loss carryforwards ("NOLs") against future taxable
income is subject to limitation if a Company experiences an "ownership change"
as defined in the Code (the "Section 382 limitation"). Moreover, if such Company
experiences an ownership change, the ability to use recognized "built-in losses"
to offset other income may also be subject to the Section 382 limitation. As a
result of its reorganization under Chapter 11, the Company will be treated as
having experienced an ownership change. Thus, after emerging from Chapter 11,
the Company's ability to offset income in each post-reorganization taxable year
by its pre-reorganization NOLs and built-in losses will be limited to an amount
not to exceed the aggregate value of the stock of the Company immediately before
such change in control (taking into account in such calculation, however, the
value of all creditors' claims surrendered in connection with the Plan of
Reorganization) multiplied by the specific interest rate published monthly by
the Internal Revenue Service.
The operation and effect of Section 382 of the Code will be materially
different from that just described if the Company is subject to the special
rules for corporations in bankruptcy provided in Section 382(1)(5) of the Code.
In that case, the Company's ability to utilize its NOLs would not be limited as
described in the preceding paragraph. However, several other limitations would
apply to the Company under Section 382(1)(5) of the Code, including (i) the
Company's NOLs would be calculated without taking into account deductions for
interest paid or accrued in the current tax year and all other tax years ending
during the three-year period prior to the current tax year with respect to
creditors' claims that are exchanged for stock of the Company under the Plan of
Reorganization (resulting in a substantial reduction in the Company's NOLs) and
(ii) if the Company undergoes another ownership change within two years after
the Effective Date, the Company's Section 382 limitation with respect to that
ownership change will be zero. The Company believes that the provisions of
Section 382(1)(5) of the Code will apply to the ownership change occurring
pursuant to the Plan of Reorganization. However, the Company can elect to have
the regular Section 382 rules (described above) apply rather than the special
rules of Section 382(1)(5) of the Code. The Company has not yet determined
whether to elect application of the regular rules under Section 382 of the Code.
ORIGINAL ISSUE DISCOUNT CONSEQUENCES
The allocation of a portion of the issue price of the Private Notes to the
Series A Warrants resulted in the Notes having an issue price less than their
principal amount. The Notes were therefore treated as having been issued at a
discount. When a debt instrument is originally issued at a discount that is
equal to or greater than a DE MINIMIS amount, the debt instrument is treated as
having original issue discount ("OID") for U.S. federal income tax purposes.
Consequently, holders of the Exchange Notes generally will be required to
include amounts in gross income for U.S. federal income tax purposes in advance
of their receipt of the cash payments to which the income is attributable. See
"Certain U.S. Federal Income Tax Considerations--Taxation of the Notes--Original
Issue Discount" for a more detailed discussion of the U.S. federal income tax
consequences for the Company and the beneficial owners of the Notes resulting
from the purchase, ownership, and disposition of the Notes.
Furthermore, since the Notes are subject to the applicable high-yield
discount obligation rules, the Company will not be able to deduct the OID
attributable to the Notes until paid in cash or property or, in certain
circumstances, at all. See "Certain U.S. Federal Income Tax
Considerations--Taxation of the
21
<PAGE>
Notes--Certain Potential Federal Income Tax Consequences to the Company and to
Corporate Holders." Since the rules applicable to high-yield discount
obligations apply, the Company's after-tax cash flow will be less than if such
OID were deductible when accrued.
If a bankruptcy case is commenced by or against the Company under the
Bankruptcy Code after the issuance of the Notes, the claim of a holder of Notes
may be limited to an amount equal to the sum of (i) the initial offering price
and (ii) that portion of OID that is not deemed to constitute "unmatured
interest" for purposes of the Bankruptcy Code. Any OID that was not amortized as
of the date of any such bankruptcy filing would constitute "unmatured interest."
To the extent that the Bankruptcy Code differs from the Internal Revenue Code in
determining the method of amortization of original issue discount, a holder of
Notes may realize taxable gain or loss upon payment of such holder's claim in
bankruptcy.
EMERGENCE FROM CHAPTER 11
The Company emerged from Chapter 11 on the Effective Date. The Company's
experience in Chapter 11 may affect its ability to negotiate favorable trade
terms with manufacturers and other vendors and to negotiate favorable lease
terms with landlords. The failure to obtain such favorable terms could have a
material adverse effect on the Company and its financial performance. On the
Effective Date, the Company entered into the Senior Credit Facility, which will
provide the Company with a seasonal revolving line of credit in an amount of
$115 million, of which up to $90 million may be used to issue letters of credit
and bankers' acceptances, subject to satisfaction of various conditions. See
"Description of Certain Indebtedness--Senior Credit Facility."
LACK OF PUBLIC MARKET FOR SECURITIES
The Exchange Notes are new securities for which there is currently no
market. The Company does not intend to apply for listing of the Exchange Notes
on any securities exchange or for inclusion of the Exchange Notes in any
automated quotation system. The Company has been advised by the Initial
Purchaser that it currently intends to make a market in the Exchange Notes.
However, there can be no assurance as to the development or liquidity of any
market for the Exchange Notes. If a market for the Exchange Notes were to
develop, the Exchange Notes could trade at prices that may be higher or lower
than their principal amount depending upon many factors, including prevailing
interest rates, the Company's operating results, and the markets for similar
securities. Historically, the market for non-investment grade debt has been
subject to disruptions that have caused substantial volatility in the prices of
securities similar to the Exchange Notes. There can be no assurance that, if a
market for the Exchange Notes were to develop, such a market would not be
subject to similar disruptions.
FAILURE TO EXCHANGE PRIVATE NOTES
The Exchange Notes will be issued in exchange for Private Notes only after
timely receipt by the Exchange Agent of such Private Notes, a properly completed
and duly executed Letter of Transmittal and all other required documentation.
Therefore, holders of Private Notes desiring to tender such Private Notes in
exchange for Exchange Notes should allow sufficient time to ensure timely
delivery. Neither the Exchange Agent nor the Company is under any duty to give
notification of defects or irregularities with respect to tenders of Private
Notes for exchange. Private Notes that are not tendered or are tendered but not
accepted will, following consummation of the Exchange Offer, continue to be
subject to the existing restrictions upon transfer thereof. In addition, any
holder of Private Notes who tenders in the Exchange Offer for the purpose of
participating in a distribution of the Exchange Notes will be required to comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale transaction. Each broker-dealer who holds Private
Notes acquired for its own account as a result of market-making or other trading
activities and who receives Exchange Notes for its own account in exchange for
such Private Notes pursuant to the Exchange Offer, must acknowledge that it will
deliver a
22
<PAGE>
prospectus in connection with any resale of such Exchange Notes. To the extent
that Private Notes are tendered and accepted in the Exchange Offer, the trading
market for untendered and tendered but unaccepted Private Notes could be
adversely affected due to the limited amount, or "float," of the Private Notes
that are expected to remain outstanding following the Exchange Offer. Generally,
a lower "float" of a security could result in less demand to purchase such
security and could, therefore, result in lower prices for such security. For the
same reason, to the extent that a large amount of Private Notes are not tendered
or are tendered and not accepted in the Exchange Offer, the trading market for
the Exchange Notes could be adversely affected. See "Plan of Distribution" and
"The Exchange Offer."
NO CASH PROCEEDS TO THE COMPANY
This Exchange Offer is intended to satisfy certain obligations of the
Company under the Registration Rights Agreement. The Company will not receive
any proceeds from the issuance of the Exchange Notes offered hereby and has
agreed to pay the expenses of the Exchange Offer. In consideration for issuing
the Exchange Notes as contemplated in this Prospectus, the Company will receive,
in exchange, Private Notes in like principal amount. The form and terms of the
Exchange Notes are identical in all material respects to the form and terms of
the Private Notes, except as otherwise described herein under "The Exchange
Offer--Terms of the Exchange Offer." The Private Notes surrendered in exchange
for the Exchange Notes will be retired and canceled and cannot be reissued.
Accordingly, issuance of the Exchange Notes will not result in any increase in
the outstanding debt of the Company.
PRICE RANGE OF THE PRIVATE NOTES
The Private Notes were designated for trading in the PORTAL market of the
NASD effective October 27, 1997. Based on reports of the Initial Purchaser, the
Company believes there is no active market for the Private Notes. As of
, 1998 there were record holders of the Private Notes and
participants in the Global Notes deposited with the Depositary.
23
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of January 31, 1998. The table should be read in conjunction with the historical
consolidated financial statements of the Company and the related notes thereto
included elsewhere in this Prospectus. See "Plan of Reorganization" and
"Selected Historical Financial Data."
<TABLE>
<CAPTION>
JANUARY 31, 1998
-----------------
<S> <C>
(DOLLARS IN
MILLIONS)
Cash and cash equivalents (other than restricted cash in the Security Account)................... $ 22.2
Restricted cash in Security Account(1)........................................................... 17.2
Long-term debt (including current maturities):
Current Maturities............................................................................. 2.5
Notes Payable--Taxes........................................................................... 1.1
Senior Credit Facility(2)...................................................................... --
Notes(3)....................................................................................... 85.0
------
Total long-term debt (including current maturities)(4)......................................... 88.6
Shareholders' equity............................................................................. 82.6
------
Total capitalization............................................................................. $ 171.2
Long-term debt (including current maturities)/Total capitalization............................... 51.8%
</TABLE>
- ------------------------
(1) Consists of a portion of the net proceeds realized from the Private Note
Offering and placed into the Security Account and represents funds that
together with the proceeds from the investment thereof will be utilized to
pay interest on the Notes to May 1, 1999.
(2) As of January 31, 1998, the Company had approximately $15.7 million of
issued letters of credit and approximately $1.8 million of bankers'
acceptances outstanding under the Senior Credit Facility.
(3) In accordance with GAAP, approximately $7.6 million of the proceeds of the
Private Note Offering was allocated to the Series A Warrants, as a discount
to the debt. Therefore, the Note net of the discount is $77.4 million.
(4) Total long-term debt (including current maturities) consists of $85.0
million of Senior Debt, $2.5 million of current maturities of long-term debt
and $1.1 million of non-current tax notes payable (as provided for in the
Plan of Reorganization, the Company is paying tax claims over a period not
to exceed six years from November 29, 1997). The presentation of Senior Debt
differs from the Consolidated Balance Sheet at January 31, 1998 as a result
of the recognition of $7.4 million (which is net of amortization) of Series
A Warrants attached to the debt that are presented as a discount to the
Senior Debt in accordance with GAAP.
USE OF PROCEEDS
The Company will not receive any proceeds from the issuance of the Exchange
Notes pursuant to the Exchange Offer. In consideration for issuing the Exchange
Notes as contemplated in this Prospectus, the Company will receive in exchange
Private Notes in like principal amount, the term and form of which are identical
in all material respects to the Exchange Notes. The Private Notes surrendered in
exchange for Exchange Notes will be retired and cancelled and cannot be
reissued. Accordingly, issuance of the Exchange Notes will not increase the
indebtedness of the Company.
The net proceeds from the offering of the Private Notes were $80.6 million
after deducting selling commissions and estimated fees and expenses. Of those
net proceeds, the Company used (i) approximately $15.4 million to purchase a
portfolio of Pledged Securities, which consists of U.S. Treasury Securities that
were pledged as security for the scheduled interest payments on the Notes
through August 1, 1999, and (ii) approximately $65.2 million to repay all
outstanding borrowings under the DIP Facilities. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
24
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following selected historical financial data of the Company for 1993,
1994, 1995, 1996 and the 39 weeks ended November 1, 1997 and the 13 weeks ended
January 31, 1998 have been taken or derived from the historical audited
consolidated financial statements of the Company. Historical data and interim
results are not necessarily indicative of future results, and interim data are
not necessarily indicative of results for a full year. The information set forth
below should be read in conjunction with the discussion under "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
PREDECESSOR COMPANY
-------------------------------------------------------
39 WEEKS 13 WEEKS
FISCAL YEAR ENDED ENDED
------------------------------------------ NOV. 1, JANUARY 31,
1993 1994 1995 1996 1997 1998
--------- --------- --------- --------- ----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net sales.............................. $ 502.6 $ 588.3 $ 619.2 $ 538.3 $ 277.1 $ 117.4
Gross profit before special
charge(1)............................ 142.1 167.8 167.2 121.9 74.3 44.1
Gross profit after special charge(1)... 142.1 167.8 167.2 121.9 62.3 44.1
Reorganization costs................... -- -- -- 43.8 38.4 --
Income (loss) from operations(2)....... 18.0 31.5 21.3 (15.7) (15.3) 11.9
Net income (loss)(2)................... (6.6) 5.2 (97.0) (76.9) (57.7) 4.5
Ratio of earnings to fixed
charges(3)........................... 0.9 1.5 N/A N/A N/A 2.2
STORE DATA:
Number of stores at end of period...... 657 701 745 537 413 413
Increase (decrease) in same store
sales(4)............................. (3.1)% 7.4% (4.0)% (8.7)% (12.2 )% (3.4 )%
Other Data:
Gross profit % before special
charge(1)............................ 28.3% 28.5% 27.0% 22.6% 26.8% 37.5%
Gross profit % after special
charge(1)............................ 28.3% 28.5% 27.0% 22.6% 22.5% 37.5%
Total capital expenditures............. $ 8.9 $ 14.8 $ 13.1 $ 1.8 $ 1.4 $ 3.7
Depreciation and amortization.......... 17.4 16.7 13.2 11.1 6.1 3.0
EBITDA before special charge(1)(5)..... 35.3 48.2 34.5 (4.7) 2.9 14.9
EBITDA after special charge(1)(5)...... 35.3 48.2 34.5 (4.7) (9.1 ) 14.9
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
AS OF AS OF
FEBRUARY 3, FEBRUARY 1, AS OF JANUARY
1996 1997 31, 1998
------------- ----------- -------------
<S> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents (excludes restricted cash in Security Account)... $ 8.2 $ 6.4 $ 22.2
Restricted cash in Security Account........................................ -- -- 17.2
Inventories................................................................ 110.7 72.6 55.8
Total assets............................................................... 199.0 132.9 209.1
Total debt (including current maturities and liabilities subject to
compromise).............................................................. 201.4 235.6 88.6(6)
Total shareholder's equity (deficit)....................................... (73.2) (157.3) 82.6
</TABLE>
- ------------------------
(1) Gross profit and EBITDA are presented before and after a special charge to
liquidate excess inventory. The special charge of approximately $12.0
million was recorded within cost of goods sold during the third quarter 1997
and relates to the liquidation of excess inventory from purchase commitments
in early 1997 for 1997 Fall merchandise based upon a chain of over 500
stores, of which 137 stores were closed by the time the merchandise was
received. See Note 8 to the consolidated financial statements at January 31,
1998, for a discussion of the special charge.
(2) Income (loss) from operations does not give effect to the $80.2 million
write-off of certain long-lived assets in 1995 and reorganization costs
incurred of $43.8 million during 1996 and $38.4 million for 1997,
respectively.
(3) The ratio of earnings to fixed charges was 0.9 for 1993, 1.5 for 1994 and
2.2 for the 13 weeks ended January 31, 1998. The ratio of earnings to fixed
charges for 1995 is not stated because of the net loss incurred in this
year. Earnings were inadequate to cover fixed charges by $79.4 million in
1995. The ratio of earnings to fixed charges for 1996 and for the 39 weeks
ended November 1, 1997 is not stated due to the suspension of interest
accruals upon the Company's Chapter 11 Filing. The ratio of earnings to
fixed charges is computed by dividing income before income taxes and
extraordinary items and fixed charges by fixed charges. Fixed charges
consist of interest expense, net, amortization of debt issuance costs, and
the portion (approximately one-third) of rent expense that is deemed to
represent interest.
(4) The Company defines same stores to be stores that have reached their
thirteenth full month of operations, excluding closed stores.
(5) EBITDA represents net earnings (losses) before interest, income taxes,
depreciation and amortization, and reorganization costs. EBITDA is presented
here to provide additional information about the Company's operations.
EBITDA is not a measure of financial performance in accordance with
Generally Accepted Accounting Principles (GAAP) and should not be considered
as an alternative to (i) net income (loss) as a measure of performance (or
any other measure of performance in accordance with GAAP) or (ii) cash flows
from operating, investing, or financing activities as an indicator of cash
flows or as a measure of liquidity. EBITDA is presented before and after a
special charge to liquidate excess inventory.
(6) Total long-term debt (including current maturities) consists of $85.0
million of Senior Debt, $2.5 million of current maturities of long-term debt
and $1.1 million of non-current tax notes payable (as provided for in the
Plan of Reorganization, the Company is paying tax claims over a period not
to exceed six years from November 29, 1997). The presentation of Senior Debt
differs from the Consolidated Balance Sheet at January 31, 1998 as a result
of the recognition of $7.4 million (which is net of amortization) of Series
A Warrants attached to the debt that are presented as a discount to the
Senior Debt in accordance with GAAP.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company recently emerged from bankruptcy under Chapter 11 of the
Bankruptcy Code. See "Plan of Reorganization." The following discussion and
analysis relates to the Company's historical financial results of operations and
financial condition without giving effect to the implementation of the new
business strategy, the Private Note Offering, the Senior Credit Facility, and
the Plan of Reorganization, except to the extent that the implementation of the
new business strategy and the Plan of Reorganization occurred prior to November
1, 1997. The Company's management does not believe that the results of
operations for future periods will be comparable to the results of operations
for prior periods, because of the implementation of the new business strategy
and the Plan of Reorganization, the completion of the Private Note Offering and
the Senior Credit Facility, and the incurrence of expenses in connection with
the Company's Chapter 11 case. The following discussion and analysis should be
read in conjunction with the "Selected Historical Financial Data," the Pro Forma
financial information appearing elsewhere in this Prospectus, and the Company's
consolidated financial statements and the notes thereto.
OVERVIEW
During the period from 1992 to 1994, the Company expanded from 605 stores,
generating net sales of $458.9 million, EBITDA of $42.9 million, and an EBITDA
margin of 9.3%, to 701 stores, generating net sales of $588.3 million, EBITDA of
$48.2 million, and an EBITDA margin of 8.2%. However, by 1995 the Company's
EBITDA margin declined to 5.6% primarily due to the following reasons: (i) the
Company, in an attempt to further its expansion strategy, opened stores without
sufficient regard to the profitability of each location; (ii) in response to
increased price competition on Levi's merchandise, the Company unsuccessfully
expanded its offering of branded apparel in the face of stiff competition from
mall-based department stores; (iii) the Company failed to competitively source
merchandise for its private label program; and (iv) the specialty apparel retail
sector experienced a downturn. By 1996, in the wake of declining sales and
deteriorating margins, the Company was unable to meet its scheduled interest
payment obligations on its then outstanding subordinated indebtedness. As a
result of the foregoing, in October 1996, the Company made the Chapter 11
Filing.
In December 1996, the new management team joined the Company and developed a
new business strategy designed to enhance the Company's profitability and
increase gross margins by capitalizing on the Company's nationally recognized
brand name and large store base and by reducing costs and implementing a new
merchandising strategy. Upon arrival, the new management team immediately began
liquidating merchandise that was inconsistent with its new merchandising
strategy and significantly reduced inventory available in the stores. In
addition, the new management team (i) closed 341 unprofitable stores; (ii)
obtained rent concessions on existing stores; (iii) reduced selling, general and
administrative expenses through personnel reductions associated with closed
stores; (iv) consolidated the Company's corporate infrastructure by closing the
Company's Dallas corporate office; and (v) established a new corporate "culture"
focused on cost control.
The Company began receiving merchandise pursuant to its new business
strategy in May 1997 and began realizing significant benefits of such new
merchandise by August 1997. Accordingly, the Company's retail margins
subsequently increased to 46.9% before the special charge of liquidating excess
inventories and 43.9% after the special charge for 1997. See Note 8 to the
consolidated financial statements for a discussion of the special charge.
Net sales consists of sales of apparel, accessories, and other merchandise
through the Company's COUNTY SEAT stores, COUNTY SEAT OUTLET stores, LEVI'S
OUTLET stores, and OLD FARMER'S ALMANAC GENERAL STORES. For the Pre-Emergence
Period, the Company's COUNTY SEAT stores, COUNTY SEAT OUTLET stores, LEVI'S
OUTLET stores, and OLD FARMERS ALMANAC GENERAL STORES comprised 88%, 2%, 9%, and
1% of net sales, respectively.
27
<PAGE>
The COUNTY SEAT OUTLET stores sell special buy and clearance merchandise,
including slow-moving merchandise from the COUNTY SEAT stores. The LEVI'S OUTLET
stores offer closeouts, seconds, and irregulars under the Levi's and Docker's
trademarks. Merchandise at the COUNTY SEAT stores is generally sold at ticketed
retail prices upon arrival, but markdowns are taken (i) in connection with
promotional activities in the ordinary course of business and (ii) on
end-of-season clearance items and slow moving merchandise. In accordance with
the new business strategy, the Company currently sells its merchandise at lower
price points than it had in prior periods. For example, for the year ended
January 31, 1998, the Company decreased its average selling price per unit at
its COUNTY SEAT stores by 28% to $14.17 from $19.78 in the prior period. As a
result, the Company improved unit volume at its COUNTY SEAT stores by 18% to
20.8 million units for the year ended January 31, 1998 from 17.7 million units
for the year ended February 1, 1997.
Cost of sales includes merchandise costs, transportation costs, storage
costs, handling costs, and other costs related to the sourcing of merchandise.
Cost of sales also includes a substantial portion of fixed occupancy costs.
Selling, general, and administrative costs include store and administrative
wages, administrative costs related to corporate offices and corporate
activities, employee benefits, marketing costs, insurance premiums, cash
management fees, and the cost of supplies, equipment rental and maintenance,
outside services, and travel.
RESULTS OF OPERATIONS
The following table shows the Company's operating results as a percentage of
net sales for the periods indicated:
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
------------------------------------------------
FISCAL YEAR 13 WEEKS ENDED
------------------------------- 39 WEEKS ENDED JANUARY 31,
1994 1995 1996 NOV. 1, 1997 1998
--------- --------- --------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Net sales.................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit before special charge(1)........ 28.5% 27.0% 22.6% 26.8% 37.5%
Gross profit after special charge(1)......... 28.5% 27.0% 22.6% 22.5% 37.5%
Selling, general, and administrative
expenses................................... 20.3% 21.4% 23.5% 25.8 24.9%
EBITDA before special charge (1)............. 8.2% 5.6% (0.9)% 1.0% 12.7%
EBITDA after special charge(1)............... 8.2% 5.6% (0.9)% (3.3 )% 12.7%
Reorganization costs......................... -- -- 8.1% 13.9% --
Income (loss) from operations(2)............. 5.4% 3.4% (2.9)% (5.5 )% 10.2%
</TABLE>
- ------------------------
(1) Gross profit and EBITDA are presented before and after a special charge to
liquidate excess inventory. The special charge of approximately $12.0
million was recorded within cost of goods sold during the third quarter 1997
and relates to the liquidation of excess inventory from purchase commitments
in early 1997 for 1997 Fall merchandise based upon a chain of over 500
stores, of which 137 stores were closed by the time the merchandise was
received. See Note 8 to the consolidated financial statements January 31,
1998, for a discussion of the special charge.
(2) Income (loss) from operations does not give effect to the $80.2 million
write-off of certain long-lived assets in 1995 and reorganization costs of
$43.8 million in 1996 and $38.4 million for 1997, respectively.
28
<PAGE>
COMPARISON OF YEARS 1997 AND 1996
Net sales decreased $143.7 million, or 26.7%, to $394.6 million for the year
ended January 31, 1998 from $538.3 million for the year ended February 1, 1997.
As contemplated by the Company's new business strategy, the decrease was
primarily due to a $108.3 million decrease in net sales from the closing of 341
stores and a $36.7 million decrease in sales from comparable stores. Comparable
store sales were 9.9% lower for the year ended January 31, 1998 than comparable
store sales for the year ended February 1, 1997 due primarily to (i) a planned
shift toward lower price points in accordance with the Company's new business
strategy and (ii) the Company's difficulty in obtaining merchandise during 1997
due to the Chapter 11 case. These decreases were offset by $1.3 million relating
to new store sales.
Gross profit decreased $15.5 million, or 12.7%, to $106.4 million for the
year ended January 31, 1998 from $121.9 million for the year ended February 1,
1997. The decrease in gross profit was primarily due to reduced net sales of
$143.7 million, a $10.5 million liquidation sale in the first quarter of 1997,
and a $12.0 million special charge to liquidate excess inventory in the third
quarter of 1997. Gross margin increased by 4.4% to 27.0% for the year ended
January 31, 1998 from 22.6% for the year ended February 1, 1997 due to (i) a
1.5% reduction in occupancy costs relating primarily to the renegotiation of
certain store leases and (ii) a 6.9% increase in retail margins before special
charges due to the successful implementation of the Company's new business
strategy, which has resulted in purchasing merchandise at lower costs per unit
and partially offset by clearing prior management's merchandise which allowed
the Company to sell merchandise at lower price points. These improvements were
partially offset by a 3.0% special charge to costs of goods sold and a 1.0%
increase in buying and merchandise handling costs.
Selling, general, and administrative expense decreased $25.9 million, or
20.4%, to $100.7 million for the year ended January 31, 1998 from $126.6 million
for the year ended February 1, 1997. This decrease was due to a $24.1 million
reduction in store expenses from closed stores and a $1.8 million reduction
relating primarily to personnel reductions in 1997 and nonrecurring severance
and outside service charges in 1996. Selling, general and administrative expense
as a percentage of net sales is 25.5% and 23.5% for the years ended January 31,
1998 and February 1, 1997, respectively.
Depreciation and amortization expense decreased $2.0 million to $9.1 million
for the year ended January 31, 1998 from $11.1 million for the year ended
February 1, 1997. The decrease was due to the net closing of 341 stores in 1996
and 1997.
Loss from operations decreased to $(3.3) million for the year ended January
31, 1998 from $(15.7) million for the year ended February 1, 1997. Loss from
operations does not give effect to reorganizations costs of $43.8 million during
1996 and $38.4 million during 1997.
For the years ended January 31, 1998 and February 1, 1997, reorganization
costs of $38.4 million and $43.8 million, respectively, were recorded. The
reorganization costs primarily relate to stores closed during 1997 and 1996.
Reorganization costs recorded in 1997 include estimated lease rejection claims,
write-offs of fixed assets associated with closed stores, other going out of
business store expenses, costs associated with the closure of the distribution
center and administrative offices and professional fees, and other
reorganization costs.
COMPARISON OF YEARS 1996 AND 1995
Results of operations for 1996 included 52 weeks, while 1995 included 53
weeks.
Net sales decreased $80.9 million, or 13.1% to $538.3 million in 1996 from
$619.2 million in 1995. Comparable store sales were 8.7% lower, on a 52 week
basis, in 1996 as compared to 1995. The decline in net sales was due to (i) the
closing of 217 store locations during 1996, which accounted for $50.0 million in
net sales, 52 weeks versus 53 weeks, (ii) a $41.6 million decrease in sales from
comparable stores on a 52 week basis, and (iii) the $6.9 million in net sales
for the fifty-third week in 1995. Comparable store sales were negatively
affected by the Company's difficulty in obtaining merchandise during the fourth
quarter of
29
<PAGE>
1996 following the Chapter 11 Filing and by the liquidation in 1997 of certain
branded merchandise that was inconsistent with the Company's new business
strategy. These decreases were offset in part by $15.1 million from new store
sales.
Gross profit decreased $45.3 million, or 27.1%, to $121.9 million in 1996,
from $167.2 million in 1995. The decrease in gross profit was primarily due to a
$24.2 million decrease due to store closures and a $25.0 million decrease due to
a decline in net sales at comparable stores. The decrease in gross profit was
offset by a $3.9 million reduction in buying, occupancy and merchandise handling
costs. Gross margin decreased to 22.6% in 1996 from 27.0% in 1995 due to the
Company's attempt to improve liquidity prior to the Chapter 11 Filing by
liquidating merchandise irrespective of gross margins achieved.
Selling, general and administrative expense decreased $6.1 million, or 4.6%,
in 1996 compared to 1995. The decrease was primarily due to reduced operating
expenses associated with stores closed in 1996. Selling, general and
administrative expense as a percentage of net sales increased to 23.5% in 1996
compared to 21.4% in 1995. The increase in selling, general and administrative
expense as a percentage of net sales was primarily due to comparable stores
reporting lower sales combined with relatively constant operating costs.
Depreciation and amortization expense decreased $2.1 million to $11.1
million in 1996 from $13.2 million in 1995. The decrease was due to the
elimination of goodwill amortization due to the $80.2 million write-off of
long-lived assets in 1995 and fixed assets becoming fully depreciated.
Income (loss) from operations decreased to $(15.7) million for 1996 from
$21.3 million for 1995. As a percentage of net sales, income (loss) from
operations was (2.9)% for 1996 compared to 3.4% for 1995.
In the third quarter of 1995, the Company recorded an $80.2 million non-cash
write-off of certain long-lived assets. Approximately $74.7 million of remaining
goodwill was written off to reflect a change in the Company's estimate of its
fair value. Certain fixed assets with a net book value of $5.5 million were
included in the write-off based on management's estimate of the recoverability
of their net book value.
Reorganization costs of $43.8 million were recorded in 1996. The
reorganization costs primarily relate to stores closed during 1996 and stores
that the new management team had decided to close. Reorganization costs recorded
in 1996 include estimated lease rejection claims of $25.6 million, write-offs of
fixed assets associated with closed stores of $7.2 million, operating and other
costs associated with closed stores of $7.2 million, and professional fees and
other reorganization costs of $3.7 million.
The Company recorded income tax benefits of $0.7 million in 1996 on a loss
before income taxes of $74.9 million. The Company's income tax provision
includes a $28.4 million valuation allowance for deferred tax assets. The
effective income tax rate differs from the statutory federal rate primarily due
to the non-deductible write-off of the valuation allowance for deferred tax
assets.
In the third quarter of 1996, the Company recorded an extraordinary charge
of $2.7 million with no tax benefit. The extraordinary charge represented the
write-off of debt issuance costs related to the pre-existing credit agreement,
which was replaced with the Existing Credit Facility in October 1996.
COMPARISON OF YEARS 1995 AND 1994
Results of operations for 1995 included 53 weeks, while 1994 included 52
weeks.
Net sales increased $30.9 million, or 5.3%, to $619.2 million in 1995 from
$588.3 million in 1994. The increase was primarily due to a $52.0 million
increase in net sales from new store locations, partially offset by a $16.4
million decrease in sales from comparable stores and a $4.7 million reduction in
sales due to store closings. Comparable store sales were 4.0% lower in 1995 than
comparable store performance in 1994 due to a weak retail environment. Sales
were also affected by unseasonable and adverse weather conditions, which
affected the mix of goods sold in both the spring and fall seasons.
30
<PAGE>
Gross profit decreased $0.6 million, or 0.4%, to $167.2 million in 1995
compared to $167.8 million in 1994. The decrease was primarily due to lower
comparable store sales, additional buying and occupancy costs from new store
locations, and a lower retail margin rate, partially offset by sales from stores
opened in 1995 and 1994. Gross Margin decreased to 27.0% in 1995 from 28.5% in
1994 due to promotional pricing and adverse weather conditions. The change in
the mix of goods sold reflected an increase in sales of competitively priced
Levi's jeans and outlet merchandise and lower sales of higher margin tops.
Selling, general, and administrative expense increased $13.1 million, or
10.9%, to $132.7 million in 1995 compared to $119.6 million in 1994. The
increase was primarily due to store operating expenses associated with new
stores opened in 1995 and 1994, as well as a $1.0 million non-recurring
consulting fee related to the evaluation of the Company's financial structure
recorded in the first half of 1995. Selling, general, and administrative expense
as a percentage of net sales increased to 21.4% in 1995 compared to 20.3% in
1994. This increase was primarily due to comparable stores reporting lower sales
combined with relatively constant operating expenses and the non-recurring
consulting fee referred to above.
Depreciation and amortization expense decreased $3.5 million to $13.2
million in 1995 from $16.7 million in 1994. The decrease was due to the
reduction in amortization expense related to the Company's noncompete agreement
and goodwill, partially offset by depreciation on new store and remodeled store
assets. The Company's noncompete agreement was fully amortized in 1994, and the
remaining balance of goodwill was written off in the third quarter of 1995.
Depreciation and amortization decreased as a percentage of net sales to 2.1%
from 2.8%, substantially as a result of the elimination of noncompete agreement
amortization.
Income from operations decreased to $21.3 million for 1995 from $31.5
million for 1994. As a percentage of net sales, income from operations was 3.4%
in 1995 compared to 5.4% for 1994.
In the third quarter of 1995, the Company recorded an $80.2 million non-cash
write-off of certain long-lived assets. The $74.7 million of remaining goodwill
was written off to reflect a change in the Company's estimate of its fair value.
Certain fixed assets with a net book value of $5.5 million were included in the
write-off based on management's estimate of the recoverability of their net book
value.
The Company recorded income tax expense of $7.6 million in 1995 on a loss
before income taxes of $79.4 million, reflecting the impact of non-deductible
charges for the $74.7 million goodwill write-off, $1.6 million goodwill
amortization, and $0.3 million of debt discount amortization. The Company's
income tax provision includes an $8.6 million valuation allowance for the
deferred tax assets, partially offset by a $1.0 million income tax benefit. The
effective income tax rate differs from the statutory federal rate primarily due
to the non-deductible write-off of goodwill and the valuation allowance for the
deferred tax assets.
Extraordinary charges totaling $10.0 million, net of related income taxes,
were recorded in 1995. In May 1995, an extraordinary charge of $2.4 million
relating to the redemption of the Company's senior notes was recorded,
consisting of prepayment premiums of $1.6 million and the write-off of debt
issuance costs related to the retirement of debt of $0.8 million. In July 1995,
an extraordinary charge of $7.6 million relating to the exchange of $104.9
million principal amount of 12% Senior Subordinated Notes maturing October 1,
2002 for $104.9 million principal amount of 12% Senior Subordinated Notes
maturing October 1, 2001 in the second quarter of 1995 was recorded, consisting
of the write-off of debt discount of $5.1 million, the write-off of debt
issuance costs related to the retirement of debt of $2.0 million, and the
payment of repurchase premiums of $0.5 million.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities for the year ended January 31, 1998
was $2.5 million due primarily to a $53.1 million net loss which was offset in
part by $9.1 million of depreciation and amortization, $1.8 million of rent
expense in excess of cash outlays, $4.9 million loss on disposal of property and
equipment and $20.2 million of non-cash reorganization costs. Net cash provided
by
31
<PAGE>
operations for the year ended February 1, 1997 was $16.3 million due primarily
to a $76.9 million net loss which was more than offset in part by $11.1 million
of depreciation and amortization, $33.6 million of non-cash reorganization
costs, a $2.7 million extraordinary item, a $38.1 million decrease in
merchandise inventories, and the creation of $16.1 million of operating
liabilities subject to compromise.
Because of the seasonal nature of the Company's business, working capital
requirements increase as inventory levels peak in anticipation of the
back-to-school and holiday shopping seasons. Working capital as of January 31,
1998 and February 1, 1997 were $52.4 million and $5.3 million, respectively.
Net cash used to make capital expenditures was $5.1 million during the year
ended January 31, 1998 and $1.8 million during the year ended February 1, 1997.
The Company's Plan of Reorganization was confirmed by the Bankruptcy Court
on, and in an order (the "Confirmation Order") dated, October 1, 1997. The
planned proceeds of the Private Note Offering together with borrowings under the
new Senior Credit Facility are being used to repay the Existing Credit Facility,
pay claims pursuant to the Plan of Reorganization, and pay other transaction
fees and expenses.
The Senior Credit Facility provides for a three-year revolving line of
credit in an amount of $115 million. Up to $90 million of such amount may be
utilized for letters of credit and bankers' acceptances. Amounts available under
the Senior Credit Facility are subject to the value of the Company's eligible
inventory (as defined in the Senior Credit Facility) and to the satisfaction of
certain conditions. The borrowing base provides for seasonal fluctuations in
inventory. Peak borrowing periods generally occur between June and November. The
Company's peak borrowing periods commence with the sourcing of its merchandise
through the utilization of letters of credit facilities with approximately three
months lead-time prior to delivery of such merchandise. The Company has entered
into the Senior Credit Facility to repay its obligations under the Existing
Credit Facility upon the closing of the Private Note Offering. See "Description
of Certain Indebtedness--Senior Credit Facility."
As of January 31, 1998, the Company had approximately $15.7 million of
letters of credit and $1.8 million of bankers' acceptances outstanding in
addition to approximately $31.1 million of remaining availability under the
Senior Credit Facility. The Company believes that cash generated from
operations, together with borrowings under the Senior Credit Facility, will be
adequate to finance 1998 operations.
INFLATION, ECONOMIC TRENDS, AND POTENTIAL DEVELOPMENTS
The Company's operations are affected by general economic trends, including
inflation. Management believes that the Company and other specialty retailers
have suffered from price competition, which has had a negative effect on sales
and gross margin. The Company believes that poor economic conditions have
adversely affected its sales and profitability in prior years and may affect
results in future periods.
32
<PAGE>
SEASONALITY
The Company, like most retailers, has a seasonal pattern of sales and
earnings. The Company has two major selling seasons: back-to-school (third
quarter) and Christmas (fourth quarter). The table below sets forth by quarter,
1997 (through the third quarter), 1996 and 1995 net sales, gross profit, and
EBITDA.
<TABLE>
<CAPTION>
FIRST TOTAL
YEAR QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER YEAR
- --------- ------------ -------------- ------------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
1997 Net sales............................. $ 93,158 $ 86,897 $ 97,082 $ 117,447 $ 394,584
Gross profit before special
charge(1)........................... 15,820 25,289 33,203 44,091 118,403
Gross profit after special
charge(1)........................... 15,820 25,289 21,229 44,091 106,429
EBITDA before special charge(1)(2).... (7,861) 247 10,462 14,902 17,750
EBITDA after special charge(1)(2)..... (7,861) 247 (1,513) 14,902 5,775
Income (loss) from operations(3)...... (10,061) (1,832) (3,371) 11,946 (3,318)
1996 Net sales............................. $ 121,604 $ 121,727 $ 157,060 $ 137,869 $ 538,260
Gross profit.......................... 26,075 31,444 33,559 30,793 121,871
EBITDA(2)............................. (5,227) (2,203) (2,511) 5,251 (4,690)
Income (loss) from operations(3)...... (8,186) (5,159) (5,430) 3,034 (15,741)
1995 Net sales............................. $ 124,189 $ 130,110 $ 159,476 $ 205,450 $ 619,225
Gross profit.......................... 29,251 34,987 41,073 61,900 167,211
EBITDA(2)............................. (622) 2,818 8,447 23,869 34,512
Income (loss) from operations(3)...... (3,878) (713) 4,998 20,868 21,275
</TABLE>
- ------------------------
(1) Gross profit and EBITDA are presented before and after a special charge to
liquidate excess inventory. The special charge of approximately $12.0
million was recorded within cost of goods sold during the 3rd quarter and
relates to the liquidation of excess inventory from purchase commitments in
early 1997 for 1997 Fall merchandise, based upon a chain of over 500 stores,
of which 137 stores were closed by the time the merchandise was received.
See Note 8 to the consolidated financial statements at January 31, 1998 for
a discussion of the special charge.
(2) EBITDA represents net earnings (losses) before interest, income taxes,
depreciation and amortization, and reorganization costs. EBITDA is presented
here to provide additional information about the Company's operations.
EBITDA is not a measure of financial performance in accordance with
Generally Accepted Accounting Principles (GAAP) and should not be considered
as an alternative to (i) net income (loss) as a measure of performance (or
any other measure of performance in accordance with GAAP) or (ii) cash flows
from operating, investing, or financing activities as an indicator of cash
flows or as a measure of liquidity. EBITDA is presented before and after
special charge to liquidate inventory.
(3) Income (loss) from operations does not give effect to the $80.2 million
write-off of certain long-lived assets in 1995 and reorganization costs of
$43.8 million and $38.4 million incurred during 1996 and 1997, respectively.
INCOME TAXES
The Company had been included in the consolidated federal income tax return
of County Seat, Inc. Prior to the Effective Date, County Seat, Inc. owned all
the Company's capital stock. The tax year-end for the Company and County Seat,
Inc. is the Saturday closest to July 31. As of January 31, 1998, the Company
33
<PAGE>
had NOLs of approximately $90.0 million. The Company's Plan of Reorganization or
significant changes in ownership of the Company could substantially limit the
use of NOLs. The Company and County Seat, Inc. account for income taxes in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." This standard requires, among other things, recognition of
future tax benefits, measured by enacted tax rates, attributable to deductible
temporary differences between financial statement and income tax bases of assets
and liabilities and to tax NOLs to the extent that realization of such benefits
is more likely than not. Based on the Company's history of earnings and in
consideration of the Company's Chapter 11 Filing, the Company's entire balance
of deferred tax assets has been reduced by a valuation allowance of $11.5
million, as realization of these long-term tax benefits is dependent upon future
earnings. Management cannot predict sufficient operating income to utilize fully
its deferred income tax assets.
CHANGES IN METHOD OF ACCOUNTING
The effects of the Company's reorganization under Chapter 11 have been
accounted for in the Company's financial statements using the principles
required by the American Institute of Certified Public Accountants' Statement of
Position 90-7, FINANCIAL REPORTING BY ENTITIES IN REORGANIZATION UNDER THE
BANKRUPTCY CODE ("Fresh Start Accounting"). Pursuant to such principles, the
Company's assets, upon emergence from Chapter 11, were stated at "REORGANIZATION
VALUE," which is defined as the value of the entity before considering
liabilities on a going-concern basis following the reorganization and represents
the estimated amount a willing buyer would pay for the assets of the Company
immediately after the reorganization. The reorganization value for the Company
is determined by reference to the remaining liabilities plus the estimated value
of total shareholders' equity of the outstanding shares of the Common Stock. The
reorganization value of the Company is allocated to the assets of the Company in
conformity with the procedures specified by Accounting Principles Board Opinion
No. 16, BUSINESS COMBINATIONS, for transactions reported on the basis of the
purchase method of accounting. In this allocation, identifiable assets are
valued at estimated fair values, and any excess reorganization value has been
recorded as "reorganization value in excess of amounts allocated to identified
assets" (a long-term intangible asset similar to "goodwill").
YEAR 2000 COMPLIANCE
The Company has recently commenced a two year project to update and, where
applicable, replace all mainframe systems with third party software to support
the operations of the Company. The Company anticipates expenditures for
hardware, software and labor to be approximately $5.7 million through 1998 (the
anticipated completion), at which point operating systems will be year 2000
compliant. The Company will also begin a process to review with its vendors the
impact of year 2000 on transactions between both parties.
34
<PAGE>
BUSINESS
OVERVIEW
The Company is among the nation's largest mall-based specialty retailers of
casual apparel, operating 413 stores in 41 states in the midwestern, southern,
and eastern regions of the United States. Under the direction of a new
management team, the Company's merchandise mix has recently been updated to
include more tops than bottoms and consist of casual shirts, sweaters, knit
tops, khakis, jeans, dresses, and accessories for men, women, and teens. The
Company's products are now primarily manufactured under private label, which, in
the Company's view, offers customers quality comparable to branded merchandise
at significantly lower prices and generates higher gross margins than the
Company has historically achieved.
In December 1996, a new management team led by Sam Forman developed a new
business plan designed to enhance the Company's profitability and increase gross
margins by reducing costs, implementing a new merchandising strategy, and
capitalizing on the Company's nationally recognized brand name and large store
base.
Mr. Forman has over forty years of retailing and manufacturing experience in
the apparel industry and has been an innovator in manufacturing and retailing
value-priced private label apparel, the cornerstone of the Company's new
merchandising strategy. Mr Forman has implemented successful business strategies
for apparel companies by maximizing profitability through direct sourcing,
value-oriented merchandising strategies, and internal cost controls. Most
recently, Mr. Forman was president and chief operating officer of American
Eagle, a mall-based specialty retailer.
The new management team has implemented a business strategy designed to
re-establish the Company as a leading national retailer of high-quality,
value-priced casual apparel and to restore its profitability and EBITDA to
historical levels. The principal elements of this business strategy are similar
to those implemented by Mr. Forman at American Eagle and include (i) reducing
costs, including, unlike at American Eagle, closing unprofitable stores, (ii)
implementing a new merchandising strategy, and (iii) initiating a controlled
expansion program.
STORES
The Company owns and operates approximately 375 COUNTY SEAT stores, 14
COUNTY SEAT OUTLET stores, 22 LEVI'S OUTLET stores, and 2 OLD FARMER'S ALMANAC
GENERAL STORES. COUNTY SEAT stores are typically located in regional shopping
malls that are typically at least 500,000 square feet in size and that are
anchored by two or more major department stores. COUNTY SEAT stores range in
size from 2,700 to 7,300 square feet and average 4,000 square feet. The Company
seeks to position its COUNTY SEAT stores in prime mall locations with sufficient
store frontage in areas occupied by comparable specialty stores. The Company
believes that, based on its business strategy and recent results of operations
since the arrival of the new management team, it will compete effectively with
comparable apparel stores due to the relative quality and value of its
merchandise selection. The Company believes that its stores are generally in
good physical condition and anticipates making approximately $3.0 million in
capital expenditures in 1998 to remodel its stores.
The Company projects a casual lifestyle image in its stores. In each COUNTY
SEAT store, there are usually large tables near the entrance filled with key
items like polo shirts, flannel shirts, or t-shirts to attract customers into
the store. Coordinated groupings and outfits are displayed throughout the store
to enable the customer to visualize the product offering and to promote multiple
unit transactions. The merchandise selection in the COUNTY SEAT stores is
limited by design to key colors and styles with a focus on offering basics. The
general layout of merchandise in the stores is planned by the Company's
corporate management but may be varied and adapted by individual store
management to properly reflect specific store characteristics and customer
preferences.
35
<PAGE>
The Company's store employees generally wear the Company's merchandise. The
Company seeks to hire sales associates who have prior retail sales experience
and an entrepreneurial spirit. Sales personnel are knowledgeable about the
merchandise and encouraged through incentives to increase the number of units
sold per transaction. The Company considers customer service an important
element of its success and believes it has an established reputation for
personal attention to the customer's needs and requirements for casual,
value-priced apparel. The Company's sales personnel, store managers, and
co-managers are trained by experienced store managers and district managers to
offer the customer courteous and knowledgeable service. Store managers and
co-managers receive bonuses based on sales and shrinkage. Other store employees
are not paid a commission but receive incentive pay based on sales.
MERCHANDISE
The Company has transitioned itself from a retailer of denim jeans and
primarily branded apparel to a private label casual apparel retailer. The new
strategy places less dependence on bottoms and branded apparel and more emphasis
on tops and women's wear and is intended to enhance gross margins. The
assortment of tops consists of classics such as polo shirts, woven and flannel
shirts, knit shirts and t-shirts in a broad range of colors with updated
features.
Since it began implementing its new merchandise strategy, the Company has
offered basic bottoms such as khakis and jeans at $19.99. The Company is
utilizing such marketing strategies and taking advantage of its reputation as a
bottoms retailer to position itself as the value leader in the mall, offering a
merchandise mix designed to appeal to a broad customer base.
SHIFT OF PRODUCT MIX. Part of the Company's merchandise strategy is to
increase the percentage of its sales derived from tops. Tops generally provide
higher margins and more unit volume than bottoms since tops usually have a lower
relative unit cost and customers typically purchase more units of tops than
bottoms. The Company's goal is to increase the ratio of tops to bottoms sold to
3:1 by the end of 1998. The Company has significantly improved the ratio of tops
to bottoms at its COUNTY SEAT stores from 1:1 for the year ended February 1,
1997 to 1.8:1 for the year ended January 31, 1998.
Another feature of the new management team's strategy is to focus on women's
apparel with a view toward broadening the customer base. The increased mix of
women's wear includes fashionable basics such as sweaters, knit tops, and casual
dresses. Based on this change in product mix, management expects women's wear to
grow from 43% of sales to 49% of sales.
PRIVATE LABEL. The Company believes that the sale of high quality
private-label merchandise builds customer loyalty and differentiates the Company
from its competitors. In addition, private-label merchandise typically has
higher gross margins than branded merchandise and allows the Company to avoid
direct price competition on national branded merchandise. Private-label
merchandise has grown from approximately 67% of sales during the year ended
February 1, 1997 to 76% during the year ended January 31, 1998.
QUALITY. Management believes that the quality of the Company's
private-label merchandise is comparable to the quality of select branded
merchandise and private-label merchandise sold by the Company's competitors. The
Company's goods are generally made with high quality cotton or other natural
fibers. For example, typically the weight of the Company's private-label jeans
is 14 3/4 ounces, the weight of its private-label t-shirts is 185 grams, and the
weight of its pique polo shirt is 220 grams, which, in management's view, are
the industry standards for high quality denim, cotton t-shirts and pique polo
shirts, respectively. The Company regularly inspects samples of its manufactured
goods prior to delivery for quality based on materials, color, sizing
specifications, and shrinkage. The Company's management team also routinely
inspects the factories of the Company's suppliers to ensure that the Company's
goods are of high quality.
36
<PAGE>
SOURCING AND SUPPLIERS
All the Company's inventory is purchased from third-party suppliers or
manufacturers. The Company owns no manufacturing facilities. Approximately 80%
of the Company's private-label products are manufactured abroad, with the
remainder being made in the United States.
A key element of the Company's strategy is to significantly reduce its cost
of goods sold while maintaining or increasing gross margins through disciplined,
direct sourcing of its merchandise. Pursuant to this strategy, the Company has
established relationships with vendors in certain developing countries. The
Company generally negotiates directly with its vendors without using agents or
middlemen. As a result, the Company has greater control over its manufacturing
costs, the manufacturing process, and the quality of its merchandise. The
Company also takes advantage of special buy situations that complement its
private-label merchandise and provide gross margin enhancement.
As a result of the Company's improved sourcing, the cost of acquiring
merchandise has declined significantly. The table below shows the decline in
average cost per unit on a percentage basis for select items at the COUNTY SEAT
stores between January 1996 and January 1997. For the year ended January 31,
1998, the average cost per unit for merchandise at the COUNTY SEAT stores was
$7.30, which is 36% lower than the average cost per unit for the year ended
February 1, 1997.
<TABLE>
<CAPTION>
PERCENT SAVINGS
IN COST PER UNIT
---------------------
<S> <C>
Menswear
Denim jeans.................................................................. 34%
Short sleeve solid tee....................................................... 43%
Short sleeve solid polo...................................................... 40%
Socks........................................................................ 40%
Womenswear
Denim jeans.................................................................. 33%
Short sleeve solid tee....................................................... 44%
Socks........................................................................ 25%
</TABLE>
The Company believes it has established relationships with an adequate
number of suppliers to meet its ongoing inventory needs. The Company has no
long-term contracts with suppliers and transacts business principally on an
order-by-order basis. During the year ended January 31, 1998, merchandise
purchased from Levi Strauss represented approximately 24% of net sales. No other
vendor or group of vendors account for more than 15% of the Company's
merchandise purchases. No more than 20% of the Company's purchases are currently
manufactured in any particular country other than the United States.
DISTRIBUTION
All merchandise is currently shipped to the Company's stores through the
distribution center in Brooklyn Park, Minnesota, except replenishment of
inventory to the LEVI'S OUTLET stores. In February, 1998 the Company signed a
ten-year lease for a new 276,000 square foot distribution center located near
Baltimore, Maryland. The Company relocated to this new facility from its
Brooklyn Park distribution center in May 1998. The new facility in Baltimore
will be able to service a substantially greater number of stores than the
distribution center which the Company currently operates or could service out of
its existing facility. The transit time for merchandise being delivered to the
distribution center generally varies from three to five days for domestic goods
and a few days to several weeks for imported goods. Freight consolidators are
used in the shipment process to reduce costs. Advanced shipping notices are
utilized when possible to anticipate delivery of goods and schedule on-call
employees for merchandise handling. The time period from receipt of goods at the
distribution center to display in the Company's stores is generally five days.
37
<PAGE>
During the year ended January 31, 1998, approximately 95% of merchandise
coming into the distribution center was vendor pre-ticketed and approximately
70% was vendor pre-packed, with 9% of the merchandise prepacked in a manner
which permits cross-docking. Pre-ticketing, pre-packing, and cross-docking save
time, reduce labor costs, and enhance inventory management. Cross-docking was
implemented late in 1997 and is currently accounting for approximately 35% of
distribution center receipts. In accordance with the new business strategy of
reducing operating costs, the Company is evaluating additional ways to reduce
distribution costs, including evaluating alternative distribution facility
options to take advantage of regional differences in labor costs.
Shipments to stores for basic items are generated by a planning and
distribution personnel team that compares individual store stock levels to the
store's model stock level. Shipments to all stores are made once or twice per
week depending on the season. The delivery schedule allows the Company to adjust
on-hand inventory at the store level, thus minimizing the total inventory needs
and maximizing inventory turns.
STORE OPENINGS AND CLOSINGS
The Company has utilized the legal protections available to it under the
Bankruptcy Code to reduce operating costs and improve profitability through its
store closing program. Under this program, immediately following the Chapter 11
Filing the Company began identifying underperforming stores and stores located
in regions where the associated administrative costs did not warrant continuing
such operations and implementing streamlined procedures for closing such stores.
The Company as a result of this review closed 341 stores by January 31,
1998. An additional two stores are expected to be closed by the spring of 1998.
The Company opened two new stores in 1997, and it reopened prior to the
Effective Date 13 COUNTY SEAT OUTLET stores that had previously been closed. In
the future, the Company expects to consider expansion through the opening of
additional stores on a selective basis. The Company expects to open 15 to 20
additional stores per year.
In deciding whether to open or close a store, the Company considers a number
of factors, including (i) the extent of competition from other mall tenants,
(ii) the location of the store in the mall, (iii) the rental rate for the
property on which the store is or will be located, (iv) the performance of other
specialty stores in the mall, (v) whether the mall's environment is suitable for
the store, (vi) the anticipated return on investment, and (vii) whether there
are at least two department store anchors in the mall in which the store is or
will be located.
PROPERTIES
As of the end of 1997, the Company owns and operates 413 go-forward stores
in 41 states. Of the 413 stores, approximately 375 are COUNTY SEAT stores, 14
are COUNTY SEAT OUTLET stores, 22 are LEVI'S OUTLET
38
<PAGE>
stores, and 2 are OLD FARMER'S ALMANAC GENERAL STORES. The following table
details the geographical distribution of the Company's stores.
<TABLE>
<CAPTION>
STATE STORES STATE STORES
- ------------------------------ ----------- ------------------------------ -----------
<S> <C> <C> <C>
Alabama 5 Nebraska 3
Arkansas 5 Nevada 2
Colorado 7 New Hampshire 2
Delaware 1 New Jersey 3
Florida 20 New Mexico 1
Georgia 11 New York 8
Idaho 3 North Carolina 13
Illinois 32 North Dakota 3
Indiana 19 Ohio 24
Iowa 13 Oklahoma 8
Kansas 8 Pennsylvania 11
Kentucky 6 South Carolina 7
Louisiana 10 South Dakota 2
Maine 2 Tennessee 11
Maryland 11 Texas 58
Massachusetts 2 Utah 11
Michigan 26 Virginia 9
Minnesota 19 West Virginia 6
Mississippi 3 Wisconsin 14
Missouri 11 Wyoming 1
---
Montana 2
Total Stores 413
---
---
</TABLE>
All the Company's stores are operated under leases that typically provide
for monthly rental payments plus a percentage of gross receipts in excess of
certain sales levels. Leases typically have an initial term of approximately
seven to ten years, except for certain outlet locations, and do not contain a
renewal option. In each case, the particular terms of the proposed lease are a
major factor in determining whether to open a store at that site. After a site
has been approved, the Company normally completes lease negotiations and
constructs the store within five to twelve months. As of January 31, 1998 the
average remaining lease term of the Company's stores was 3.5 years.
Approximately 8% to 19% of store leases expire each year. The Company has
not experienced problems renewing its leases but no assurance can be given that
the Company can renew existing leases on favorable terms.
In addition to its retail stores, the Company currently leases office space
in New York, New York, and Eden Prairie, Minnesota. In January 1998, the Company
closed its leased offices in Dallas, Texas, which formerly housed the Company's
executive office, merchandising, merchandising planning, and real estate
functions. To complete the Company's office consolidation, the Company plans to
close the Eden Prairie office by the end of June 1998 and transfer functions
formerly performed there to the New York office. Once the Eden Prairie office is
closed, the New York office will house all functions in approximately 34,000
leased square feet. The Eden Prairie office currently houses the accounting,
finance, human resources, and MIS functions in approximately 28,000 leased
square feet, of which 2,400 square feet is sub-leased to a third party. The
Company also currently owns a distribution center in Brooklyn Park, Minnesota,
which provides product distribution to all stores except for Levi's Outlet
stores, which are direct-shipped by Levi Strauss. The Brooklyn Park distribution
center occupies 159,000 square feet. In February 1998, the Company signed a
lease for a new 276,000 square foot facility in the Baltimore, Maryland area.
The
39
<PAGE>
Company's chief executive office is located at 469 Seventh Avenue, 11th Floor,
New York, New York 10018 and its telephone number is (212) 714-4800.
COMPETITION
The retail apparel industry is highly competitive, with merchandise
selection, price, quality, fashion, customer service, location and store
environment being the principal competitive factors. While the Company believes
that it is able to compete favorably with respect to each of these factors, the
Company believes it competes primarily on the basis of price, merchandise
selection, and customer service. In recent years, the Company has experienced
increased competition, particularly with respect to branded apparel.
The Company competes in the highly competitive casual apparel industry. The
Company's specialty store competitors include The Gap, The Limited, Abercrombie
& Fitch, Express, Structure, Gadzooks, The Buckle, American Eagle, Miller's
Outpost, Designs, Inc., Wet Seal, and Contempo Casuals. Among the Company's
largest specialty store competitors, the Company is one of the few companies
offering a full selection of Levi's jeans, the biggest selling brand of jeans in
the United States. The Company also competes with department and discount stores
that sell casual apparel. Many of the Company's competitors are larger and have
greater financial resources than the Company.
MARKETING
The Company relies on mall traffic, the Company's reputation, in-store
promotions, and in-store visual merchandising to attract customers. In-store
visual merchandising is dynamic and coordinated so that all stores feature a
consistent marketing strategy. One of the Company's current marketing strategies
is the in-store promotion of the sale of jeans and khakis for $19.99. This
strategy is designed to make the Company's stores a destination for high quality
merchandise at value prices and take advantage of the Company's reputation as a
bottoms retailer.
The Company utilizes co-op advertising from Levi Strauss, in mass media and
merchandise tabloids. In 1997, Levi Strauss paid for approximately 52% of this
expense. Marketing expenses net of co-op payments have averaged approximately
0.5% of sales for the last five years. The Company has incurred marketing
expenses in the amount of $2.1 million during 1997 for, among other things,
direct marketing, in-store displays, and limited mass media advertising.
CREDIT SALES
In 1997, approximately 37% of the Company's total sales were paid for with
credit cards. The Company accepts MasterCard, VISA, Discover, and American
Express. Under its agreements with MasterCard, VISA, Discover, and American
Express, the Company receives daily payments on amounts charged on those cards.
The payments are not subject to recovery by MasterCard, VISA, Discover or
American Express unless the charge in question involved invalid use of a credit
card.
OTHER OPERATIONS
In addition to 375 COUNTY SEAT stores, the Company owns and operates 14
COUNTY SEAT OUTLET stores, 22 LEVI'S OUTLET stores, and 2 OLD FARMER'S ALMANAC
GENERAL STORES. During 1997, 90% of the Company's sales were derived from the
COUNTY SEAT stores.
The COUNTY SEAT OUTLET stores range in size from 5,000 to 8,400 square feet,
with the average size being 5,700 square feet. The COUNTY SEAT OUTLET stores are
located primarily in factory outlet shopping centers. The COUNTY SEAT OUTLET
stores sell special buy and clearance merchandise. The Company uses the COUNTY
SEAT OUTLET stores to facilitate the sale of slow-moving merchandise at the
COUNTY SEAT stores, thus enabling the COUNTY SEAT stores to remain stocked with
fresh, higher margin merchandise.
40
<PAGE>
Located primarily in outlet shopping malls in nine midwestern states, the
Company's LEVI'S OUTLET stores carry a large and comprehensive assortment of
Levi's and Docker's products for men, women, and children. The LEVI'S OUTLET
stores target value conscious consumers by offering Levi's closeouts, seconds,
and irregulars. The LEVI'S OUTLET stores range in size from 8,900 square feet to
13,700 square feet and average about 11,100 square feet. The Company operates
the LEVI'S OUTLET stores on a royalty-free basis pursuant to a license
agreement, which expires on July 31, 2000. Under the terms of this license
agreement, the Company is the only party other than Levi Strauss or any
subsidiary of Levi Strauss that is permitted to use the Levi's trademark in
connection with the sale of closeouts, seconds, and irregulars in nine
midwestern states. The Company is also permitted to use the Levi's trademark in
connection with the sale of closeouts, seconds, and irregulars in two other
states, but two outlet stores operated by Designs, Inc. are also permitted to
use the Levi's trademarks in those states.
The Company's two OLD FARMER'S ALMANAC GENERAL STORES are located in malls
in Indianapolis, Indiana and Bloomington, Minnesota and offer housewares, food
products, decorative home products, clothing, and stationery in a
turn-of-the-century setting that includes potbellied-stoves, and rocking chairs.
The Company's OLD FARMER'S ALMANAC GENERAL STORES are operated pursuant to a
license agreement with Yankee Publishing, Inc. The license agreement grants the
Company the right to use the Old Farmer's Almanac trademark, which is also
licensed to certain other parties, in connection with the marketing,
distribution, and sale of certain products in the United States, Canada, and
Mexico. The Company is required to pay to Yankee Publishing, Inc., on a
quarterly basis, a royalty of 2% of total net sales. If the Company's Old
Farmer's Almanac General Stores do not achieve certain annual royalty targets,
then it must pay Yankee Publishing, Inc. the shortfall in the royalty target for
the applicable year or permit Yankee Publishing, Inc. to license the use of the
Old Farmer's Almanac trademark to additional parties. Pursuant to the license
agreement, Yankee Publishing, Inc. has the right to terminate the license if the
Company has not continually operated at least three OLD FARMER'S ALMANAC GENERAL
STORES for a period of one fiscal year at any time. The Company and Yankee
Publishing, Inc. have agreed in principle that the Company will operate at least
five OLD FARMER'S ALMANAC GENERAL STORES from October 1, 1998 throughout the
remainder of the term of the license. The license agreement expires in 2005 but
is subject to renewal if certain sales targets are met or specified amounts are
paid by the Company to Yankee Publishing, Inc.
INFORMATION SYSTEMS
In 1995, the Company completed installation of a new point of sale (POS)
system. The Company's POS system provides daily merchandising data to the
merchandise information systems on a store-by-store basis by individual stock
keeping unit ("SKU"). The new POS system added bar coded universal product code
("UPC") scanning with integrated price-lookup and credit authorization, enhanced
promotional pricing support and improved processing of store transfers. The POS
system generates reports showing merchandise data organized by store,
department, class, category, style, and size. This provides merchandise planners
with detailed information enabling them to adjust stock levels and balance
merchandise and size distribution profiles. The Company's buyers are provided
with velocity sales reports, which rank selling within categories and classes.
Timely sales reporting allows the Company to react quickly to developing sales
trends. The Company believes timely and accurate data capture is critical to the
success of its business.
The Company's systems assist merchandise management in all aspects of
inventory control by tracking purchases and receipts, controlling inter-store
movement, and determining the on-hand inventory for all locations. Stock status
is monitored at the distribution center, at individual stores and in transit, by
capturing SKU level data (style, color, and size). A stock ledger application
developed by the Company provides financial dollar inventory control and gross
margin results for all physical locations and merchandise departments. The
Company's information systems help to shorten the time from product ordering to
receipt at the store. This reduced lead time helps the Company maintain lower
inventory levels and take advantage of sales opportunities.
41
<PAGE>
The Company's systems allow the Company to plan unit sales and inventory for
all merchandise categories according to season. Merchandise categories are
planned by store and adjusted for seasonality, demographics, and sales trends.
The planning system is integrated with a comprehensive distribution and
replenishment system facilitating delivery of merchandise to the correct
location in a timely manner.
Merchandise pricing decisions are controlled centrally and communicated to
stores on a next-day basis through the use of the Company's data transmission
system. Timely and centralized control allows the Company to test sales volume
sensitivity to price changes.
The Company's non-POS systems are primarily mainframe systems. The Company
has recently commenced a two-year project to update and, where applicable,
replace these systems with third-party packaged solutions which will provide
enhanced support to all operating areas, particularly merchandising. The Company
is working with IBM on the selection and implementation process. The Company
currently anticipates aggregate expenditures for hardware, software, labor, and
compliance with year 2000 requirements of approximately $5.7 million between
1997 and 1998 to complete this project, including $2.0 million in 1998.
TRADEMARKS AND SERVICE MARKS
The Company uses numerous trademarks, service marks and trade names in its
business, including COUNTY SEAT-Registered Trademark-, COUNTY SEAT THE
JEANSTORE-Registered Trademark-, NUOVO-Registered Trademark-, NUOVO COUNTY
SEAT-Registered Trademark-, and TEN STAR-Registered Trademark-. While the
Company believes that the products and services underlying such trade names and
trademarks are of great importance to the Company and that such trade names and
trademarks as a whole are of material importance to the Company's business in
which they are used, besides COUNTY SEAT-Registered Trademark- and COUNTY SEAT
THE JEANSTORE-Registered Trademark-, none individually is material to the
Company's business. Certain of the Company's service marks are owned by CSS
Trade Names, Inc. ("CSS"), the Company's subsidiary, and licensed to the
Company. CSS has no other assets other than such service marks.
LITIGATION
The Company has been named as a defendant in certain legal proceedings.
Although the outcome of these matters cannot be determined, the Company believes
that the disposition of these proceedings will not materially affect the
financial position or results of operations of the Company.
On or about September 29, 1997, RAI Credit Corporation ("RAI") filed an
adversary proceeding against the Company in the Bankruptcy Court. The Company
and RAI had entered into an Account Purchase and Service Agreement dated July
11, 1997 (the "RAI Agreement") pursuant to which RAI had agreed to establish and
service a private-label credit card program for the Company. In September 1997,
the Company notified RAI that it was terminating the RAI Agreement on the ground
that RAI had materially breached and failed to perform under the RAI Agreement.
RAI's complaint alleges that the Company wrongfully terminated the RAI Agreement
and seeks compensatory damages of not less than $10,741,960 and an injunction
prohibiting the Company from entering into a private-label credit card program
with any person other than RAI prior to the beginning of 1999, as well as
attorneys' fees and costs.
The Company believes that it has meritorious defenses to RAI's complaint and
counterclaims against RAI, which it intends to pursue vigorously. Although the
ultimate outcome of the litigation cannot be predicted at this time, management
believes that any resolution of this matter will not have a material adverse
effect on the Company's financial position or future results of operations.
Simultaneous with the Company's Chapter 11 Filing, CSS, the Company's
wholly-owned subsidiary, also filed a petition for reorganization relief under
Chapter 11 of the Bankruptcy Code with the Bankruptcy Court.
42
<PAGE>
As contemplated by the Plan of Reorganization and the Confirmation Order,
the Company is litigating various Disputed Claims (as defined in the Plan). As
of , 1998, the aggregate amount of all Disputed Claims was $
million. Cash in the amount of $ million has been established to cover the
estimated aggregate amount of (x) the disputed amount of all Disputed Claims
that are unliquidated or, if liquidated, as to which the Company shall have
requested estimation, and (y) the Face Amount (as defined in the Plan) of all
other liquidated Disputed Claims. Payments and distributions from the
Distribution Reserve to each holder of a Disputed Claim, to the extent that
claim ultimately becomes an Allowed Claim (as defined in the Plan), will be made
in accordance with the provisions of the Plan that govern the class of claims to
which that Allowed Claim belongs under the Plan.
EMPLOYEES
At May 15, 1998, the Company had a total of 6,298 employees, of which 5,957
worked in the Company's stores, 185 worked in the Company's offices, and 150
worked in the Company's distribution center. All the Company's employees are
non-union, and the Company enjoys good labor relations.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the current
directors and executive officers of the Company and the positions they hold.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Sam Forman........................................... 70 Chairman, President, Chief Executive Officer
Brett D. Forman...................................... 28 Executive Vice President and Director
Paul Roth............................................ 53 Executive Vice President
Paul J. Kittner...................................... 48 Senior Vice President, Chief Financial Officer and
Treasurer
Bernadette R. Duponchel.............................. 44 Senior Vice President
Ronda A. Hisiger..................................... 46 Senior Vice President
John R. Meinert...................................... 70 Director
Marshall E. Felenstein............................... 65 Director
M. Brent Stevens..................................... 36 Director
John S. Belisle...................................... 50 Director
Faith Larsen......................................... 42 Director
</TABLE>
The Company's board of directors consists of seven members, five of whom
were previously selected and began serving as directors on the Effective Date.
The remaining two members were selected at the first meeting of the Company's
board of directors by the non-management directors. As provided in, and for the
term of, the Forman Employment Agreement (as defined below), Mr. Forman has the
right to serve as a director of the Company and to name one other person to act
as his designee (the "Executive Designee") to serve as an additional director of
the Company. See "--Forman Employment Agreement." All of the Company's directors
shall hold office until the first annual meeting of shareholders and until their
successors are duly elected and qualified. Thereafter, directors who are elected
at an annual meeting of shareholders shall hold office until the next annual
meeting of shareholders and until their successors are elected and qualified.
43
<PAGE>
BACKGROUND OF DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is a brief description of the business experience of the
executive officers and directors of the Company.
SAM FORMAN has served as president and chief executive officer of the
Company since December 1996. Since the Effective Date he has also served as the
chairman of the Company's board of directors. Prior to joining the Company, Mr.
Forman formed Forman Enterprises in 1995 to purchase the outlet stores then
operated by American Eagle. Mr. Forman was president and chief operating officer
of American Eagle from 1992 to 1995 and chairman of Kuppenheimer from 1982 to
1992. Mr. Forman is the chairman of the board of directors of Forman
Enterprises. His service as a director of the Company commenced on the Effective
Date. Sam Forman is the father of Brett D. Forman, a director and executive vice
president of the Company.
BRETT D. FORMAN has served as an executive vice president of the Company
since the Effective Date and served from December 1996 until the Effective Date
as the senior vice president of real estate and corporate development of the
Company. In 1995, he joined his father, Sam Forman, in creating Forman
Enterprises. He was an analyst at Bear, Stearns & Co. Inc from 1994 to 1995 and
was employed by Blue Cross of Western Pennsylvania from 1992 to 1994. His
service as a director of the Company commenced on the Effective Date. He is the
Executive Designee.
PAUL ROTH has served as executive vice president of the Company, with
responsibility for merchandising since December 1996. Before joining the
Company, Mr. Roth served as merchandise manager at American Eagle, which he
joined in 1992. Mr. Roth has nearly thirty years of retail merchandising
experience and was a senior vice president and the general merchandise manager
at R. H. Macy from 1980 to 1991.
PAUL J. KITTNER has served as a senior vice president, treasurer and chief
financial officer of the Company since September 1997. Before joining the
Company, Mr. Kittner was part of the co-sourcing practice at Deloitte & Touche
from November 1996 to September 1997. Before joining Deloitte & Touche, Mr.
Kittner was a vice president and controller for the Leslie Fay Companies, Inc.
from March 1993 to November 1996 and a senior vice president, chief financial
officer, and treasurer for The He-Ro Group Ltd. from November 1989 to November
1992. Prior to joining The He-Ro Group, Ltd., Mr. Kittner was a senior vice
president and the chief financial officer for Loehmann's, Inc. and a vice
president at Associated Dry Goods Corporation.
BERNADETTE R. DUPONCHEL has served as a senior vice president of the Company
with responsibility for planning and distribution since 1997. Ms. Duponchel
served as a vice president of planning and distribution of J. Crew Retail from
July 1996 to November 1997 and as a vice president of planning and distribution
of Britches from 1994 to 1996. From 1993 to 1994 she served as a vice president
of planning and distribution of American Eagle. Ms Duponchel has nearly twenty
years of experience in merchandise planning and allocation.
RONDA A. HISIGER has served as a senior vice president of the Company with
responsibility for store operations since August 1997. Ms. Hisiger served as the
senior vice-president of store operations at Paul Harris Stores, Inc. from
September 1995 to July 1997 and the regional director of stores for certain
divisions of Petrie Stores Corporation from March 1991 to August 1995. Ms.
Hisiger has over twenty-five years of experience in retail store operations.
JOHN R. MEINERT has served as a director of the Company since January 1998
and is a member of both the Compensation Committee and the Audit Committee of
the Company's board of directors. Since January 1990 Mr. Meinert has been a
principal, and since January 1996 the chairman of the board of directors, of the
investment banking firm J.H. Chapman Group, L.L.C. From 1975 through December
1986, Mr. Meinert served as chief financial and administrative officer of
Hartmarx Corporation/Hart Shaffner & Marx. From 1973 to April 1990 he was a
member of the board of directors of Hartmarx
44
<PAGE>
Corporation and the chairman of that board from December 1986 until 1990, and
thereafter has been designated as chairman emeritus. He is a member of the board
of Northwestern University's Kellogg Graduate School of Management and John
Evans Club, the Chicagoland Chamber of Commerce and Better Business Bureau and
has been vice president of the American Institute of CPAs and president of the
Illinois CPA Society.
MARSHALL E. FELENSTEIN has served as a director of the Company since January
1998 and is a member of the Compensation Committee of the Company's board of
directors. Since December 1990 he has been a principal of Felenstein Koniver &
Associates, retail consultants. From 1986 to present Mr. Felenstein has been a
director of Dorchester Public Relations, Inc., a private public relations firm.
Mr. Felenstein has over forty years of experience in the retail industry.
M. BRENT STEVENS has served as a director of the Company since the Effective
Date and is a member of the Audit Committee of the Company's board of directors.
He is a managing director of Jefferies & Company, Inc., which he joined in 1990.
JOHN S. BELISLE has served as a director of the Company since the Effective
Date and is a member of the Compensation Committee of the Company's board of
directors. Mr. Belisle served as a managing director and the chief workout
officer of Chemical Banking Corporation from 1989 to 1996. He has been an
independent consultant since 1996 and formed Alco & Belisle, LLC, a
reorganization consulting firm, in 1998.
FAITH LARSEN has served as a director of the Company since the Effective
Date and is a member of the Audit Committee of the Company's board of directors.
After joining BankAmerica Corporation in 1977, Ms. Larsen served as a senior
vice president and chief workout officer in New York from 1992 to September
1996. Since October 1996, she has been an independent consultant.
45
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information with respect to the accrued
compensation of the Company's Chief Executive Officer and each of the four other
most highly compensated executive officers of the Company (collectively, the
"Named Executive Officers") received from the Company in 1997, 1996 and 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION AWARDS
-----------------------------
ANNUAL COMPENSATION SECURITIES
NAME AND -------------------------------- UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY $ BONUS $ OPTIONS # COMPENSATION $
- ---------------------------------------------------- --------- --------- ---------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
Sam Forman 1997 669,231 1,000,000 3,529,410(1) 9,537
Chairman, CEO and President 1996 140,769 -- -- --
1995 -- -- -- --
Brett D. Forman 1997 154,693 150,000 -- --
Executive Vice President 1996 23,462 -- -- --
1995 -- -- -- --
Paul Roth 1997 177,665 -- -- --
Executive Vice President 1996 37,019 -- -- --
1995 -- -- -- --
Steven Anderson 1997 131,250 30,000 -- --
Senior Vice President/CIO 1996 -- -- -- --
1995 -- -- -- --
David Mitchell 1997 129,696 25,000 -- --
Vice President 1996 115,449 -- -- --
1995 124,478 13,357 -- --
</TABLE>
- ------------------------
(1) Represents Series C Warrants issued to Sam Forman pursuant to his employment
agreement with the Company. The warrants have a term of five years.
Currently, warrants exercisable for 1,176,470 shares of Common stock are
vested; an additional 1,176,470 warrants will vest on October 29, 1998 and
an additional 1,176,470 warrants will vest on October 29, 2000. The exercise
price of the warrants is determined on the basis of the total recovery to
the holders of general unsecured claims under the Plan. See "Forman
Employment Agreement."
DIRECTORS' COMPENSATION
Directors each receive $25,000 in annual directors' fees, and $1,500 per
each meeting attended. The Company is also contemplating establishing a plan to
compensate directors with equity compensation in the form of stock options. In
addition, all directors are reimbursed for their expenses, if any, incurred for
attendance at each Board meeting.
46
<PAGE>
The following table sets forth information with respect to option grants to
the Company's Chief Executive Officer during the last fiscal year:
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------- POTENTIAL
PERCENT OF REALIZABLE VALUE
TOTAL AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF
SECURITIES /SAR STOCK PRICE
UNDERLYING GRANTED TO EXERCISE APPRECIATION FOR
OPTION EMPLOYEES OF BASE OPTION TERM
/SARS IN FISCAL PRICE EXPIRATION --------------------
NAME GRANT (1) YEAR (S/SB) DATE 5% ($) 10% ($)
- ------------------------------------------------ ---------- ------------- ------------- --------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Sam Forman...................................... 3,529,410 100 (1) (1)
</TABLE>
- ------------------------
(1) Represents Series C Warrants issued to Sam Forman pursuant to his employment
agreement with the Company. The warrants have a term of five years.
Currently, warrants exercisable for 1,176,470 shares of Common stock are
vested; an additional 1,176,470 warrants will vest on October 29, 1998 and
an additional 1,176,470 warrants will vest on October 29, 2000. The exercise
price of the warrants is determined on the basis of the total recovery to
the holders of general unsecured claims under the Plan. See "Forman
Employment Agreement."
COMMITTEES OF BOARD OF DIRECTORS
An Audit Committee has been established by the Company's board of directors
consisting exclusively of independent directors. The current members of the
Audit Committee are Messrs. Meinert and Stevens and Ms. Larsen. The Audit
Committee makes recommendations to the board of directors regarding the
independent accountants to be nominated for election by the stockholders and
reviews the independence of such accountants, approves the scope of the annual
audit activities of the independent accountants, approves the audit fee payable
to the independent accountants and reviews such audit results. Arthur Andersen
LLP presently serves as the independent accountants of the Company.
The board of directors has also established a Compensation Committee which
consists of Messrs. Belisle, Meinert and Felenstein. The duties of the
Compensation Committee are to provide a general review of the Company's
compensation and benefit plans to ensure that they meet corporate objectives.
The Compensation Committee also reviews compensation policies and practices with
respect to senior executive officers and directors of the Company and makes its
recommendations to the board. The board of directors may also establish other
committees to assist in the discharge of its responsibilities.
FORMAN EMPLOYMENT AGREEMENT
Mr. Sam Forman is employed pursuant to an employment agreement (the "Forman
Employment Agreement") with the Company. Under the terms of the Forman
Employment Agreement, which expires in August 2002, Mr. Forman is entitled to
receive as compensation a base salary of $600,000 per year, which shall be
adjusted annually in accordance with the federal cost of living index. Mr.
Forman received, in connection with the Forman Employment Agreement, Series C
Warrants, which entitle him to purchase 15% of the Common Stock, subject to
dilution only by the Series A Warrants and by certain options to
47
<PAGE>
purchase Common Stock that may be granted to certain employees and directors of
the Company. The Series C Warrants have the following exercise prices: (1) the
Series C-1 Warrants have an exercise price which represents a recovery to the
holders of general unsecured claims under the Plan (a "Recovery") of 40%; (ii)
the Series C-2 Warrants have an exercise price which represents a Recovery of
70%; and (iii) the Series C-3 Warrants have an exercise price which represents a
Recovery of 90%; PROVIDED FURTHER that, notwithstanding the foregoing, if, for
any consecutive ten trading days during the five-year term of the Series C
Warrants, the product of the average value per share of the Company's Common
Stock times the number of outstanding shares of such Common Stock (including
shares reserved for Warrants other than the Series C Warrants) exceeds $200
million, then the exercise price of the Series C-1 Warrants shall be zero. Mr.
Forman is also entitled to receive certain severance benefits if, among other
things, (i) any person or entity acquires beneficial ownership of 51% or more of
the Common Stock (including Common Stock subject to options and warrants)
following the Effective Date, (ii) Mr. Forman's designee (the "Forman Designee")
to serve on the Company's Board of Directors is removed from or not elected to
the Company's Board of Directors, or (iii) Mr. Forman resigns from the Company
following certain specified events. Mr. Forman may terminate the Forman
Employment Agreement at any time upon sixty days' written notice to the
Company's Board of Directors.
LIMITATIONS ON LIABILITY; INDEMNIFICATION
The Company's articles of incorporation, which have been amended and
restated pursuant to the Plan of Reorganization, provide that no director of the
Company shall be personally liable to the Company or its shareholders for
monetary damages for breach of any fiduciary duty. The Articles of
Incorporation, however, do not eliminate or limit the liability of a director
for, among other things, (i) a breach of the director's duty of loyalty, (ii)
acts or omissions not in good faith or that involve intentional misconduct or a
knowing violation of law, (iii) failing to vote against or consenting to an
unlawful distribution, or (iv) any transaction from which the director derived
an improper personal benefit.
CERTAIN RELATIONSHIPS
Mr. Sam Forman is chairman of the board of directors and owns, together with
his family, 70% of the voting securities of Forman Enterprises. Forman
Enterprises owns and operates 73 factory outlet stores that sell casual apparel
similar to that sold by the Company. The Forman Employment Agreement provides
that Mr. Forman must devote substantially all of his working time to the
performance of his responsibilities as chief executive officer of the Company.
Mr. Forman's sons, Brett Forman and Richard Forman, have relationships with both
the Company and Forman Enterprises. Brett Forman is a member of the board of
directors, a shareholder, and a nonemployee president of Forman Enterprises but
devotes substantially all of his time to the performance of his responsibilities
as executive vice president and a director of the Company. Richard Forman is an
employee but not an officer of the Company. Richard Forman also owns voting
securities of Forman Enterprises.
To take advantage of operating synergies and reduce the Company's corporate
overhead, the Company has engaged Forman Enterprises to perform certain
consulting services for the Company. In August 1997, with the approval of the
Bankruptcy Court, the Company entered into a Consulting Agreement with Forman
Enterprises (the "Consulting Agreement"), pursuant to which Forman Enterprises
provides the Company with sourcing, merchandising, budgeting, store management,
and related services. Howard Katcher, the chief operating officer of Forman
Enterprises, Amaz Zivony, the vice president of sourcing of Forman Enterprises,
and Wendy Forman, the vice president of merchandising and a shareholder of
Forman Enterprises, will each provide services to the Company primarily related
to the sourcing of merchandise, spending, respectively, 50%, 75%, and 75% of
their working time to perform such services on behalf of the Company. Wendy
Forman is the daughter of Sam Forman. The Company will reimburse Forman
Enterprises for 50%, 75%, and 75%, respectively, of Messrs. Katcher and Zivony's
and Ms. Forman's salary and benefits payable by Forman Enterprises. In 1997, the
Company purchased
48
<PAGE>
$1,666,827 of merchandise and paid consulting fees and related expenses of
$321,739 to Forman Enterprises; in 1998, payments for consulting fees expected
to result in an aggregate payment of approximately $750,000. The Company does
not expect to purchase merchandise from Forman Enterprises. The Consulting
Agreement provides for an additional payment of $40,000 per month by the Company
to reimburse Forman Enterprises for the consulting services referenced above
other than those being performed by Messrs. Katcher and Zivony and Ms. Forman,
from which will be deducted a $5,000 payment from Forman Enterprises to the
Company to pay Forman Enterprises's share of rent expense for the Company's New
York office. In addition, Forman Enterprises and the Company utilize many of the
same suppliers.
Thirty percent of the equity of Forman Enterprises is owned by Mr. Larry
Ashinoff. Coronet, an entity controlled by Mr. Ashinoff, sells merchandise to
both the Company and Forman Enterprises. During 1997, payments for merchandise
to Coronet totaled approximately $762,000.
These relationships pose a potential conflict of interest. The Company
believes that the potential for a conflict of interest is minimized because (i)
Forman Enterprises is not, for the most part, a mall-based retailer, (ii) the
overlap in suppliers could strengthen the Company's ability to acquire goods at
a low cost in furtherance of its business strategy, and (iii) the Consulting
Agreement is at least as advantageous to the Company as would an arrangement for
similar consulting services entered into with an unaffiliated third party.
In 1997, the Company engaged Felenstein Koniver & Associates ("FKA"), to act
as a real estate consultant to the Company at (i) a consulting fee of $3,000 per
month plus (ii) a success fee of $3,000 for each lease completed by the Company
and arranged by FKA. In fiscal year 1997, the Company entered into 27 leases
that were arranged by FKA and total payments to FKA totaled $117,219. As noted
above, Mr. Felenstein, a member of the Company's board of directors, is a
principal of FKA.
During 1997, prior to their retention after the Effective Date by the
Company, Eaton & Van Winkle represented Sam Forman and Forman Enterprises on
certain matters. Eaton & Van Winkle has continued since the Effective Date to
represent Sam Forman and Forman Enterprises on certain matters.
The Audit Committee of the Board of Directors is monitoring and will
continue to monitor these relationships.
49
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information concerning the beneficial
ownership of shares of Common Stock on , 1998, by: (i) each
stockholder known by the Company to beneficially own more than 5% of the
outstanding shares of Common Stock (ii) each director of the Company, (iii) each
Named Executive Officer, (iv) and all directors and current executive officers
as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
----------------------------
<S> <C> <C>
AMOUNT AND
NAME AND ADDRESS OF NATURE OF PERCENTAGE OF
BENEFICIAL OWNER OWNERSHIP(1) CLASS(2)
- ------------------------------------------------------------------------------------- ------------- -------------
Dean Witter High Yield Securities, Inc............................................... 1,782,411(3)
Sam Forman........................................................................... 1,176,470(4)
Brett D. Forman...................................................................... -- --
John S. Belisle...................................................................... -- --
Marshall E. Felenstein............................................................... -- --
Faith Larsen......................................................................... -- --
John R. Meinert...................................................................... -- --
M. Brent Stevens..................................................................... -- --
Directors and Named Executive Officers as a group.................................... 1,176,470(4)
</TABLE>
(1) In computing the number of shares beneficially owned by a person and the
percentage of ownership of that person, shares of Common Stock subject to
options or warrants held by that person that are currently exercisable or
exercisable within 60 days of the date hereof are deemed outstanding.
(2) Beneficial ownership is determined in accordance with the rules and
regulations of the Securities and Exchange Commission. In computing the
number of shares beneficially owned by a person and the percentage of
ownership of that person, shares of Common Stock subject to options or
warrants held by that person that are currently exercisable or exercisable
within 60 days of the date hereof are deemed outstanding. Such shares,
however, are not deemed outstanding for the purpose of computing the
percentage ownership of any other person.
(3) The investment advisor for the mutual fund listed is Dean Witter
InterCapital Inc. An additional 3,720,461 shares are held by other Dean
Witter mutual funds which are also managed by Dean Witter InterCapital Inc.
None of such funds own individually more than 5% of the Company's Common
Stock.
(4) Represents the vested portion of Series C Warrants issued to Mr. Sam Forman.
See Note 1 to Summary Compensation Table and "Forman Employment Agreement."
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Private Notes were sold by the Company on October 29, 1997 (the "Issue
Date") to the Initial Purchaser pursuant to the Purchase Agreement. The Initial
Purchaser subsequently sold the Private Notes to "qualified institutional
buyers" ("QIBs"), as defined in Rule 144A under the Securities Act ("Rule
144A"), in reliance on Rule 144A. As a condition to the initial sale of the
Private Notes, the Company and the Initial Purchaser entered into the
Registration Rights Agreement dated as of October 29, 1997. Pursuant to the
Registration Rights Agreement, the Company agreed that it would use its best
efforts to (i) file with the Commission within 120 days after the Issue Date a
registration statement under the Securities Act with respect to the Exchange
Offer and (ii) cause such Registration Statement to become effective under the
Securities Act within 180 days after the Issue Date. The Company agreed to issue
and exchange Exchange Notes for all Private Notes validly tendered and not
withdrawn before the expiration of the Exchange Offer. A copy of the
Registration Rights Agreement has been filed as an
50
<PAGE>
exhibit to the Registration Statement of which this Prospectus is a part. The
Registration Statement is intended to satisfy certain of the Company's
obligations under the Registration Rights Agreement and the Purchase Agreement.
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 Private
Notes validly tendered and not withdrawn prior to the Expiration Date.
The Company will issue $1,000 principal amount of Exchange Notes in exchange
for each $1,000 principal amount of outstanding Private Notes validly tendered
pursuant to the Exchange Offer and not withdrawn prior to the Expiration Date.
Private Notes may be tendered only in integral multiples of $1,000.
The form and terms of the Exchange Notes are the same as the form and terms
of the Private Notes except that (i) the exchange will be registered under the
Securities Act and, therefore, the Exchange Notes will not bear legends
restricting the transfer thereof and (ii) holders of the Exchange Notes will not
be entitled to any of the registration rights of holders of Private Notes under
the Registration Rights Agreement, which rights will terminate upon the
consummation of the Exchange Offer. The Exchange Notes will evidence the same
indebtedness as the Private Notes (which they replace) and will be issued under,
and be entitled to the benefits of, the Indenture, which also authorized the
issuance of the Private Notes, such that both series of Notes will be treated as
a single class of debt securities under the Indenture.
As of the date of this Prospectus, $85,000,000 in aggregate principal amount
of the Private Notes is outstanding, all of which is registered in the name of
Cede & Co., as nominee for The Depository Trust Company (the "Depositary").
Solely for reasons of administration, the Company has fixed the close of
business on March 1, 1998 as the record date for the Exchange Offer for purposes
of determining the persons to whom this Prospectus and the Letter of Transmittal
will be mailed initially. There will be no fixed record date for determining
holders of the Private Notes entitled to participate in the Exchange Offer.
Holders of the Private Notes do not have any appraisal or dissenters' rights
under the Minnesota Business Corporation Law or the Indenture in connection with
the Exchange Offer. The Company intends to conduct the Exchange Offer in
accordance with the provisions of the Registration Rights Agreement and the
applicable requirements of the Securities Act and the rules and regulations of
the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Private Notes
when, 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
of Private Notes for the purposes of receiving the Exchange Notes from the
Company.
Holders who tender Private 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 Private
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than certain applicable taxes described below, in connection
with the Exchange Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time on
, 1998, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the terms "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
51
<PAGE>
In order to extend the Exchange Offer, the Company will (i) notify the
Exchange Agent of any extension by oral or written notice and (ii) issue a press
release or other public announcement which shall include disclosure of the
approximate number of Private Notes deposited to date, each prior to 9:00 a.m.,
New York City time, on the next business day after the previously scheduled
Expiration Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Private Notes, (ii) to extend the Exchange Offer or (iii) if, in
the opinion of counsel for the Company, the consummation of the Exchange Offer
would violate any applicable law, rule or regulation or any applicable
interpretation of the staff of the Commission, to terminate or amend the
Exchange Offer by giving oral or written notice of such delay, extension,
termination or amendment to the Exchange Agent. Any such delay in acceptance,
extension, termination or amendment will be followed as promptly as practicable
by a press release or other 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 holders, and the Company
will extend the Exchange Offer for a period of five to ten business days,
depending upon the significance of the amendment and the manner of disclosure to
the holders, if the Exchange Offer would otherwise expire during such five to
ten business day period.
Without limiting the manner in which the Company may choose to make a public
announcement of any delay, extension, amendment or termination of the Exchange
Offer, the Company shall have no obligation to publish, advertise, or otherwise
communicate any such public announcement, other than by making a timely release
to an appropriate news agency.
RESALE OF THE EXCHANGE NOTES
With respect to the Exchange Notes, based upon interpretations by the staff
of the Commission set forth in certain no-action letters issued to third
parties, the Company believes that a holder who exchanges Private Notes for
Exchange Notes in the ordinary course of business, who is not participating,
does not intend to participate, and has no arrangement with any person to
participate in a distribution of the Exchange Notes, and who is not an
"affiliate" of the Company within the meaning of Rule 405 of the Securities Act,
will be allowed to resell Exchange Notes to the public without further
registration under the Securities Act and without delivering to the purchasers
of the Exchange Notes a prospectus that satisfies the requirements of Section 10
of the Securities Act. However, if any holder acquires Exchange Notes in the
Exchange Offer for the purpose of distributing or participating in the
distribution of the Exchange Notes, such holder cannot rely on the position of
the staff of the Commission enumerated in such no-action letters issued to third
parties and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction,
unless an exemption from registration is otherwise available. Each broker-dealer
that receives Exchange Notes for its own account in exchange for Private Notes
acquired by such broker-dealer as a result of market-making or other trading
activities must acknowledge that it will deliver a prospectus in connection with
any resale of such Exchange 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 any Exchange Notes
received in exchange for Private Notes acquired by such broker-dealer as a
result of market-making or other trading activities. Pursuant to the
Registration Rights Agreement, the Company has agreed to make this Prospectus,
as it may be amended or supplemented from time to time, available to any such
broker-dealer that requests copies of such Prospectus in the Letter of
Transmittal for use in connection with any such resale for a period of time as
is necessary for such persons to comply with the prospectus delivery
requirements of the Securities Act in order to resell the Exchange Notes. See
"Plan of Distribution."
Each Holder participating in the Exchange Offer shall be required to
represent to the Company that at the time of the consummation of the Exchange
Offer (i) any Exchange Notes received by such Holder
52
<PAGE>
will be acquired in the ordinary course of its business, (ii) such Holder will
have no arrangements or understanding with any person to participate in the
distribution of the Private Notes or Exchange Notes within the meaning of the
Securities Act, (iii) such Holder is not an "affiliate" (as defined in Rule 405
of the Securities Act) of the Company, or if it is an affiliate, such Holder
will comply with the registration and prospectus delivery requirements of the
Securities Act to the extent applicable, (iv) if such Holder is not a
broker-dealer, that it is not engaged in, and does not intend to engage in, the
distribution of the Exchange Notes and (v) if such Holder is a broker-dealer,
that it will receive Exchange Notes for its own account in exchange for Private
Notes that were acquired as a result of market-making activities or other
trading activities and that it will be required to acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Notes.
PROCEDURES FOR TENDERING
To tender in the Exchange Offer, a holder of Private Notes must complete,
sign and date the Letter of Transmittal, or 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 to the
Exchange Agent at the address set forth below under "--Exchange Agent" for
receipt prior to the Expiration Date. In addition, either (i) certificates for
such Private Notes must be received by the Exchange Agent along with the Letter
of Transmittal, (ii) a timely confirmation of a book-entry transfer (a
"Book-Entry Confirmation") of such Private Notes into the Exchange Agent's
account at the Depositary pursuant to the procedure for book-entry transfer
described below, must be received by the Exchange Agent prior to the Expiration
Date or (iii) the holder must comply with the guaranteed delivery procedures
described below.
The tender by a holder that is not withdrawn prior to the Expiration Date
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 PRIVATE NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK
OF THE HOLDER, BUT THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED
OR CONFIRMED BY THE EXCHANGE AGENT. INSTEAD OF DELIVERY BY MAIL, IT IS
RECOMMENDED THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE, PROPERLY
INSURED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO
THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. DO NOT SEND THE LETTER OF
TRANSMITTAL OR ANY PRIVATE NOTES TO THE COMPANY. HOLDERS MAY REQUEST THEIR
RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO
EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner(s) of the Private Notes whose Private Notes are held
through a broker, dealer, commercial bank, trust Company or other nominee and
who wishes to tender should contact such intermediary promptly and instruct such
intermediary to tender on such beneficial owner's behalf.
Signatures on a Letter of Transmittal or a notice of withdrawal described
below (see "--Withdrawal of Tenders"), as the case may be, must be guaranteed by
an Eligible Institution (as defined below) unless the Private Notes tendered
pursuant thereto are tendered (i) by a registered holder who has not completed
the box titled "Special Delivery Instruction" 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 made by a member firm of a
registered national securities exchange or of the NASD, a commercial bank or
trust Company having an office or correspondent in the United States or an
"eligible guarantor institution" within the meaning of Rule 17Ad-15 under the
Exchange Act which is a member of one of the recognized signature guarantee
programs identified in the Letter of Transmittal (an "Eligible Institution").
53
<PAGE>
If the Letter of Transmittal is signed by a person other than the registered
holder of any Private Notes listed therein, such Private Notes must be endorsed
or accompanied by a properly completed bond power, signed by such registered
holder exactly as such registered holder's name appears on such Private Notes.
In connection with any tender of Private Notes in definitive certified form,
if the Letter of Transmittal or any Private 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.
The Exchange Agent and the Depositary have confirmed that any financial
institution that is a participant in the Depositary's system may utilize the
Depositary's Automated Tender Offer Program to tender Private Notes.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Private 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 Private
Notes not properly tendered or any Private 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 Private 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 Private Notes must be
cured within such time as the Company shall determine. Although the Company
intends to notify holders of defects or irregularities in connection with
tenders of Private Notes, neither the Company, the Exchange Agent nor any other
person shall incur any liability for failure to give such notification. Tenders
of Private Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived.
While the Company has no present plan to acquire any Private Notes that are
not tendered in the Exchange Offer or to file a registration statement to permit
resales of any Private Notes that are not tendered pursuant to the Exchange
Offer, the Company reserves the right in its sole discretion to purchase or make
offers for any Private Notes that remain outstanding subsequent to the
Expiration Date and, to the extent permitted by applicable law, purchase Private
Notes in the open market, in privately negotiated transactions or otherwise. The
terms of any such purchases or offers could differ from the terms of the
Exchange Offer.
By tendering Private Notes pursuant to the Exchange Offer, each holder of
Private Notes will represent to the Company that, among other things, (i) the
Exchange Notes to be acquired by such holder of Private Notes in connection with
the Exchange Offer are being acquired by such holder in the ordinary course of
business of such holder, (ii) such holder has no arrangement or understanding
with any person to participate in the distribution of the Exchange Notes, (iii)
such holder acknowledges and agrees that any person who is a broker-dealer
registered under the Exchange Act or is participating in the Exchange Offer for
the purposes of distributing the Exchange Notes must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale of the Exchange Notes acquired by such person
and cannot rely on the position of the staff of the Commission set forth in
certain no-action letters, (iv) such holder understands that a secondary resale
transaction described in clause (iii) above and any resales of Exchange Notes
obtained by such holder in exchange for Private Notes acquired by such holder
directly from the Company should be covered by an effective registration
statement containing the selling security holder information required by Item
507 or Item 508, as applicable, of Regulation S-K of the Commission and (v) such
holder is not an "affiliate", as defined in Rule 405 under the Securities Act,
of the Company. If the holder is a broker-dealer that will receive Exchange
Notes for such holder's own account in exchange for Private Notes that were
acquired as a result of market-making activities or other trading activities,
such holder will be required to acknowledge in the Letter of Transmittal that
such holder will deliver a prospectus in connection with any resale of such
54
<PAGE>
Exchange Notes; however, by so acknowledging and by delivering a prospectus,
such holder will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
RETURN OF PRIVATE NOTES
If any tendered Private Notes are not accepted for any reason set forth in
the terms and conditions of the Exchange Offer or if Private Notes are withdrawn
or are submitted for a greater principal amount than the holders desire to
exchange, such unaccepted, withdrawn or nonexchanged Private Notes will be
returned without expense to the tendering holder thereof (or, in the case of
Private Notes tendered by book-entry transfer in to the Exchange Agent's account
at the Depositary pursuant to the book-entry transfer procedures described
below, such Private Notes will be credited to an account maintained with the
Depositary) as promptly as practicable.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Private Notes at the Depositary for purposes of the Exchange Offer within
two business days after the date of this Prospectus, and any financial
institution that is a participant in the Depositary's systems may make book-
entry delivery of Private Notes by causing the Depositary to transfer such
Private Notes into the Exchange Agent's account at the Depositary in accordance
with the Depositary's procedures for transfer. However, although delivery of
Private Notes may be effected through book-entry transfer at the Depositary, the
Letter of Transmittal or facsimile thereof, with any required signature
guarantees and any other required documents, must, in any case, be transmitted
to and received by the Exchange Agent at the address set forth below under
"--Exchange Agent" on or prior to the Expiration Date or pursuant to the
guaranteed delivery procedures described below.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Private Notes and (i) whose Private Notes
are not immediately available or (ii) who cannot deliver their Private Notes,
the Letter of Transmittal or any other required documents to the Exchange Agent
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 substantially in the form provided by the Company (by
facsimile transmission, mail or hand delivery) setting forth the name and
address of the holder, the certificate number(s) of such Private Notes (if
applicable) and the principal amount of Private Notes tendered, stating that
the tender is being made thereby and guaranteeing that, within five New York
Stock Exchange trading days after the Expiration Date, the Letter of
Transmittal (or a facsimile thereof), together with the certificate(s)
representing the Private Notes in proper form for transfer or a Book-Entry
Confirmation, as the case may be, 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 executed Letter of Transmittal (or facsimile thereof),
as well as the certificate(s) representing all tendered Private Notes in
proper form for transfer or a Book-Entry Confirmation, as the case may be,
and all other documents required by the Letter of Transmittal are received
by the Exchange Agent within five New York Stock Exchange trading days after
the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Private Notes according to the
guaranteed delivery procedures set forth above.
55
<PAGE>
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Private Notes may be
withdrawn at any time prior to the Expiration Date.
To withdraw a tender of Private Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to the Expiration Date. Any such
notice of withdrawal must (i) specify the name of the person having deposited
the Private Notes to be withdrawn (the "Depositor"), (ii) identify the Private
Notes to be withdrawn (including the certificate number or numbers, if
applicable, and principal amount of such Private Notes) and (iii) be signed by
the holder in the same manner as the original signature on the Letter of
Transmittal by which such Private Notes were tendered (including any required
signature guarantees). All questions as to the validity, form and eligibility
(including time of receipt) of such notices will be determined by the Company,
in its sole discretion, whose determination shall be final and binding on all
parties. Any Private Notes so withdrawn will be deemed not to have been validly
tendered for purposes of the Exchange Offer, and no Exchange Notes will be
issued with respect thereto unless the Private Notes so withdrawn are validly
retendered. Properly withdrawn Private Notes may be retendered by following one
of the procedures described above under "The Exchange Offer--Procedures for
Tendering" at any time prior to the Expiration Date.
TERMINATION OF CERTAIN RIGHTS
All registration rights under the Registration Rights Agreement accorded to
holders of the Private Notes (and all rights to receive additional interest in
the event of a Registration Default as defined therein) will terminate upon
consummation of the Exchange Offer except with respect to the Company's
continuing obligation for a period of up to 180 days after the Registration
Statement is declared effective to keep the Registration Statement effective and
to provide copies of the latest version of the Prospectus to any broker-dealer
that requests copies of such Prospectus in the Letter of Transmittal for use in
connection with any resale by such broker-dealer of Exchange Notes received for
its own account pursuant to the Exchange Offer in exchange for Private Notes
acquired for its own account as a result of market-making or other trading
activities.
EXCHANGE AGENT
First Trust National Association has been appointed as Exchange Agent for
the Exchange Offer. Questions and requests for assistance, requests for
additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notice of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
<TABLE>
<CAPTION>
By Facsimile:
(For Eligible Institutions
By Mail: Only) By Hand or Overnight Courier
<S> <C> <C>
First Trust National (612) 244-1537 First Trust National
Association Association
180 East Fifth Street Confirm by Telephone: 180 East Fifth Street
St. Paul, Minnesota 55101 (612) 244-1215 St. Paul, Minnesota 55101
Attention: Specialized Attention: Specialized
Finance, Finance,
4th Floor 4th Floor
</TABLE>
First Trust National Association also serves as Trustee under the Indenture.
56
<PAGE>
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, facsimile transmission, telephone or in person by
officers and regular employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable, out-of-pocket expenses in connection therewith.
The expenses to be incurred in connection with the Exchange Offer, including
registration fees, fees and expenses of the Exchange Agent and the Trustee,
accounting and legal fees, and printing costs, will be paid by the Company.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Private Notes pursuant to the Exchange Offer. If, however, Exchange Notes
and/or substitute Private Notes not exchanged are to be delivered to, or are to
be registered or issued in the name of, any person other than the holder of the
Private Notes tendered hereby, or if tendered Private Notes are registered in
the name of any person other than the person signing this Letter of Transmittal,
or if a transfer tax is imposed for any reason other than the exchange of the
Private Notes pursuant to the Exchange Offer, then the amount of any such
transfer taxes (whether imposed on the registered holder or any other persons)
will be payable by the tendering holder. If satisfactory evidence of payment of
such taxes or exemption therefrom is not submitted with the Letter of
Transmittal, the amount of such transfer taxes will be billed directly to such
tendering holder.
CONSEQUENCE OF FAILURE TO EXCHANGE
Participation in the Exchange Offer is voluntary. Holders of the Private
Notes are urged to consult their financial and tax advisors in making their own
decisions on what action to take.
Private Notes that are not exchanged for the Exchange Notes pursuant to the
Exchange Offer will remain "restricted securities" within the meaning of Rule
144(a)(3)(iv) of the Securities Act. Accordingly, such Private Notes may not be
offered, sold, pledged or otherwise transferred except (i) to a person whom the
seller reasonably believes is a "qualified institutional buyer" within the
meaning of Rule 144A under the Securities Act purchasing for its own account or
for the account of a qualified institutional buyer in a transaction meeting the
requirements of Rule 144A, (ii) in an offshore transaction complying with Rule
903 or Rule 904 of Regulation S under the Securities Act, (iii) pursuant to an
exemption from registration under the Securities Act provided by Rule 144
thereunder (if available), (iv) pursuant to an effective registration statement
under the Securities Act or (v) pursuant to another available exemption from the
registration requirements of the Securities Act, and, in each case, in
accordance with all other applicable securities laws.
ACCOUNTING TREATMENT
For accounting purposes, the Company will recognize no gain or loss as a
result of the Exchange Offer. The expenses of the Exchange Offer will be
amortized over the remaining term of the Notes.
DESCRIPTION OF THE NOTES
GENERAL
The Notes will be issued pursuant to an Indenture (the "Indenture") among
the Company, the Subsidiary Guarantors (as defined), and First Trust National
Association, as trustee (the "Trustee"). The terms of the Notes include those
stated in the Indenture and those made part of the Indenture by reference to the
Trust Indenture Act of 1939 (the "Trust Indenture Act"). The Notes and the
Registration Rights Agreement are subject to all such terms, and holders of the
Notes are referred to the Indenture, the
57
<PAGE>
Registration Rights Agreement and the Trust Indenture Act for a statement
thereof. The following summary of certain provisions of the Indenture and the
Registration Rights Agreement does not purport to be complete and is subject to
and qualified in its entirety by reference to the Indenture and the Registration
Rights Agreement, including the definitions contained therein. Copies of the
proposed forms of Indenture and Registration Rights Agreement have been filed as
part of the registration statement covering the Notes. Copies are also available
from the Company and the Initial Purchaser upon request. The definitions of
certain terms used in the following summary are set forth below under "Certain
Definitions."
The Notes will be senior unsecured obligations of the Company. The Notes
will rank senior in right of payment to all present and future subordinated
indebtedness of the Company and PARI PASSU in right of payment with all present
and future unsubordinated indebtedness. The Notes will be effectively
subordinated to all existing and future secured indebtedness of the Company,
including indebtedness under the Senior Credit Facility, to the extent of the
value of the assets securing such indebtedness. As of the Effective Date, the
Company had an aggregate of $99.0 million of outstanding indebtedness (excluding
approximately $35.6 million of letters of credit and bankers' acceptances), of
which approximately $12.3 million was indebtedness under the Senior Credit
Facility.
PRINCIPAL, MATURITY, AND INTEREST
The Notes are limited in aggregate principal amount to $85 million and will
mature on November 1, 2004. Interest will be payable on the Notes in cash at the
rate per annum of 12 3/4%, semi-annually in arrears, on each November 1 and May
1, to holders of record on the immediately preceding October 15 and April 15,
respectively, commencing on May 1, 1998. Cash interest will be computed on the
basis of a 360-day year, consisting of twelve 30-day months. Interest on the
Notes will increase from time to time if the Company fails to fulfill its
obligations under the Registration Rights Agreement. In that regard, the Company
informed the Trustee on February 26, 1998 that the Company had not filed by the
Filing Date (this and the other capitalized terms used in this sentence without
definition are defined in the Registration Rights Agreement) either the Exchange
Registration Statement or the Initial Shelf Registration Statement; accordingly,
Additional Interest will accrue on the Notes until either such registration
statement has been filed and all other applicable Registration Defaults, if any,
have been cured.
The Notes will be payable both as to principal and interest at the office or
agency of the Company, or, at the option of the Company, payment of interest may
be made by check mailed to the holders of the Notes at their respective
addresses set forth in the register of holders of Notes. Until otherwise
designated by the Company, the Company's office or agency will be the office of
the Trustee maintained for such purpose. The Notes will be issued in registered
form only, without coupons, in denominations of $1,000 principal amount and
integral multiples thereof.
SECURITY ACCOUNT
In order to secure the Company's obligations with respect to the first three
scheduled interest payments under the Notes, the Company has deposited in the
Security Account to be held by the Trustee, as security agent (the "Security
Agent"), pursuant to the terms and conditions of the Indenture and the Security
Agreement (as defined herein), certain Pledged Securities acquired by the
Company upon consummation of the Private Note Offering with a portion of the net
proceeds from the sale of the Notes in an amount equal to approximately $15.5
million. The funds in the Security Account have been invested by the Security
Agent in Pledged Securities. The amount of Pledged Securities purchased depended
on the interest rates on government securities prevailing at the time of
purchase.
Interest earned on the Pledged Securities will be added to the Security
Account. The Pledged Securities and Security Account will also secure the
repayment of the principal amount and premium, if any, on the Notes to May 1,
1999.
58
<PAGE>
The funds in the Security Account will be applied to satisfy the Company's
obligations to pay interest on the Notes to May 1, 1999. Under the terms of the
Security Agreement, after all scheduled interest payments on the Notes to May 1,
1999 have been made, any remaining Pledged Securities and proceeds thereof, if
any, will be released from the Security Account to the Company.
GUARANTEES
CSS, whose only assets consist of certain service marks of the Company, has
entered into a supplemental indenture pursuant to which it guarantees the
repayment of the Notes (the "CSS Guarantee"). The repayment of the Notes will
also be unconditionally and irrevocably guaranteed, jointly and severally, by
all Restricted Subsidiaries of the Company formed after the Closing Date
(together with CSS, the "Subsidiary Guarantors"). The Indenture provides that,
as long as any Notes remain outstanding, any Subsidiary Guarantor shall enter
into a supplemental indenture and guarantee repayment of the Notes (each,
including the CSS Guarantee, a "Subsidiary Guarantee"). The Subsidiary Guarantee
of each Subsidiary Guarantor will rank pari passu in right of payment to all
existing and future unsubordinated indebtedness of such Subsidiary Guarantor.
The Subsidiary Guarantee will be effectively subordinated to secured
indebtedness of the Subsidiary Guarantor, including indebtedness outstanding
under the Senior Credit Facility, in each case, to the extent of the assets
securing such indebtedness.
The obligations of each Subsidiary Guarantor will be limited to the maximum
amount as will, after giving effect to all other contingent and fixed
liabilities of such Subsidiary Guarantor and after giving effect to any
collections from or payments made by or on behalf of any other Subsidiary
Guarantor in respect of the obligations of such other Subsidiary Guarantor under
its Subsidiary Guarantee, result in the obligations of such Subsidiary Guarantor
under the Subsidiary Guarantee not constituting a fraudulent conveyance or
fraudulent transfer under federal or state law. The net worth of any Subsidiary
Guarantor for such purpose shall include any claim of such Subsidiary Guarantor
against the Company for reimbursement and any claim against any other Subsidiary
Guarantor for contribution. Each Subsidiary Guarantor may consolidate with or
merge into or sell its assets to the Company or another Subsidiary Guarantor, or
with other Persons upon the terms and conditions set forth in the Indenture. See
"--Certain Covenants-- Mergers, Consolidations or Sale of Assets" and "--Certain
Covenants --Asset Sales." If all the capital stock of a Subsidiary Guarantor is
sold (including by way of merger or consolidation) by the Company and the sale
complies with the provisions set forth in "--Certain Covenants --Asset Sales,"
the Subsidiary Guarantee with respect to such Subsidiary Guarantor will be
released. Any Subsidiary Guarantor may cease to be a Subsidiary Guarantor, and
the Subsidiary Guarantee of such Subsidiary Guarantor will terminate at any time
that the Board of Directors designates such Subsidiary Guarantor as an
"Unrestricted Subsidiary," as provided below.
OPTIONAL REDEMPTION
The Notes are not subject to any mandatory redemption provisions or sinking
fund payments. Except as described below, the Notes are not redeemable at the
Company's option prior to November 1, 2001. Thereafter, the Notes will be
subject to redemption at the option of the Company, in whole or in part, upon
not less than 30 nor more than 60 days' notice, at the redemption prices
(expressed as percentages of principal amount) set forth below, plus accrued and
unpaid interest thereon to the applicable redemption date, if redeemed during
the twelve-month period beginning on November 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---------------------------------------------------------------------------------- -----------
<S> <C>
2001.............................................................................. 106.3750%
2002.............................................................................. 103.1875%
2003 and thereafter............................................................... 100%
</TABLE>
Notwithstanding the foregoing, prior to November 1, 2001, the Company may
redeem, at its option, up to one-third of the principal amount of outstanding
Notes at a redemption price equal to 112.75% of
59
<PAGE>
their principal amount on the redemption date, plus accrued and unpaid interest
thereon to the redemption date, with all or a portion of the net proceeds of an
offering of Capital Stock (other than Disqualified Stock) of the Company;
provided, that (i) at least two-thirds of the original principal amount of the
Notes are outstanding immediately following such redemption and (ii) such
redemption shall occur within 60 days of the date of the closing of such
offering of Capital Stock of the Company. The restrictions on optional
redemptions set forth in the Indenture do not limit the Company's right to make
open market or privately negotiated purchases of the Notes from time to time.
If less than all the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the national securities exchange, if any, on which the Notes are
listed, or, if the Notes are not so listed, on a pro rata basis, by lot or by
such method as the Trustee deems to be fair and appropriate, provided that Notes
with a principal amount of $1,000 or less may not be redeemed in part. Notice of
redemption will be mailed by first class mail at least 15 days but not more than
60 days before the redemption date to each holder of Notes to be redeemed at
such holder's registered address. If any Note is to be redeemed in part only,
the notice of redemption that relates to such Note will state the portion of the
principal amount thereof to be redeemed. A new Note in principal amount equal to
the unredeemed portion thereof will be issued in the name of the holder thereof
upon cancellation of the original Note. On and after the date of redemption,
interest will cease to accrue on the Notes or portions of Notes called for
redemption.
REPURCHASE UPON CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the Company will be required to
notify the Trustee in writing thereof and to offer to repurchase all or any part
(equal to $1,000 of principal or an integral multiple thereof) of each holder's
Notes pursuant to the offer described below (the "Change of Control Offer") at a
purchase price equal to 101% of the principal amount thereof on the date of
purchase, plus accrued and unpaid interest thereon, if any, through the date of
purchase (the "Change of Control Payment"). Within 30 days following any Change
of Control, the Company shall mail a notice to each holder stating: (1) that the
Change of Control Offer is being made pursuant to the covenant entitled "Change
of Control" and that all Notes tendered will be accepted for payment; (2) the
purchase price and the purchase date, which shall be no earlier than 30 days nor
later than 60 days from the date such notice is mailed (the "Change of Control
Payment Date"); (3) that any Note not tendered will continue to accrue interest;
(4) that, unless the Company defaults in the payment of the Change of Control
Payment, on and after the Change of Control Payment Date, all Notes accepted for
payment pursuant to the Change of Control Offer shall cease to accrue interest;
(5) that holders electing to have any Notes purchased pursuant to a Change of
Control Offer will be required to surrender the Notes, with the form entitled
"Option of Holder to Elect Purchase" on the reverse of the Notes completed, to
the Paying Agent at the address specified in the notice prior to the close of
business on the third Business Day preceding the Change of Control Payment Date;
(6) that holders will be entitled to withdraw their election if the Paying Agent
receives, not later than the close of business on the second Business Day
preceding the Change of Control Payment Date, a telegram, telex, facsimile
transmission, or letter setting forth the name of the holder, the principal
amount of Notes delivered for purchase, and a statement that such holder is
withdrawing his election to have such Notes purchased; and (7) that holders
whose Notes are being purchased only in part will be issued new Notes equal in
principal amount to the unpurchased amount of the Notes surrendered; provided
that each Note purchased and each new Note issued shall be in a principal amount
equal to $1,000 or an integral multiple thereof. The Company will comply with
the requirements of Rule 14e-1 under the Exchange Act and any other securities
laws and regulations thereunder to the extent such laws and regulations are
applicable in connection with the repurchase of the Notes in connection with a
Change of Control. To the extent that the provisions of any securities laws or
regulations conflict with the "Repurchase upon Change of Control" provisions of
the Indenture, the Company shall comply with the applicable securities laws and
regulations and shall not be deemed to have breached its obligations under the
"Repurchase upon Change of Control" provisions of the Indenture by virtue
thereof.
60
<PAGE>
On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment Notes or portions thereof tendered pursuant to
the Change of Control Offer, (2) deposit with the Paying Agent an amount equal
to the Change of Control Payment in respect of all Notes or portions thereof so
tendered and (3) deliver or cause to be delivered to the Trustee the Notes so
accepted together with an Officers' Certificate stating the amount of the Notes
or portions thereof tendered to the Company. The Paying Agent shall promptly
mail to each holder of Notes so accepted payment in an amount equal to the
purchase price for such Notes, and the Trustee shall promptly authenticate and
mail to each holder a new Note equal in principal amount to the unpurchased
portion of the Notes surrendered, if any; provided, that each such new Note
shall be in a principal amount of $1,000 or an integral multiple thereof. The
Company will publicly announce the results of the Change of Control Offer on or
as soon as practicable after the Change of Control Payment Date.
There can be no assurance that sufficient funds will be available at the
time of any Change of Control Offer to make required repurchases. The Company's
failure to comply with the covenant described above, including failure to pay
the repurchase price, will be an Event of Default under the Indenture.
CERTAIN COVENANTS
RESTRICTED PAYMENTS. The Company will not, and will not permit any of its
Restricted Subsidiaries to, directly or indirectly (i) declare or pay any
dividend or make any distribution on account of the Company's or any of its
Restricted Subsidiaries' Equity Interests (other than dividends or distributions
payable in Equity Interests (other than Disqualified Stock) of the Company or
dividends or distributions payable to the Company or any Wholly-Owned Restricted
Subsidiary of the Company); (ii) purchase, redeem or otherwise acquire or retire
for value any Equity Interests of the Company or any Restricted Subsidiary or
other Affiliate of the Company (other than any such Equity Interests owned by
the Company or any Wholly-Owned Restricted Subsidiary of the Company); (iii)
voluntarily purchase, redeem, decease or otherwise acquire or retire for value
any other Indebtedness (other than Indebtedness under the Senior Credit Facility
or Indebtedness evidenced by the Notes or the New Notes) that is PARI PASSU with
or subordinated to the Notes; or (iv) make any Restricted Investment (all such
payments and other actions set forth in clauses (i) through (iv) above being
collectively referred to as "Restricted Payments") unless, at the time of such
Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof;
(b) immediately after giving effect to such transaction, on a pro forma
basis as if such transaction had occurred at the beginning of the applicable
four-quarter period, the Company would be permitted to incur at least $1.00
of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test
set forth in the first paragraph under "-- Incurrence of Indebtedness and
Issuance of Preferred Stock";
(c) the amount of such Restricted Payment, together with the aggregate
amount of all other Restricted Payments made by the Company and its
Restricted Subsidiaries after the date of the Indenture, is less than the
sum of (x) 50% of the Consolidated Net Income of the Company for the period
(taken as one accounting period) from the beginning of the first quarter
commencing immediately after the date of the Indenture to the end of the
Company's most recently ended fiscal quarter for which internal financial
statements are available at the time of such Restricted Payment (or, if such
Consolidated Net Income for such period is a deficit, 100% of such deficit),
plus (y) 100% of the net cash proceeds received by the Company from the
issuance or sale of Equity Interests of the Company (other than Equity
Interests sold to a Restricted Subsidiary or Affiliate of the Company and
other than Disqualified Stock) after the date of the Indenture and on or
prior to the time of such Restricted Payment, plus (z) 100% of the net cash
proceeds received by the Company from the issuance or sale, other than to a
Restricted Subsidiary or Affiliate of the Company, of any debt security of
the Company that has been converted into Equity Interests of the Company
(other than
61
<PAGE>
Disqualified Stock) pursuant to the terms thereof after the date of the
Indenture and on or prior to the time of such Restricted Payment. For
purposes of this clause (c) the amount of any Restricted Payment paid in
property other than cash shall be the fair market value of such property as
determined reasonably and in good faith by the Board of Directors of the
Company (and evidenced by a resolution set forth in an Officers' Certificate
delivered to the Trustee); and
(d) at least two fiscal quarters shall have elapsed since the Effective
Date.
The foregoing provisions will not prohibit, so long as no Default or Event
of Default shall have occurred and be continuing or would occur as a consequence
of any of the following: (i) the payment of any dividend within 60 days after
the date of declaration thereof, if at said date of declaration such payment
would have complied with the provisions of the Indenture; (ii) the redemption,
repurchase, retirement or other acquisition of any Indebtedness or Equity
Interests of the Company in exchange for, or solely out of the proceeds of, the
substantially concurrent sale (other than to a Restricted Subsidiary or other
Affiliate of the Company) of other Equity Interests of the Company (other than
any Disqualified Stock); (iii) the redemption, repurchase or payoff of Purchase
Money Obligations required to be repaid with the proceeds of the sale of the
asset financed by such indebtedness; (iv) the redemption, repurchase, defeasance
or payoff of any Indebtedness with proceeds of any Refinancing Indebtedness
permitted to be incurred under "-- Incurrence of Indebtedness and Issuance of
Preferred Stock"; (v) the repurchase, redemption or other acquisition or
retirement for value of any Equity Interests of the Company or any Subsidiary of
the Company held by any officer or employee of the Company or its Subsidiaries;
PROVIDED, HOWEVER, that the aggregate amount of all such repurchases,
redemptions and other acquisitions and retirements under this clause (v) on or
after the date of the Indenture shall not exceed $2.5 million, except for any
such repurchases, redemptions and other acquisitions and retirements funded with
insurance proceeds or proceeds received in connection with the issuance of
Equity Interests of the Company and its Restricted Subsidiaries, which shall not
be subject to such limitation; (vi) the purchase, redemption, defeasance or
other acquisition or retirement of Series A Warrants, Series B Warrants or
Series C Warrants, in each case to the extent required by the terms of the
agreement or agreements relating thereto or governing the terms thereof as in
effect on the Closing Date; (vii) distributions required under the Plan of
Reorganization or (viii) payments or distributions to dissenting stockholders
required by applicable law pursuant to and in connection with transactions
permitted under the terms of the Indenture.
Not later than the date of making any Restricted Payment, the Company shall
deliver to the Trustee an Officers' Certificate stating that such Restricted
Payment is permitted and setting forth the basis upon which the calculations
required by the "Restricted Payments" covenant were computed, which calculations
may be based upon the Company's latest available financial statements.
62
<PAGE>
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK. The Company
will not, and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, create, incur, issue, assume, guarantee or otherwise become directly
or indirectly liable with respect to (collectively, "incur") any Indebtedness
(other than Permitted Indebtedness), and the Company will not issue any
Disqualified Stock and will not permit any of its Restricted Subsidiaries to
issue any shares of Preferred Stock; PROVIDED, HOWEVER, that the Company may
incur Indebtedness or issue shares of Disqualified Stock, if (i) no Default or
Event of Default shall have occurred and be continuing or would occur after
giving effect on a pro forma basis to such incurrence or issuance and (ii) the
Fixed Charge Coverage Ratio for the Company's most recently ended four full
fiscal quarters for which internal financial statements are available
immediately preceding the date on which such additional Indebtedness is incurred
or such Disqualified Stock is issued would have been at least equal to 2.5:1,
determined on a pro forma basis as if the additional Indebtedness had been
incurred, or the Disqualified Stock had been issued, as the case may be, at the
beginning of such four-quarter period.
ASSET SALES. The Company will not, and will not permit any of its
Restricted Subsidiaries to, consummate an Asset Sale unless (i) the Company or
the applicable Restricted Subsidiary, as the case may be, receives consideration
at the time of such Asset Sale in an amount at least equal to the fair market
value of the assets sold or otherwise disposed of (A), as determined in good
faith by the Company's Board of Directors (as set forth in a resolution of such
Board of Directors and set forth in an Officers' Certificate delivered to the
Trustee) with respect to any Asset Sale pursuant to which at least 85% of the
consideration received by the Company or the Restricted Subsidiary, as the case
may be, from such Asset Sale shall be in the form of cash or Cash Equivalents
and is received at the time of such disposition or (B) with respect to any other
Asset Sale, as determined by an Independent Financial Advisor (as evidenced by a
favorable opinion delivered by such Independent Financial Advisor to the Trustee
as to (x) the adequacy of the consideration received by the Company or the
Restricted Subsidiary, as the case may be, from such Asset Sale and (y) the
fairness, from a financial point of view, of such Asset Sale); and (ii) upon the
consummation of an Asset Sale, the Company shall (I) apply, or cause such
Restricted Subsidiary to apply, the Net Cash Proceeds relating to such Asset
Sale within 180 days of such Asset Sale either (A) to repay any Indebtedness
secured by the assets involved in such Asset Sale or outstanding Indebtedness
under the Senior Credit Facility, in each case, together with a concomitant
permanent reduction in the amount of such Indebtedness (including a permanent
reduction in the committed amounts therefor in the case of any revolving credit
facility so repaid), (B) to make an investment in properties and assets that
replace the properties and assets that were the subject of such Asset Sale or in
properties and assets that will be used in the business of the Company and its
Restricted Subsidiaries ("Replacement Assets"), or (C) to effect a combination
of repayment and investment permitted by the foregoing clauses (ii)(I)(A) and
(B) or (II) (A) enter into a definitive written agreement, within 150 days of
such Asset Sale, committing it, subject to conditions customary in such
agreements, to apply, or cause such Restricted Subsidiary to apply, the Net Cash
Proceeds relating to such Asset Sale within 270 days of such Asset Sale to an
investment in Replacement Assets or (B) effect a combination of repayment and
investment permitted by the foregoing clauses (ii)(I)(A) and (B) and
(ii)(II)(A). On (i) the 181st day after an Asset Sale, (ii) if a definitive
written agreement relating to an investment in Replacement Assets was entered
into within 150 days of such Asset Sale, on the 271st day after such Asset Sale
or such earlier date on which such definitive agreement is for any reason
terminated or (iii) such earlier date as the Board of Directors of the Company
or of such Restricted Subsidiary determines to apply the Net Cash Proceeds
relating to such Asset Sale as set forth in clauses (ii)(I) and (ii)(II) of the
immediately preceding sentence, in each case as applicable (each, a "Net
Proceeds Offer Trigger Date"), such aggregate amount of Net Cash Proceeds which
has not been applied on or before such Net Proceeds Offer Trigger Date as
permitted in clauses (ii)(I) or (ii)(II) of the immediately preceding sentence
(each a "Net Proceeds Offer Amount") shall be applied by the Company or such
Restricted Subsidiary to make an offer to purchase (the "Net Proceeds Offer"),
on a date (the "Net Proceeds Offer Payment Date") not less than 30 nor more than
60 days following the applicable Net Proceeds Offer Trigger Date, from all
holders of Notes on a pro rata basis that amount of Notes equal to
63
<PAGE>
the Net Proceeds Offer Amount at a price equal to 100% of the principal amount
of the Notes to be purchased, plus accrued and unpaid interest thereon, if any,
to the date of purchase; PROVIDED, HOWEVER, that if at any time any non-cash
consideration received by the Company or any Restricted Subsidiary of the
Company, as the case may be, in connection with any Asset Sale is converted into
or sold or otherwise disposed of for cash (other than interest received with
respect to any such non-cash consideration), then such conversion or disposition
shall be deemed to constitute an Asset Sale hereunder, and the Net Cash Proceeds
thereof shall be applied in accordance with this covenant. The Company may defer
the Net Proceeds Offer until there is an aggregate unutilized Net Proceeds Offer
Amount equal to or in excess of $10 million resulting from one or more Asset
Sales (at which time, the entire unutilized Net Proceeds Offer Amount, and not
just the amount in excess of $10 million, shall be applied as required pursuant
to this paragraph).
In the event of the transfer of substantially all (but not all) of the
property and assets of the Company and its Restricted Subsidiaries as an
entirety to a Person in a transaction permitted under "--Merger, Consolidation
or Sale of Assets" below, the successor corporation shall be deemed to have sold
the properties and assets of the Company and its Restricted Subsidiaries not so
transferred for purposes of this covenant, and shall comply with the provisions
of this covenant with respect to such deemed sale as if it were an Asset Sale.
In addition, the fair market value of such properties and assets of the Company
or its Restricted Subsidiaries deemed to be sold shall be deemed to be Net Cash
Proceeds for purposes of this covenant.
Each Net Proceeds Offer will be mailed to the record holders of Notes as
shown on the register of holders within 25 days following the Net Proceeds Offer
Trigger Date, with a copy to the Trustee, and shall comply with the procedures
set forth in the Indenture. Upon receiving notice of the Net Proceeds Offer,
holders may elect to tender their Notes in whole or in part (in integral
multiples of $1,000 principal amount) in exchange for cash. To the extent
holders properly tender Notes in an amount exceeding the Net Proceeds Offer
Amount, Notes of tendering holders will be purchased on a pro rata basis (based
on amounts tendered). A Net Proceeds Offer shall remain open for a period of 20
business days or such longer period as may be required by law.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Net Proceeds Offer. To the extent that the
provisions of any securities laws or regulations conflict with the "Asset Sale"
provisions of the Indenture, the Company shall comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations under the "Limitation on Asset Sales" provisions of the Indenture by
virtue thereof.
There can be no assurance that sufficient funds will be available at the
time of any Net Proceeds Offer to make required repurchases.
LIMITATIONS ON ISSUANCES AND SALES OF CAPITAL STOCK OF RESTRICTED
SUBSIDIARIES. The Company will not cause or permit any of its Restricted
Subsidiaries to issue or sell any Capital Stock (other than to the Company or to
a Wholly-Owned Restricted Subsidiary of the Company) or permit any Person (other
than the Company or a Wholly-Owned Restricted Subsidiary of the Company) to own
or hold any Capital Stock of any Restricted Subsidiary of the Company or any
Lien or security interest therein (other than Permitted Liens); PROVIDED,
HOWEVER, such covenant shall not prohibit the disposition (by sale, merger or
otherwise) of all the Capital Stock of a Restricted Subsidiary; provided any Net
Cash Proceeds therefrom are applied in accordance with the covenants described
under "-- Asset Sales."
LIENS. The Indenture will provide that neither the Company nor any of its
Restricted Subsidiaries may, directly or indirectly, incur, any Lien, except
Permitted Liens, on any asset now owned or hereafter acquired, or any income or
profits therefrom or assign or convey any right to receive income therefrom.
64
<PAGE>
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING
SUBSIDIARIES. The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any encumbrances or restrictions on the ability of any
Restricted Subsidiary to (a) pay dividends or make any other distributions to
the Company or any of its Restricted Subsidiaries (A) on such Restricted
Subsidiary's Capital Stock or (B) with respect to any other interest or
participation in, or measured by, its profits, or pay any Indebtedness owed to
the Company or any of its Restricted Subsidiaries, (b) make loans or advances to
the Company or any of its Restricted Subsidiaries or (c) transfer any of its
properties or assets to the Company or any of its Restricted Subsidiaries,
except for such encumbrances or restrictions existing under or by reasons of (1)
applicable law; (2) the Indenture, Notes or Senior Credit Facility; (3)
customary non-assignment provisions of any contract or any lease entered into in
the ordinary course of business; (4) agreements existing on the Closing Date to
the extent and in the manner such agreements are in effect on the Closing Date;
or (5) an agreement governing Indebtedness incurred to Refinance the
Indebtedness issued, assumed or incurred pursuant to an agreement referred to in
clause (2) or (4) above; provided, however, that the provisions relating to such
encumbrance or restriction contained in any such Indebtedness are no less
favorable to the Company in any material respect as determined by the Board of
Directors of the Company in their reasonable and good faith judgment than the
provisions relating to such encumbrance or restriction contained in agreements
referred to in such clause (2) or (4).
MERGER, CONSOLIDATION OR SALE OF ASSETS. The Company will not, in a single
transaction or series of related transactions, consolidate or merge with or into
(whether or not the Company is the surviving corporation), or sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of its
properties or assets to, another corporation, Person or entity unless (i) the
Company is the surviving corporation, or the entity or the person formed by or
surviving any such consolidation or merger (if other than the Company) or to
which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made is a corporation organized or existing under the laws of
the United States, any state thereof or the District of Columbia; (ii) the
entity or person formed by or surviving any such consolidation or merger (if
other than the Company) or to which such sale, assignment, transfer, lease,
conveyance or other disposition will have been made assumes all the obligations
of the Company under the Registration Rights Agreement and, pursuant to a
supplemental indenture in a form reasonably satisfactory to the Trustee, under
the Notes and the Indenture; (iii) immediately after such transaction (including
giving effect to any Indebtedness and Acquired Debt incurred or expected to be
incurred in connection with or in respect of such transaction and to any
assumption required by clause (ii) above) no Default or Event of Default exists;
(iv) the Company or any corporation formed by or surviving any such
consolidation or merger, or to which such sale, assignment, transfer, lease
conveyance or other disposition will have been made (A) will have Consolidated
Net Worth (immediately after the transaction but prior to any purchase
accounting adjustments resulting from the transaction) equal to or greater than
the Consolidated Net Worth of the Company immediately preceding the transaction
and (B) will, at the time of such transaction and after giving pro forma effect
thereto as if such transaction had occurred at the beginning of the applicable
four-quarter period, be permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Indenture and will have a Fixed Charge Coverage
Ratio, determined on a pro forma basis, greater than or equal to the Fixed
Charge Coverage Ratio of the Company immediately prior to the transaction and
(v) the Company or the entity or Person formed by or surviving any such
consolidation or merger, or to which such sale, assignment, transfer, lease,
conveyance or other disposition will have been made shall have delivered to the
Trustee an Officers' Certificate and an opinion of counsel (with respect to
which opinion such counsel may rely solely as to matters of fact on an Officers'
Certificate), each stating that such consolidation, merger, sale, assignment,
transfer, lease, conveyance or other disposition and any supplemental indenture
required in connection with such transaction comply with the applicable
provisions of the Indenture and that all conditions precedent in the Indenture
relating to such transaction have been satisfied.
65
<PAGE>
For purposes of the foregoing, the transfer (by lease, assignment, sale, or
otherwise in a single transaction or series of transactions) of all or
substantially all the properties or assets of one or more Subsidiaries of the
Company the Capital Stock of which constitutes all or substantially all the
properties and assets of the Company, shall be deemed to be the transfer of all
or substantially all the properties and assets of the Company.
The Indenture will provide that upon any consolidation, combination or
merger or any transfer of all or substantially all the assets of the Company in
accordance with the foregoing, in which the Company is not the continuing
corporation, the successor Person formed by such consolidation or into which the
Company is merged or to which such conveyance, lease or transfer is made shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture and the Notes with the same effect as if such
surviving entity had been named as such.
Each Restricted Subsidiary (other than any Restricted Subsidiary whose
Subsidiary Guarantee is to be released in accordance with the terms of the
Subsidiary Guarantee and the Indenture in connection with any transaction made
in compliance with the provisions of "-- Asset Sales") will not, and the Company
will not cause or permit any Restricted Subsidiary to, consolidate with or merge
with or into any Person (other than the Company or any Restricted Subsidiary of
the Company), or sell, assign, transfer, lease, convey or otherwise dispose of
all or substantially all of its assets, other than to the Company or any other
Restricted Subsidiaries unless: (i) the entity formed by or surviving any such
consolidation or merger (if other than the Restricted Subsidiary), or to which
such disposition shall have been made, is a corporation organized and existing
under the laws of the United States, any state thereof or the District of
Columbia; (ii) such entity assumes by supplemental indenture all the obligations
of the Restricted Subsidiary on the Subsidiary Guarantee; (iii) immediately
after giving effect to such transaction, no Default or Event of Default shall
have occurred and be continuing; and (iv) immediately after giving effect to
such transaction and the use of any net proceeds therefrom on a pro forma basis,
the Company could satisfy the provisions of clause (iv) of the first paragraph
of this covenant. Any merger or consolidation of a Restricted Subsidiary with
and into the Company (with the Company being the surviving entity) or another
Restricted Subsidiary need only comply with clause (iv) of the first paragraph
of this covenant.
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. The Company will not, and will
not permit any of its Restricted Subsidiaries to, directly or indirectly, enter
into or permit to exist any transaction or series of related transactions
(including, without limitation, the purchase, sale, lease or exchange of any
property or the rendering of any services or the entering into any contract,
agreement, understanding, loan, or guarantee) with, or for the benefit of, any
of its Affiliates (each an "Affiliate Transaction"), other than (x) Affiliate
Transactions permitted under the next succeeding paragraph and (y) Affiliate
Transactions and each series of related Affiliate Transactions that are similar
or part of a common plan, having an aggregate value of less than $2 million;
provided that such transactions are on terms that are no less favorable than
those that might reasonably have been obtained in a comparable transaction at
such time on an arm's-length basis from a Person that is not an Affiliate of the
Company or such Restricted Subsidiary. All Affiliate Transactions (and each
series of related Affiliate Transactions that are similar or part of a common
plan) involving aggregate payments or other property with a fair market value in
excess of $2 million shall be approved by a majority of the disinterested
members of the Board of Directors of the Company, such approval to be evidenced
by a Board Resolution stating that such Board of Directors has determined that
such transaction complies with the foregoing provisions. If the Company or any
Restricted Subsidiary of the Company enters into an Affiliate Transaction (or a
series of related Affiliate Transactions which are similar or part of a common
plan) that involves an aggregate fair market value of more than $5 million, the
Company shall, prior to the consummation thereof, obtain a favorable opinion as
to the fairness of such transaction or series of related transactions to the
Company from a financial point of view from an Independent Financial Advisor and
deliver such opinion to the Trustee.
The restrictions set forth in the preceding paragraph shall not apply to (i)
reasonable fees and compensation paid to and indemnity provided on behalf of,
officers, directors, employees or consultants of
66
<PAGE>
the Company or any Subsidiary as determined in good faith by the Company's Board
of Directors or senior management; (ii) transactions exclusively between or
among the Company and any of its Wholly-Owned Restricted Subsidiaries or
exclusively between or among such Wholly-Owned Restricted Subsidiaries, PROVIDED
such transactions are not otherwise prohibited by the Indenture; and (iii)
Restricted Payments not prohibited by the Indenture.
SUBSIDIARY GUARANTEES. The Indenture will provide that as long as any Notes
remain outstanding, any Restricted Subsidiary shall (a) execute and deliver to
the Trustee a supplemental indenture in form reasonably satisfactory to the
Trustee pursuant to which such Restricted Subsidiary shall unconditionally
guarantee all the Company's obligations under the Notes and the Indenture on the
terms set forth in the Indenture and (b) deliver to the Trustee an opinion of
counsel, subject to customary exceptions, that such supplemental indenture has
been duly authorized, executed and delivered by such Restricted Subsidiary and
constitutes a legal, valid, binding and enforceable obligation of such
Restricted Subsidiary. Thereafter, such Restricted Subsidiary shall be a
Subsidiary Guarantor for all purposes of the Indenture.
Any Restricted Subsidiary may cease to be a Subsidiary Guarantor and the
Subsidiary Guarantee of such Restricted Subsidiary will terminate at any time
that the Board of Directors of the Company designates such Restricted Subsidiary
as an "Unrestricted Subsidiary," as provided below. As of the Closing Date, the
Company has one Subsidiary, CSS, whose only assets are certain service marks of
the Company. See "Business --Trademarks and Service Marks." After the Chapter 11
case of CSS has been dismissed by the Bankruptcy Court, CSS shall agree to
guarantee payment of the Company's obligations under the Notes and the
Indenture. While the Company believes that its service marks as a whole are of
material importance to its business, such service marks have minimal value as a
source of funds or assets underlying any Subsidiary Guarantee executed by CSS.
If all the Capital Stock of any Restricted Subsidiary is sold to a Person
(other than the Company or any of its Restricted Subsidiaries) and the Net
Proceeds from such Asset Sale are used in accordance with the terms of the
covenant described under "-- Asset Sales," then such Restricted Subsidiary will
be released and discharged from all of its obligations under its Subsidiary
Guarantee of the Notes and the Indenture.
CONDUCT OF BUSINESS. Neither the Company nor any of its Restricted
Subsidiaries will engage in any businesses other than (a) the business conducted
or proposed to be conducted by the Company and its Restricted Subsidiaries on
the Closing Date or (b) any business reasonably related and complimentary to any
business described in clause (a) above.
REPORTS. So long as any Notes are outstanding, the Company will furnish to
the holders of Notes all quarterly and annual financial information and other
reports filed with the Commission pursuant to the Exchange Act and, whether or
not the Company is required to file any financial information with the
Commission, will furnish to the holders of the Notes and to prospective
purchasers of the Notes, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act for so long as is
required for an offer or sale of the Notes under Rule 144A. From and after the
date of effectiveness of any registration statement filed with the Commission
with respect to the Notes, the Company will furnish to the holders of Notes such
quarterly, annual or other reports or information that is required to be filed
with the Commission.
KEY MAN LIFE INSURANCE. The Company shall use commercially reasonable
efforts to obtain, not later than 30 days after the Closing Date, and to
maintain, for so long as the Notes are outstanding, key man life insurance upon
the life of Sam Forman, the Company's chief executive officer, and any successor
chief executive officer of the Company, or other senior executive officer of the
Company performing similar functions, with the death benefit thereunder payable
to the Company in an amount not less than $10,000,000. The Company shall at all
times retain all the incidents of ownership of such insurance and
67
<PAGE>
shall not borrow upon or otherwise impair its right to receive the proceeds of
such insurance, except that the Company may incur Permitted Liens on such
insurance and proceeds.
PAYMENTS FOR CONSENT
Neither the Company nor any of its Subsidiaries shall, directly or
indirectly, pay or cause to be paid any consideration, whether by way of
interest, fee or otherwise, to any holder of any Notes for, or as inducement to,
any consent, waiver or amendment of any of the terms or provisions of the
Indenture or the Notes unless such consideration is offered to be paid or agreed
to be paid to all holders of the Notes then outstanding that consent, waive or
agree to amend any of such terms or provisions in the time frame set forth in
the solicitation documents relating to such consent, waiver or agreement.
EVENTS OF DEFAULT AND REMEDIES
The Indenture will provide that each of the following constitutes an Event
of Default: (i) default for 10 days by the Company in the payment when due of
interest on the Notes; (ii) default by the Company in payment of principal (or
premium, if any) on the Notes when due, redemption, by acceleration or
otherwise, including any default in the performance or breach of the provisions
described under "-- Repurchase Upon Change of Control," "-- Asset Sales" and "--
Merger, Consolidation or Sale of Assets"; (iii) failure by the Company or any of
its Restricted Subsidiaries to comply with any of its other agreements or
covenants in, or provisions of, the Indenture or the Notes and the default
continues for a period of 30 days following receipt by the Company of a written
notice specifying the nature of such failure; (iv) default under (after giving
effect to any applicable grace periods or any extension of any maturity date)
any mortgage, indenture or instrument under which there may be issued or by
which there may be secured or evidenced any Indebtedness by the Company or any
of its Restricted Subsidiaries whether such Indebtedness now exists, or is
created after the date of the Indenture, if (a) either (A) such default results
from the failure to pay principal of or interest on such Indebtedness and the
default continues for a period of 30 days or (B) as a result of such default the
maturity of such Indebtedness has been accelerated, and (b) the principal amount
of such Indebtedness, together with the principal amount of any other such
Indebtedness with respect to which a payment default (after the expiration of
any applicable grace period or any extension of the maturity date) has occurred,
or the maturity of which has been so accelerated, exceeds $2 million in the
aggregate, and the default continues for a period of 10 days after the Company
has received written notice specifying the default from the Trustee or the
Holders of at least 25% of the aggregate principal amount of the then
outstanding Notes; (v) failure by the Company or any of its Restricted
Subsidiaries to pay final judgments (other than any judgment as to which a
reputable insurance Company has accepted full liability in writing) aggregating
in excess of $2 million which judgments are not stayed or discharged within 60
days after their entry; (vii) certain events of bankruptcy or insolvency with
respect to the Company or any of its Restricted Subsidiaries; and (viii) except
as permitted under the Indenture, any Subsidiary Guarantee for any reason ceases
to be in full force and effect or becomes or is declared to be null and void,
unenforceable or invalid or any Restricted Subsidiary denies its obligations
under its Subsidiary Guarantee.
If any Event of Default occurs and is continuing, the Trustee or the holders
of at least 25% in aggregate principal amount of the then outstanding Notes may
by written notice declare all the Notes to be due and payable immediately.
Notwithstanding the foregoing, in the case of an Event of Default arising from
certain events of bankruptcy or insolvency, all outstanding Notes will become
immediately due and payable without further action or notice. Holders of the
Notes may not enforce the Indenture or the Notes except as provided in the
Indenture. Subject to certain limitations, holders of a majority in aggregate
principal amount of the then outstanding Notes may direct the Trustee in its
exercise of any trustee power. The Trustee may withhold from holders of the
Notes notice of any continuing Default or Event of Default (except a Default or
Event of Default relating to the payment of principal or interest) if it
determines that withholding notice is in their interest.
68
<PAGE>
The holders of a majority in aggregate principal amount of the Notes then
outstanding, by written notice to the Trustee, may on behalf of the holders of
all the Notes (a) waive any existing Default or Event of Default and its
consequences under the Indenture except a continuing Default or Event of Default
in the payment of interest on, or the principal of, the Notes, or a Default or
Event of 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 or (b) rescind an acceleration and its consequences if the rescission
would not conflict with any judgment or decree if all existing Events of Default
(except nonpayment of principal or interest that has become due solely because
of the acceleration) have been cured or waived.
The Company is required, upon becoming aware of any Default or Event of
Default, to deliver to the Trustee a statement specifying such Default or Event
of Default and what action the Company is taking or proposes to take with
respect thereto.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No past, present or future director, officer, employee, incorporator or
stockholder of the Company or any Subsidiary Guarantor, as such, shall have any
liability for any obligations of the Company or any Subsidiary Guarantor under
the Notes, the Indenture, the Warrant Agreement or the Registration Rights
Agreement or for any claim based on, in respect of, or by reason of, such
obligation. Each holder by accepting a Note waives and releases all such
liability. The waiver and release are part of the consideration for issuance of
the Notes. Such waiver may not be effective to waive certain liabilities under
the federal securities laws, and it is the view of the Commission that such a
waiver is against public policy.
DEFEASANCE AND DISCHARGE OF THE INDENTURE AND THE NOTES
If the Company irrevocably deposits, or causes to be deposited, in trust
with the Trustee or the Paying Agent, at any time prior to the stated maturity
of the Notes or the date of redemption of all the outstanding Notes, as trust
funds in trust, money or direct non-callable obligations of or guaranteed by the
United States of America in an amount sufficient (as to principal, premium (if
any) and interest, but without reinvestment thereof) to pay timely and discharge
the principal amount of and premium, if any, and accrued cash interest on the
Notes to redemption or maturity, as the case may be, and comply with certain
other conditions required by the Indenture, the Indenture shall cease to be of
further effect as to all outstanding Notes (except, among other things, as to
(i) remaining rights of registration of transfer and substitution and exchange
of the Notes, (ii) rights of holders to receive payment of principal of and
interest on the Notes and (iii) the rights, obligations and immunities of the
Trustee) and the Subsidiary Guarantees will be discharged. Such trust may only
be established if (i) the Company has delivered to the Trustee an opinion of
independent counsel to the effect that the holders of the Notes will not
recognize income, gain or loss for federal income tax purposes as a result of
such deposit and defeasance and will be subject to federal income tax on the
same amount, in the same manner and at the same times as would have been the
case if such deposit and defeasance had not occurred, (ii) the Company shall
have delivered to the Trustee an opinion of counsel to the effect that, after
the passage of 90 days following the deposit, the trust funds will not be
subject to section 547 of the Bankruptcy Code or any similar federal or state
law for the relief of debtors, (iii) no Default or Event of Default shall have
occurred or be continuing, and (iv) certain other customary conditions precedent
are satisfied.
TRANSFER AND EXCHANGE
A holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a holder, among other things, to
furnish appropriate endorsements and transfer documents, and the Company may
require a holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note selected
for redemption. Also, the Company is not required to transfer or exchange any
Note for a period of 15 days before a date
69
<PAGE>
fixed for redemption of Notes. The registered holder of a Note will be treated
as the owner of such Note for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next succeeding paragraph, the Indenture or the
Notes may be amended or supplemented with the consent of the holders of at least
a majority in aggregate principal amount of the Notes then outstanding
(including consents obtained in connection with a tender offer or exchange offer
for Notes) and any existing Default or Event of Default or compliance with any
provision of the Indenture or the Notes may be waived with the consent of the
holders of a majority in aggregate principal amount of the then outstanding
Notes (including consents obtained in connection with a tender offer or exchange
offer for Notes).
Without the consent of each holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting holder of Notes)(i) reduce
the principal amount of Notes whose holders must consent to an amendment,
supplement or waiver, (ii) reduce the principal of, or the premium on, or change
the fixed maturity of any Note or alter the provisions with respect to the
redemption of the Notes or alter the provisions with respect to repurchases or
redemptions of the Notes with net proceeds from Asset Sales or upon a Change of
Control, (iii) reduce the rate of or change the time for payment of interest,
including default interest, on any Note, (iv) waive a Default or Event of
Default in the payment of principal of or premium, if any, or interest on any
Note (other than a Default in the payment of an amount due as a result of an
acceleration, where such acceleration is rescinded pursuant to the Indenture),
(v) make any Note payable in money other than that stated in the Notes, (vi)
make any change in the provisions of the Indenture relating to waivers of past
Defaults or the rights of holders of Notes to receive payments of principal of
or interest on the Notes, (vii) waive a redemption payment with respect to any
Note, or (viii) modify or change any provision of the Indenture affecting the
ranking of the Notes or the Subsidiary Guarantees in a manner which adversely
affects the holders of Notes.
Notwithstanding the foregoing, without the consent of any holder of Notes,
the Company may amend or supplement the Indenture or the Notes to cure any
ambiguity, defect or inconsistency, to provide for uncertificated Notes in
addition to or in place of certificated Notes, to provide for the assumption of
the Company's obligations to holders of the Notes or any Restricted Subsidiary's
obligation under its Subsidiary Guarantee of the Notes in the case of a merger
or consolidation, to make any change that would provide any additional rights or
benefits to the holders of the Notes or that does not adversely affect the legal
right under the Indenture of any such holder, or to comply with the requirements
of the Commission in order to effect or maintain the qualification of the
Indenture under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Trustee under the Indenture will be First Trust National Association.
The Indenture contains certain limitations on the rights of the Trustee, should
it become a creditor of the Company, to obtain payment of claims in certain
cases, or to realize on certain property received in respect of any such claim
as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Commission for permission to continue
or resign.
The holders of a majority in aggregate principal amount of the then
outstanding Notes will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Trustee,
subject to certain exceptions. The Indenture provides that in case an Event of
Default shall occur (which shall not be cured), the Trustee will be required, in
the exercise of its power, to use the degree of care of a prudent person in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the Indenture
at the
70
<PAGE>
request of any holder of Notes, unless such holder shall have offered to the
Trustee an indemnity satisfactory to it against any loss, liability or expense.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture
without charge by writing to the Company at 469 Seventh Avenue, 11th Floor, New
York, New York 10018, Attention: Chris R. Decker.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definitions are provided.
"ACQUIRED DEBT" means, with respect to any specified person, Indebtedness of
any other person existing at the time such other person merged with or into or
became a Subsidiary of such specified person, excluding Indebtedness incurred in
connection with, or in contemplation of, such other person merging with or into
or becoming a Subsidiary of such specified person.
"AFFILIATE" of any specified person means any other person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management of policies of such person, whether through the
ownership of voting securities, by agreement or otherwise; provided, however,
that in the case of a corporation, beneficial ownership of 10% or more of the
aggregate voting power of the Voting Stock of a person shall be deemed to be
control. In the case of an individual, (A) members of such Person's immediate
family (as defined in Instruction 2 of Item 404(a) of Regulation S-K under the
Securities Act) and (B) trusts, any trustee or beneficiaries of which are such
Person or members of such Person's immediate family, shall be under common
control with such individual. Notwithstanding the foregoing, neither the Initial
Purchaser nor any of its Affiliates will be deemed to be Affiliates of the
Company.
"ASSET SALE" means, with respect to any transaction or series of
transactions, any direct or indirect sale, issuance, conveyance, transfer, lease
(other than operating leases entered into in the ordinary course of business),
assignment or other transfer for value by the Company or any of its Restricted
Subsidiaries to any Person other than the Company or a Wholly-Owned Restricted
Subsidiary of the Company of (a) any Capital Stock of any Restricted Subsidiary
of the Company; or (b) any other property or assets of the Company or any
Restricted Subsidiary of the Company other than in the ordinary course of
business; provided, however, that Asset Sales shall not include (i) the sale,
lease, conveyance, disposition or other transfer of all or substantially all the
assets of the Company as permitted under "-- Merger, Consolidation and Sale of
Assets," (ii) the sale, conveyance, transfer or other disposition by the Company
or any of its Restricted Subsidiaries of (x) obsolete or unusable inventory or
other assets or (y) receivables generated by customer purchases in the ordinary
course of business or (iii) Sale and Leaseback Transactions.
"BOARD RESOLUTION" means, with respect to any Person, a copy of a resolution
certified by the Secretary or an Assistant Secretary of such Person to have been
duly adopted by the Board of Directors of such Person and to be in full force
and effect on the date of such certification, and delivered to the Trustee.
"CAPITAL 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 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 (i) with respect to any Person that is a corporation,
any and all shares, interests, participations, rights or other equivalents
(however designated) of corporate stock, including, without
71
<PAGE>
limitation, partnership interests and other indicia of ownership and (ii) with
respect to any other Person, any and all partnership or other equity interests
of such Person.
"CASH EQUIVALENTS" means (i) obligations issued or unconditionally
guaranteed by the United States of America or any agency thereof, or obligations
issued by any agency or instrumentality thereof and backed by the full faith and
credit of the United States of America; (ii) commercial paper rated the highest
grade by Moody's Investors Service, Inc. and Standard & Poor's Corporation and
maturing not more than one year from the date of creation thereof; (iii) time
deposits with, and certificates of deposit and banker's acceptances issued by,
any bank having capital surplus and undivided profits aggregating at least $500
million and maturing not more than one year from the date of creation thereof;
(iv) repurchase agreements that are secured by a perfected security interest in
an obligation described in clause (i) and are with any bank described in clause
(iii); (v) money market accounts with any bank having capital surplus and
undivided profits aggregating at least $500 million; (vi) readily marketable
direct obligations issued by any state of the United States of America or any
political subdivision thereof having one of the two highest rating categories
obtainable from either Moody's Investors Service, Inc. or Standard & Poor's
Corporation; and (vii) money market funds investing only in U.S. Government
Obligations.
"CHANGE OF CONTROL" means the occurrence of any of the following (in one
transaction or a series of transactions): (i) the sale, lease, transfer,
conveyance or other disposition of all or substantially all of the Company's
assets to any "person" or "group" (as such terms are used in Section 13(d) and
14(d) of the Exchange Act) other than to one or more Existing Holders; (ii) the
liquidation or dissolution of the Company or the adoption of a plan by the
stockholders of the Company relating to the dissolution or liquidation of the
Company; (iii) at any time following the first anniversary of the Effective
Date, any "person" or "group" (as such terms are used in Section 13(d) and 14(d)
of the Exchange Act), except for one or more Existing Holders, is or becomes the
"beneficial owner" (as such term is defined in Rules 13d-3 and 13d-5 under the
Exchange Act, except that a person shall be deemed to have "beneficial
ownership" of all securities that such person has the right to acquire, whether
such right is exercisable immediately or only after the passage of time),
directly or indirectly, of more than 50% of the aggregate ordinary voting power
of the total outstanding Voting Stock of the Company; or (iv) at any time
following the first anniversary of the Effective Date, with respect to the
Company's Board of Directors as such board is constituted on and after the
Effective Date, during any period of two consecutive years, individuals who at
the beginning of such period constituted the Board of Directors of the Company
(together with any new directors who are approved by a vote of at least 66 2/3%
of the directors then still in office who were either directors at the beginning
of such 3 period or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the Board of
Directors of the Company then still in office.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the Company's assets. Although there is a developing body of case law
interpreting the phrase "substantially all," there is no precise established
definition of the phrase under applicable law. Accordingly, the ability of a
holder of Notes to require the Company to repurchase such Notes as a result of a
sale, lease, transfer, conveyance or other disposition of less than all of the
assets of the Company and its Subsidiaries to another person may be uncertain.
"CLOSING DATE" means the date of original issuance of the Notes.
"COMMISSION" means the Securities and Exchange Commission.
"CONSOLIDATED CASH FLOW" means, with respect to any person for any period,
the Consolidated Net Income of such person for such period plus (to the extent
such amounts are deducted in calculating such income (loss) from operations of
such Person for such period and without duplication) (a) provision for taxes
based on income or profits to the extent such provision for taxes was included
in computing Consolidated Net Income, (b) consolidated interest expense of such
person for such period, whether paid or accrued (including deferred financing
costs, non-cash interest payments and the interest component of
72
<PAGE>
capital lease obligations), to the extent such expense was deducted in computing
Consolidated Net Income, and (c) depreciation and amortization (including
amortization of goodwill and other intangibles) for such period to the extent
such depreciation or amortization were deducted in computing Consolidated Net
Income, in each case, on a consolidated basis and determined in accordance with
GAAP.
"CONSOLIDATED NET INCOME" means, with respect to any person for any period,
the aggregate of the Net Income of such person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP,
plus extraordinary charges deducted in computing Net Income to the extent
related to and incurred in respect of the Chapter 11 Filing, the Private Note
Offering and the issuance of the New Notes; provided, that (i) the Net Income of
any person that is not a Restricted Subsidiary or that is accounted for by the
equity method of accounting shall be included only to the extent of the amount
of dividends or distributions paid to the referent person or a Wholly-Owned
Subsidiary thereof, (ii) the Net Income of any Restricted Subsidiary will not be
included to the extent that declarations of dividends or similar distributions
by that Restricted Subsidiary are not at the time permitted, directly or
indirectly, by operation of the terms of its organization document or any
agreement, instrument, judgment or state or government regulation, (iii) the Net
Income of any person acquired in a pooling of interests transaction for any
period prior to the date of such acquisition shall be excluded and (iv) the
cumulative effect of a change in accounting principles shall be excluded.
"CONSOLIDATED NET WORTH" means, with respect to any person, the sum of (i)
the consolidated equity of the common stockholders of such person and its
consolidated Restricted Subsidiaries plus (ii) the respective amounts reported
on such person's most recent balance sheet with respect to any series of
preferred stock (other than Disqualified Stock) that by its terms is not
entitled to the payment of dividends unless such dividends may be declared and
paid only out of net earnings in respect of the year of such declaration and
payment, but only to the extent of (a) any cash received by such person upon
issuance of such preferred stock and (b) the fair market value of any non-cash
consideration received by such person upon issuance of such preferred stock;
provided that such value has been determined in good faith by a nationally
recognized investment bank, less (x) all write-ups, subsequent to the date of
the Indenture, in the book value of assets owned by such person or a
consolidated Restricted Subsidiary of such person, other than (a) write-ups
resulting from foreign currency translations and (B) write-ups upon the
acquisition of assets acquired in a transaction to be accounted for by purchase
accounting under GAAP, (y) all investments in persons that are not consolidated
Restricted Subsidiaries (except, in each case, a Permitted Investment), and (z)
all unamortized debt discount and expense and unamortized deferred financing
charges (except such amounts arising from the issuance of the Notes), all of the
foregoing determined in accordance with GAAP.
"DEFAULT" means any event known to the Company or which should have been
known to the Company after due inquiry that is, or with the passage of time or
the giving of notice or both would be, an Event of Default.
"DISQUALIFIED STOCK" means any Capital Stock which, (i) either by its terms
(or by the terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at
the option of the holder thereof, in whole or in part, on or prior to the
Maturity Date or (ii) is convertible or exchangeable at the option of the issuer
thereof or any other Person for debt securities.
"EQUITY INTERESTS" means Capital Stock or warrants, options or other rights
to acquire Capital Stock (but excluding any debt security that is convertible
into, or exchangeable for, Capital Stock).
"EXCHANGE OFFER" means the offer that may be made by the Company pursuant to
the Registration Rights Agreement to exchange New Notes for the Notes.
"EXISTING HOLDERS" shall mean, collectively, the record and beneficial
holders of Common Stock that receive such Common Stock in connection with the
Plan of Reorganization.
73
<PAGE>
"FIXED CHARGE COVERAGE RATIO" means, with respect to any person for any
period, the ratio of the Consolidated Cash Flow of such person for such period
to the Fixed Charges of such person for such period. In the event that the
Company or any of its Subsidiaries incurs, assumes, guarantees, repays,
repurchases or redeems any Indebtedness (other than revolving credit borrowings)
or issues or redeems Preferred Stock subsequent to the commencement of the
period for which the Fixed Charge Coverage Ratio is being calculated but prior
to the event for which the calculation of the Fixed Charge Coverage Ratio is
made, then the Fixed Charge Coverage Ratio (both the numerator and the
denominator therein) shall be calculated giving pro forma effect to such
incurrence, assumption, guarantee, repayment, repurchase or redemption of
Indebtedness, or such issuance or redemption of Preferred Stock, as if the same
had occurred at the beginning of the applicable period; PROVIDED that pro forma
effect shall be given to repayments, repurchases or redemptions of Indebtedness
or Preferred Stock only to the extent such Indebtedness or Preferred Stock is
permanently retired (and, in the case of the Notes, surrendered to the Trustee
for cancellation). In addition, in the event of any Asset Sale, Consolidated
Cash Flow for such period shall be reduced by an amount equal to the
Consolidated Cash Flow (if positive) directly attributable to the assets sold
and Consolidated Interest Expense shall be reduced by an amount equal to the
Consolidated Interest Expense directly attributable to any Indebtedness assumed
by third parties or repaid with the proceeds of such Asset Sale, in each case as
if the same had occurred at the beginning of the applicable period. In the event
that acquisitions, divestitures, mergers or consolidations have been made by the
Company or any of its Subsidiaries subsequent to the commencement of the
four-quarter period over which the Fixed Charge Coverage Ratio is being
calculated, but prior to the event for which the calculation of the Fixed Charge
Coverage Ratio is being made, then the Fixed Charge Coverage Ratio shall be
calculated giving pro forma effect to such acquisitions, divestitures, mergers
and consolidations as if such transactions had occurred at the beginning of the
applicable period.
"FIXED CHARGES" means, with respect to any person for any period, the sum of
(a) consolidated interest expense of such person for such period, whether paid
or accrued, to the extent such expense was deducted in computing Consolidated
Net Income (including amortization of non-cash interest payments and the
interest component of capital leases but excluding amortization of deferred
financing fees) and (b) the product of (i) all dividend payments, whether paid
in cash, assets, securities or otherwise, in the case of a person that is a
Subsidiary of the Company, on any series of preferred stock of such person, and
all dividend payments in respect of any series of preferred stock of the
Company, whether paid in cash, assets, securities or otherwise (other than
dividends payable in additional shares of the preferred stock on which such
dividends are paid), times (ii) a fraction, the numerator of which is one and
the denominator of which is one minus the then current combined federal, state
and local statutory tax rate of such person, expressed as a decimal, in each
case, on a consolidated basis and in accordance with GAAP.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as approved by a significant segment of the accounting profession.
"INDEBTEDNESS" means, with respect to any person, any indebtedness of such
person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or bankers' acceptances or
letters of credit (or reimbursement agreements in respect thereof) or
representing the balance deferred and unpaid of the purchase price of any
property (including pursuant to capital leases) or representing any Interest
Rate Swap Obligations, except any such balance that constitutes an accrued
expense or trade payable, if and to the extent any of the foregoing Indebtedness
(other than Interest Rate Swap Obligations) would appear as a liability upon a
balance sheet of such person prepared in accordance with GAAP, and also
includes, to the extent not otherwise included, the guarantee (other than by
endorsement of negotiable instruments for collection in the ordinary course of
business), direct or indirect, by such person in any manner (including, without
limitation, letters of credit and reimbursement
74
<PAGE>
agreements in respect thereof), of all or any part of any of the items which
would be included within this definition.
"INDEPENDENT FINANCIAL ADVISOR" means a nationally recognized independent
public accounting firm or investment banking firm (i) which does not, and whose
directors, officers and employees or Affiliates do not, have a direct or
indirect financial interest in the Company and (ii) which, in the judgment of
the Board of Directors of the Company, is otherwise independent and qualified to
perform the task for which it is to be engaged.
"INTEREST RATE SWAP OBLIGATIONS" means the obligations of any Person
pursuant to any arrangement with any other Person, whereby, directly or
indirectly, such Person is entitled to receive from time to time periodic
payments calculated by applying either a floating or a fixed rate of interest on
a stated notional amount in exchange for periodic payments made by such other
Person calculated by applying a fixed or a floating rate of interest on the same
notional amount and shall include, without limitation, interest rate swaps,
caps, floors, collars and similar agreements.
"INVESTMENTS" means, with respect to any person, all investments by such
person in other persons (including Affiliates) in the form of loans (including
direct or indirect guarantees), advances or capital contributions (excluding
commissions, travel and similar advances to officers and employees made in the
ordinary course of business), purchases or other acquisitions for consideration
of Indebtedness, Equity Interests or other securities and all other items that
are or would be classified as investments on a balance sheet prepared in
accordance with GAAP.
"LIEN" means, with respect to any asset, mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the nature
thereof, any option or other agreement to sell or give a security interest in
and any filing of or agreement to give any financing statement under the Uniform
Commercial Code (or equivalent statutes) of any jurisdiction, excluding true
lease and consignment filings).
"NET CASH PROCEEDS" means, with the respect to any Asset Sale, the proceeds
in the form of cash or Cash Equivalents including payments in respect of
deferred payment obligations when received in the form of cash or Cash
Equivalents (other than the portion of any such deferred payment constituting
interest) received by the Company or any of its Subsidiaries from such Asset
Sale net of (a) reasonable out-of-pocket expenses and fees relating to such
Asset Sale (including, without limitation, legal, accounting and investment
banking fees and sales commissions), (b) taxes paid or payable after taking into
account any reduction in consolidated tax liability due to available tax credits
or deductions and any tax sharing arrangements, (c) repayment of Indebtedness
that is required to be repaid in connection with such Asset Sale and (d)
appropriate amounts to be provided by the Company or any Subsidiary, as the case
may be, as a reserve, in accordance with GAAP, against any liabilities
associated with such Asset Sale and retained by the Company or any Subsidiary,
as the case may be, after such Asset Sale, including, without limitation,
pension and other post-employment benefit liabilities, liabilities related to
environmental matters and liabilities under any indemnification obligations
associated with such Asset Sale.
"NET INCOME" means, with respect to any person, the net income (loss) of
such person, determined in accordance with GAAP, excluding, however, any gain
(but not loss), together with any related provision for taxes on such gain (but
not loss), realized in connection with any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions), and
excluding any extraordinary gain (but not loss), together with any related
provision for taxes on such extraordinary gain (but not loss).
"NEW NOTES" means the Company's 12 3/4% Senior Notes due 2004, Series B, as
described and 4 authenticated and issued under the Indenture.
"OBLIGATIONS" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
75
<PAGE>
"PAYING AGENT" shall initially be the Trustee until a successor paying agent
for the Notes is selected in accordance with the Indenture.
"PERMITTED INDEBTEDNESS" means each of the following:
(a) Indebtedness incurred by the Company and its Subsidiaries under the
Senior Credit Facility in an aggregate principal amount not to exceed $130
million;
(b) Indebtedness incurred by the Company or its Restricted Subsidiaries
in connection with or arising out of Sale and Leaseback Transactions,
Capital Lease Obligations or Purchase Money Obligations, PROVIDED, that the
aggregate principal amount at any one time outstanding of all such Sale and
Leaseback Transactions, Capital Lease Obligations and Purchase Money
Obligations does not exceed $10 million;
(c) Indebtedness of the Company represented by the Notes or the New
Notes and Indebtedness of the Restricted Subsidiaries of the Company
represented by the Subsidiary Guarantees (whether incurred on the Closing
Date, or in connection with the Exchange Offer or any shelf registration
contemplated by the Registration Rights Agreement);
(d) Indebtedness owed by the Company to any of its Wholly-Owned
Subsidiaries for so long as such Indebtedness is held by a Wholly-Owned
Subsidiary of the Company, subject to no Lien except a Lien in favor of or
for the benefit of lenders party to the Senior Credit Facility; PROVIDED
that (i) any such Indebtedness of the Company is unsecured and subordinated,
pursuant to a written agreement, to the Company's obligations under the
Indenture and the Notes and (ii) if as of any date any Person other than a
Wholly-Owned Subsidiary of the Company owns or holds any such Indebtedness
or any Person holds a Lien in respect of such Indebtedness, such date shall
be deemed the date of incurrence of Indebtedness not constituting Permitted
Indebtedness of the Company;
(e) Indebtedness of a Wholly-Owned Subsidiary of the Company to the
Company or to a Wholly-Owned Subsidiary of the Company for so long as such
Indebtedness is held by the Company or a Wholly-Owned Subsidiary of the
Company, in each case subject to no Lien held by a Person other than (x) the
Company or a Wholly-Owned Subsidiary of the Company or (y) the lenders party
to the Senior Credit Facility or a Person acting as their agent; PROVIDED
that if as of any date any Person other than the Company or a Wholly-Owned
Subsidiary of the Company owns or holds such Indebtedness or holds a Lien in
respect of such Indebtedness, such date shall be deemed the date of
incurrence of Indebtedness not constituting Permitted Indebtedness by the
issuer of such Indebtedness;
(f) the incurrence by the Company and its Restricted Subsidiaries of
Indebtedness issued in exchange for, or the proceeds of which are
contemporaneously used to extend, refinance, renew, replace, or refund
(collectively, "Refinance") Permitted Indebtedness referred to in clauses
(a), (b) and (c) above and outstanding Indebtedness incurred in accordance
with the "Incurrence of Indebtedness and Issuance of Preferred Stock"
covenant (other than pursuant to this definition of Permitted Indebtedness
except to the extent provided in clauses (a), (b) and (c) thereof) (the
"Refinancing Indebtedness"); PROVIDED, HOWEVER, that (1) the principal
amount of such Refinancing Indebtedness shall not exceed the principal
amount of Indebtedness so Refinanced (plus the amount of reasonable fees
required to be paid and reasonable expenses incurred in connection
therewith); (2) the Refinancing Indebtedness shall rank in right of payment
no more senior (and at least as subordinated) to the Notes than did the
Indebtedness being Refinanced; (3) if the Indebtedness being Refinanced is
Indebtedness of the Company or any Subsidiary, then such Refinancing
Indebtedness shall be Indebtedness solely of the Company or such Subsidiary;
(4) such Refinancing Indebtedness shall have a Weighted Average Life equal
or longer than, and a stated maturity which is the same or later than, that
of the Indebtedness being Refinanced; and (5) the Indebtedness so Refinanced
is permanently retired (and, in case of the Notes, surrendered to the
Trustee for cancellation); and
76
<PAGE>
(g) Interest Rate Swap Obligations of the Company covering Indebtedness
of the Company or any of its Restricted Subsidiaries and Interest Rate Swap
Obligations of any Restricted Subsidiary covering Indebtedness of such
Restricted Subsidiary; PROVIDED, HOWEVER, that such Interest Rate Swap
Obligations are entered into to protect the Company and its Restricted
Subsidiaries from fluctuations in interest rates on Indebtedness incurred in
accordance with the Indenture to the extent the notional principal amount of
such Interest Rate Swap Obligation does not exceed the principal amount of
the Indebtedness to which such Interest Rate Swap Obligation relates.
"PERMITTED INVESTMENTS" means (i) Investments by the Company or any
Wholly-Owned Subsidiary of the Company in any Person that is or will become
immediately after such Investment a Wholly-Owned Subsidiary of the Company or
that will merge or consolidate into the Company or a Wholly-Owned Subsidiary of
the Company, (ii) Investments in the Company by any Restricted Subsidiary of the
Company; PROVIDED that any Indebtedness evidencing such Investment is unsecured
and subordinated, pursuant to a written agreement, to the Company's obligations
under the Notes and the Indenture; (iii) investments in cash and Cash
Equivalents; (iv) Interest Rate Swap Obligations entered into in the ordinary
course of the Company's or its Subsidiaries' businesses and otherwise in
compliance with the Indenture; (v) Investments in securities of trade creditors
or customers received pursuant to any plan of reorganization or similar
arrangement upon the bankruptcy or insolvency of such trade creditors or
customers; (vi) Investments in the Notes; (vii) Investments made by the Company
or its Subsidiaries as a result of an Asset Sale made in compliance with the
"Asset Sales" covenant; (viii) Investments existing on the Closing Date; and
(ix) Investments in joint ventures or other similar arrangements in an aggregate
amount not to exceed $5 million.
"PERMITTED LIENS" means the following types of Liens:
(i) Liens for taxes, assessments or governmental charges or claims
either (a) not delinquent or (b) contested in good faith by appropriate
proceedings and as to which the Company or its Restricted Subsidiaries shall
have set aside on its books such reserves as may be required pursuant to
GAAP;
(ii) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by law
incurred in the ordinary course of business for sums not yet delinquent or
being contested in good faith, if such reserve or other appropriate
provision, if any, as shall be required by GAAP shall have been made in
respect thereof;
(iii) Liens incurred or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other
types of social security, including any Lien securing letters of credit
issued in the ordinary course of business, or to secure the performance and
return-of-money bonds and other similar obligations (exclusive of
obligations for the payment of borrowed money);
(iv) judgment Liens not giving rise to an Event of Default so long as
such Lien is adequately bonded and any appropriate legal proceedings which
may have been duly initiated for the review of such judgment shall not have
been finally terminated or the period within which such proceedings may be
initiated shall not have expired;
(v) easements, rights-of-way, zoning restrictions and other similar
charges or encumbrances in respect of real property not interfering in any
material respect with the ordinary conduct of the business of the Company or
any of its Restricted Subsidiaries;
(vi) any interest or title of a lessor under any Capitalized Lease
Obligation; provided that such Liens do not extend to any property or assets
which is not leased property subject to such Capitalized Lease Obligation;
(vii) Purchase Money Liens of the Company or any Restricted Subsidiary
of the Company acquired in the ordinary course of business; PROVIDED,
HOWEVER, that (A) the related Purchase Money
77
<PAGE>
Obligation shall not exceed the cost of such property or assets and shall
not be secured by any property or assets of the Company or any Restricted
Subsidiary of the Company other than the property and assets so acquired and
(B) the Lien securing such Indebtedness shall be created within 90 days of
such acquisition;
(viii) Liens securing reimbursement obligations with respect to
commercial letters of credit which encumbered documents and other property
relating to such letters of credit and products and proceeds thereof;
(ix) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual, or warranty requirements of the Company
or any of its Subsidiaries, including rights of offset and set-off;
(x) Liens incurred in the ordinary course of business securing Interest
Rate Swap Obligations, which Interest Rate Swap Obligations relate to
Indebtedness that is otherwise permitted under the Indenture;
(xi) Liens securing Acquired Debt incurred in accordance with the
covenant described under "--Incurrence of Indebtedness and Issuance of
Preferred Stock"; PROVIDED that (A) such Liens secured such Acquired Debt at
the time of and prior to the incurrence of such Acquired Debt by the Company
or a Restricted Subsidiary of the Company and were not granted in connection
with, or in anticipation of, the incurrence of such Indebtedness by the
Company or a Restricted Subsidiary of the Company and (B) such Liens do not
extend to or cover any property or assets of the Company or of any of its
Subsidiaries other than the property or assets that secured the Acquired
Debt prior to the time such Indebtedness became Acquired Debt of the Company
or a Restricted Subsidiary of the Company and are no more favorable to the
lienholders than those securing the Acquired Debt prior to the incurrence of
such Acquired Debt by the Company or a Restricted Subsidiary of the Company;
(xii) Liens existing on the Closing Date to the extent and in the manner
such Liens are in effect on the Closing Date;
(xiii) Liens securing Indebtedness under the Senior Credit Facility;
(xiv) Liens of the Company or a Wholly-Owned Subsidiary of the Company
on assets of any Subsidiary of the Company;
(xv) Liens securing Refinancing Indebtedness which is incurred to
Refinance any Indebtedness which has been secured by a Lien permitted under
the Indenture and which has been incurred in accordance with the provisions
of the Indenture; PROVIDED, HOWEVER, that such Liens (a) are no less
favorable to the holders of Notes and are not more favorable to the
lienholders with respect to such Liens than the Liens in respect of the
Indebtedness being Refinanced and (b) other than Liens securing Indebtedness
under the Senior Credit Facility, do not extend to or cover any property or
assets of the Company or any of its Restricted Subsidiaries not securing the
Indebtedness so Refinanced; and
(xvi) Liens on the Security Account.
"PERSON" or "PERSON" means any individual, corporation, partnership, joint
venture, association, joint stock Company, trust, unincorporated organization or
government or any agency or political subdivision thereof.
"PLEDGED SECURITIES" means the U.S. Government Obligations to be purchased
by the Company and held in the Security Account in accordance with the Security
Agreement.
"PREFERRED STOCK" means, with respect to any Person, any Capital Stock of
such Person or its Restricted Subsidiaries in respect of which a holder thereof
is entitled to receive payment upon dissolution or
78
<PAGE>
otherwise before any payment may be made with respect to any other Capital Stock
of such Person or its Restricted Subsidiaries.
"PURCHASE AGREEMENT" means the Purchase Agreement, dated October 23, 1997,
between the Company and the Initial Purchaser.
"PURCHASE MONEY LIENS" means (i) Liens to secure or securing Purchase Money
Obligations permitted to be incurred under the Indenture and (ii) Liens to
secure Refinancing Indebtedness incurred solely to Refinance Purchase Money
Obligations permitted to be incurred under the Indenture, provided that such
Refinancing Indebtedness is incurred no later than six (6) months after the
satisfaction of such Purchase Money Obligations and such Lien extends to or
covers only the asset or property securing the Purchase Money Obligations being
Refinanced.
"PURCHASE MONEY OBLIGATIONS" means Indebtedness representing, or incurred to
finance, the cost of acquiring any assets (including Purchase Money Obligations
of any other person at the time such other person is merged with or into or is
otherwise acquired by the Company or its Wholly Owned Subsidiaries), provided
that (i) the principal amount of such Indebtedness does not exceed 100% of such
cost (including the amount of reasonable expenses incurred and reasonable fees
and interest required to be paid), (ii) any Lien securing such Indebtedness does
not extend to or cover any other asset or property other than the asset or
property being so acquired and (iii) such Indebtedness is incurred, and any
Liens with respect thereto are granted, within 90 days of the acquisition of
such property or asset.
"RESTRICTED INVESTMENT" means an Investment other than a Permitted
Investment.
"RESTRICTED SUBSIDIARY" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"SALE AND LEASEBACK TRANSACTION" means any direct or indirect arrangement
with any Person or to which any such Person is a party providing for the leasing
to the Company or a Restricted Subsidiary of any property whether owned by the
Company or any Restricted Subsidiary at the Closing Date or later acquired,
which has been or is to be sold or transferred by the Company or such Restricted
Subsidiary to such Person or to any other Person from whom funds have been or
are to be advanced by such Person on the security of such Property.
"SECURITY ACCOUNT" means one or more accounts established with the Trustee
pursuant to the terms of the Security Agreement for the deposit of a portion of
the proceeds from the Private Note Offering and the Pledged Securities in the
Security Account.
"SECURITY AGENT" shall mean the Trustee as security agent under the Security
Agreement.
"SECURITY AGREEMENT" means the Security and Disbursement Agreement, dated as
of the Closing Date, between the Trustee, as security agent, and the Company
relating to the Security Account.
"SENIOR CREDIT FACILITY" means (i) the credit facility evidenced by the Loan
and Security Agreement, dated as of the Closing Date, among the Company,
BankBoston Retail Finance Inc., and the lenders party thereto, and (ii) any
additional or replacement credit facility entered into by the Company subsequent
to the Closing Date which is permitted to be incurred under clause (a) of the
definition of "Permitted Indebtedness" pursuant to which the Company and its
Subsidiaries may incur Indebtedness thereunder at any time outstanding in an
aggregate principal amount not to exceed $130 million, together with all other
agreements, instruments and documents executed or delivered pursuant thereto or
in connection therewith, in each case, as such agreements, instruments or
documents may be amended, supplemented, extended, renewed, replaced or otherwise
modified from time to time.
"SIGNIFICANT SUBSIDIARY" means any Subsidiary which would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such Regulation is in effect on the date
hereof.
79
<PAGE>
"SUBSIDIARY" means, with respect to any person, any corporation, association
or other business entity of which more than 50% of the total voting power of
shares of Capital Stock entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof
is at the time owned or controlled, directly or indirectly, by such person or
one or more of the other Subsidiaries of that person or a combination thereof.
"SUBSIDIARY GUARANTOR" means CSS Trade Names, Inc. (after its Chapter 11
case is dismissed by the Bankruptcy Court) and all Restricted Subsidiaries of
the Company formed after the Closing Date.
"UNRESTRICTED SUBSIDIARY" of any Person means (i) any Subsidiary of such
Person that at the time of determination shall be or continue to be designated
an Unrestricted Subsidiary by the Board of Directors of such Person in the
manner provided below and (ii) any Subsidiary of an Unrestricted Subsidiary. The
Board of Directors may designate any Subsidiary (including any newly acquired or
newly formed Subsidiary) to be an Unrestricted Subsidiary unless such Subsidiary
owns any Capital Stock of, or owns or holds any Lien on any property of, the
Company or any other Subsidiary of the Company that is not a Subsidiary of the
Subsidiary to be so designated; PROVIDED that (v) immediately after giving
effect to such designation, the Company is able to incur at least $1.00 of
additional Indebtedness in compliance with the "Incurrence of Indebtedness and
Issuance of Preferred Stock" covenant, (w) immediately before and immediately
after giving effect to such designation, no Default or Event of Default shall
have occurred and be continuing, (x) the Company certifies to the Trustee that
such designation complies with the "Restricted Payments" covenant and (y) each
Subsidiary to be so designated and each of its Subsidiaries has not at the time
of designation, and does not thereafter, create, incur, issue, assume, guarantee
or otherwise become directly or indirectly liable with respect to any
Indebtedness pursuant to which the lender has recourse to any of the assets of
the Company or any of its Restricted Subsidiaries. The Board of Directors may
designate any Unrestricted Subsidiary to be a Restricted Subsidiary only if (x)
immediately after giving effect to such designation, the Company is able to
incur at least $1.00 of additional Indebtedness in compliance with the
"Incurrence of Indebtedness and Issuance of Preferred Stock" covenant and (y)
immediately before and immediately after giving effect to such designation, no
Default or Event of Default shall have occurred and be continuing. Any such
designation by the Board of Directors shall be evidenced to the Trustee by
promptly filing with the Trustee a copy of the Board Resolution giving effect to
such designation and an Officers' Certificate certifying that such designation
complied with the foregoing provisions.
"U.S. GOVERNMENT OBLIGATIONS" means non-callable direct obligations of, and
non-callable obligations guaranteed by, the United States of America for the
payment of which the full faith and credit of the United States of America is
pledged.
"VOTING STOCK" means, with respect to any Person, (i) one or more classes of
the Capital Stock of such Person having general voting power under ordinary
circumstances to elect at least a majority of the Board of Directors, managers
or trustees of such Person (irrespective of whether or not at the time Capital
Stock of any other class or classes shall have or might have voting power by
reason of the happening of any contingency); and (ii) any Capital Stock of such
Person convertible or exchangeable without restriction at the option of the
holder thereof into Capital Stock of such Person described in clause (i) above.
"WEIGHTED AVERAGE LIFE" means, as of the date of determination, with respect
to any Indebtedness, the quotient obtained by dividing (i) the sum of the
products of the numbers of years from the date of determination to the date of
each successive scheduled principal payment of such Indebtedness multiplied by
the amount of such principal payment by (ii) the sum of all such principal
payments.
"WHOLLY-OWNED RESTRICTED SUBSIDIARY" means, with respect to any person, a
Restricted Subsidiary all the Capital Stock of which (other than directors'
qualifying shares) is owned by such person or another Wholly-Owned Restricted
Subsidiary of such person.
80
<PAGE>
SAME-DAY SETTLEMENT AND PAYMENT
Secondary trading in long-term notes and debentures of corporate issuers is
generally settled in clearing-house or next-day funds. In contrast, the Notes
are expected to be eligible to trade in the PORTAL market and to trade in the
Depository's Same-Day Funds Settlement System, and any permitted secondary
market trading activity in the Notes will therefore be required by the
Depository to be settled in immediately available funds. No assurance can be
given as to the effect, if any, of such settlement arrangements on trading
activity in the Notes.
BOOK-ENTRY, DELIVERY AND FORM
Except as set forth in the next paragraph, the Securities to be sold as set
forth herein will initially be issued in the form of one or more registered
Global Notes (the "Global Notes") each of which will be deposited on the Closing
Date with the Trustee as custodian for, and registered in the name of, a nominee
of DTC (such nominee being referred to herein as the "Global Holder"). The
following are summaries of certain rules and operating procedures of DTC which
affect the Global Notes.
Securities that are (A) originally issued to or transferred to (i)
"institutional accredited investors" (as such terms are defined under "Notice to
Investors" elsewhere herein) who are not "qualified institutional buyers" (as
defined in Rule 144A under the Securities Act) ("QIBs") or to any other persons
who are not QIBs (the "Non-Global Purchasers") or (ii) except as described
below, persons outside the United States pursuant to sales in accordance with
Regulation S under the Securities Act or (B) issued as described below under
"Certificated Securities, will be issued in registered form (the "Certificated
Securities"). Upon the transfer to a QIB of Certificated Securities initially
issued to a Non-Global Purchaser, such Certificated Securities will, unless the
applicable Global Security has previously been exchanged for Certificated
Securities, be exchanged for an interest in the Global Security representing the
principal amount of Notes or number of Series A Warrants being transferred. For
a description of the restrictions on the transfer of Certificated Securities,
see "Notice to Investors."
Securities originally purchased by persons outside the United States
pursuant to sales in accordance with Regulation S under the Securities Act will
be represented upon issuance by a temporary Global Note certificate and a
temporary Global Warrant certificate (each a "Temporary Certificate") that will
not be exchangeable for Certificated Securities until the expiration of the
"40-day restricted period," within the meaning of Rule 903(c)(3) of Regulation S
under the Securities Act. The Temporary Certificate will be registered in the
name of, and held by, a temporary certificate holder (the "Temporary Certificate
Holder") until the expiration of the applicable restricted period, at which time
the Temporary Certificate will be delivered to the Trustee or Warrant Agent, as
the case may be, in exchange for Certificated Securities registered in the names
requested by the Temporary Certificate Holder. In addition, until the expiration
of the applicable restricted period, transfers of interests in the Temporary
Certificate can only be effected through the Temporary Certificate Holder in
accordance with the requirements set forth in "Notice to Investors."
DTC has advised the Company that it is a limited-purpose trust Company that
was created to hold securities for its participating organizations
(collectively, the "Participants" or the "DTC's Participants") and to facilitate
the clearance and settlement of transactions in such securities between
Participants through electronic book-entry changes in accounts of its
Participants. DTC's Participants include securities brokers and dealers, banks
and trust companies, clearing corporations and certain other organizations.
Access to DTC's system is also available to other entities such as banks,
brokers, dealers and trust companies (collectively, the "Indirect Participants"
or "DTC's Indirect Participants") that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly. Persons who are
not Participants may beneficially own securities held by or on behalf of DTC
only through DTC Participants or DTC's Indirect Participants.
81
<PAGE>
The Company expects that pursuant to procedures established by DTC (i) upon
deposit of the Global Notes, DTC will credit the accounts of Participants with
portions of the Global Notes and (ii) ownership of the Securities will be shown
on, and the transfer of ownership thereof will be effected only through, records
maintained by DTC (with respect to the interests of the DTC's Participants),
DTC's Participants and DTC's Indirect Participants. The laws of some states
require that certain persons take physical delivery in definitive form of
securities that they own. Consequently, the ability to transfer Securities will
be limited to such extent. For certain other restrictions on the transferability
of the Securities, see "Notice to Investors."
So long as the Global Holder is the registered owner of any Notes, the
Global Holder will be considered the sole owner of such Securities outstanding
under the Indenture. Except as provided below, owners of beneficial interests in
a Global Note will not be entitled to have Securities registered in their names,
will not receive or be entitled to receive physical delivery of Certificated
Securities, and will not be considered the owners or Holders thereof under the
Indenture for any purpose. As a result, the ability of a person having a
beneficial interest in Securities represented by a Global Note to pledge such
interest to persons or entities that do not participate in DTC's system or to
otherwise take actions in respect of such interest, may be affected by the lack
of a physical certificate evidencing such interest. Accordingly, each QIB owning
a beneficial interest in a Global Note must rely on the procedures of DTC and,
if such QIB is not a Participant or an Indirect Participant, on the procedures
of the Participant through which such QIB owns its interest, to exercise any
rights of a holder under such Global Note or the Indenture.
Neither the Company nor the Trustee nor the Warrant Agent will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of Securities by DTC, or for maintaining, supervising
or reviewing any records of DTC relating to such Securities.
Payments in respect of the principal of, premium, if any, and interest on
any Notes registered in the name of a Global Holder on the applicable record
date will be payable by the Trustee to or at the direction of such Global Holder
in its capacity as the registered holder under the Indenture. Under the terms of
the Indenture, the Company and the Trustee may treat the persons in whose names
the Notes, including the Global Notes, are registered as the owners thereof for
the purpose of receiving such payments and for any and all other purposes
whatsoever. Consequently, neither the Company nor the Trustee has or will have
any responsibility or liability for the payment of such amounts to be beneficial
owners of Notes (including principal, premium, if any and interest), or to
immediately credit the accounts of the relevant Participants with such payment,
in amounts proportionate to their respective interests in the Global Notes in
principal amount of beneficial interests in the relevant security as shown on
the records of DTC. Payments by DTC's Participants and DTC's Indirect
Participants to the beneficial owners of Notes will be governed by standing
instructions and customary practice and will be the responsibility of DTC's
Participants or DTC's Indirect Participants.
CERTIFICATED SECURITIES
If (i) the Company notifies the Trustee in writing that DTC is no longer
willing or able to act as a depository and the Company does not appoint a
qualified successor within 90 days or (ii) the Company, at its option, notifies
the Trustee in writing that it elects to cause the issuance of Notes in
definitive form under the Indenture, then, upon surrender by the relevant Global
Holder of its Global Note, Certificated Securities in such form will be issued
to each person that such Global Holder and DTC identify as the beneficial owner
of the related Notes. In addition, subject to certain conditions, any person
having a beneficial interest in the Global Note may, upon request to the
Trustee, exchange such beneficial interest for Notes in the form of Certificated
Securities. Upon any such issuance, the Trustee is required to register such
Certificated Securities in the name of, and cause the same to be delivered to,
such person or persons (or the nominee of any thereof) in fully registered form.
82
<PAGE>
Neither the Company nor the Trustee shall be liable for any delay by the
related Global Holder or DTC in identifying the beneficial owners of the related
Securities and each such person may conclusively rely on, and shall be protected
in relying on, instructions from such Global Holder or of DTC for all purposes
(including with respect to the registration and delivery, and the respective
principal amounts of the Notes to be issued).
CERTAIN PROVISIONS OF THE ARTICLES OF
INCORPORATION AND BYLAWS
ELECTION OF DIRECTORS
Pursuant to the Bylaws, the directors of the Company appointed pursuant to
the Plan of Reorganization will hold office until the first annual meeting of
the Company's shareholders and until their successors are elected and qualified.
Thereafter, directors who are elected at an annual meeting of the Company's
shareholders shall hold office until the next annual meeting of shareholders and
until their successors are elected and qualified.
INDEMNIFICATION
The Articles of Incorporation provide that the Company shall indemnify each
director and officer of the Company to the fullest extent permitted by law.
LIMITATIONS ON DIRECTORS' LIABILITY
The Articles of Incorporation provide that no director of the Company shall
be personally liable to the Company or its shareholders for monetary damages for
any breach of fiduciary duty as a director, except to the extent such exemption
from liability or limitation thereof is not permitted under the Business
Corporation Act of the State of Minnesota (the "MBCA"). These provisions will
not limit the liability of directors under federal securities laws and will not
affect the availability of equitable remedies such as an injunction or
rescission based upon a director's breach of his duty of care or duty of
loyalty.
83
<PAGE>
CERTAIN PROVISIONS OF THE
MINNESOTA BUSINESS CORPORATION ACT
Certain provisions of the MBCA could thwart an unsolicited takeover of the
Company. These provisions are intended to provide management flexibility, to
enhance the likelihood of continuity and stability in the composition of the
Board of Directors and in the policies formulated by the Board of Directors, and
to discourage an unsolicited takeover of the Company if the Board of Directors
determines that such a takeover is not in the best interests of the Company and
its shareholders. However, these provisions could have the effect of
discouraging certain attempts to acquire the Company, thus depriving the
Company's shareholders of opportunities to sell their shares of Common Stock at
prices higher than prevailing market prices.
Section 302A.671 of the MBCA applies, with certain exceptions, to any
acquisition of voting stock of the Company (from a person other than the
Company, and other than in connection with certain mergers and exchanges to
which the Company is a party) resulting in any person acquiring beneficial
ownership of 20% or more of the Company's voting stock then outstanding. Section
302A.671 requires approval of any such acquisitions by a majority vote of the
shareholders of the Company prior to its consummation. In general, shares
acquired in the absence of such approval are denied voting rights and are
redeemable at their then fair market value by the Company within 30 days after
the acquiring person has failed to give a timely information statement to the
Company or the date the shareholders voted not to grant voting rights to the
acquiring person's shares. A corporation, pursuant to a provision in its
articles of incorporation or bylaws, may elect not to be governed by Section
302A.671 of the MBCA. The Company will not make such an election, and as a
result, the Company will be subject to the provisions of Section 302A.671 of the
MBCA following completion of the Private Note Offering.
Section 302A.673 of the MBCA prohibits certain transactions between a
Minnesota corporation and an "interested shareholder," which is defined as a
person who, together with any affiliates or associates of such person,
beneficially owns, directly or indirectly, 10% or more of the outstanding voting
shares of a Minnesota corporation. Section 302A.673 prohibits certain business
combinations (defined broadly to include mergers, consolidations, sales or other
dispositions of assets having an aggregate value of 10% or more of the
consolidated assets of the corporation, and certain transactions that would
increase the interested shareholder's proportionate share ownership in the
corporation) between an interested shareholder and a corporation for a period of
four years after the date the interested shareholder acquired its stock unless
the business combination or the acquisition of the shares is approved by an
affirmative vote of a majority of a committee of all the disinterested members
of the Board of Directors. A corporation, pursuant to a provision in its
articles of incorporation or bylaws, may elect not to be governed by Section
302A.673 of the MBCA. The Company will not make such an election, and, as a
result, the Company will be subject to the provisions of Section 302A.673 of the
MBCA following completion of the Private Note Offering.
PLAN OF REORGANIZATION
The Private Note Offering and the Plan of Reorganization were consummated on
October 29, 1997. The Plan of Reorganization was confirmed by the Bankruptcy
Court on October 1, 1997. The Plan of Reorganization was designed to reorganize
the Company's capital structure so that the Company could continue as a going
concern with adequate capitalization. The Plan of Reorganization organizes the
claims against and interests in the Company into seven classes. Under the terms
of the Plan of Reorganization, the class consisting of general unsecured claims
received 20,000,000 shares of Common Stock and the class consisting of preferred
stock interests received Series B Warrants, which, when exercised, will entitle
the holders thereof to receive an aggregate of up to 3,000,000 shares of Common
Stock. All other classes, with the exception of the class consisting of common
stock interests and the class consisting of fines, penalties, and punitive
damage claims, were either reinstated or paid in full under the Plan of
Reorganization using the proceeds from the Private Note Offering and amounts
borrowed under the Senior Credit Facility. See
84
<PAGE>
"Use of Proceeds." The class consisting of common stock interests and the class
consisting of fines, penalties, and punitive damage claims has not received a
distribution of either cash or property under the Plan of Reorganization.
The disclosure statement (the "Disclosure Statement") that relates to the
Plan of Reorganization was approved by the Bankruptcy Court on August 22, 1997
and distributed to pre-petition creditors and other parties-in-interest shortly
thereafter. The Disclosure Statement contains, among other things, a description
of the Plan of Reorganization and information relating to the Company, its
operating history, and future prospects. The Disclosure Statement also contains
projections as to the future operating and financial results of the Company. The
inclusion of such projections in the Disclosure Statement was required by the
Bankruptcy Court. Such projections, which are subject to numerous assumptions
and qualifications as set forth in the Disclosure Statement, were prepared in
connection with the Disclosure Statement and not for the purpose of evaluating
an investment in the Notes. The Initial Purchaser did not participate in the
preparation of such projections and disclaims any responsibility therefor.
Copies of the Disclosure Statement are available from Donlin, Recano & Company,
Inc., 419 Park Avenue South, Suite 1206, New York, NY 10016; telephone number
(212) 481-1411.
DESCRIPTION OF CERTAIN INDEBTEDNESS
The following is a description of certain indebtedness of the Company
outstanding as of November 1, 1997.
SENIOR CREDIT FACILITY
As of the Effective Date, the Company entered into a revolving credit
facility (the "Senior Credit Facility") with BankBoston Retail Finance Inc. and
the lenders named therein. The Senior Credit Facility provides the Company with
a three-year revolving line of credit in the amount of $115 million. $90 million
of the availability under the Senior Credit Facility may be utilized for
issuance of letters of credit and bankers' acceptances primarily to secure
obligations to merchandise suppliers; provided that only $20 million of such
availability may be utilized in connection with the issuance of standby letters
of credit. The ability of the Company to borrow under the Senior Credit Facility
or to issue letters of credit or bankers' acceptance thereunder is subject to
various conditions precedent including, without limitation, accuracy of
representations, compliance with covenants and absence of defaults thereunder.
The amounts available to be borrowed thereunder or utilized in connection with
the issuance of letters of credit or bankers' acceptances are limited to
specified percentages of the value of the Company's eligible inventory, as
determined under the Senior Credit Facility, ranging from 65% to 75% based upon
the Company's projected seasonal working capital requirements. Availability at
any time will be reduced by any amounts then borrowed under the Senior Credit
Facility, as well as then outstanding amounts of letters of credit and bankers'
acceptances issued thereunder.
Interest on amounts advanced under the Senior Credit Facility will accrue,
at the option of the Company, at (a) the applicable London interbank offered
rate (as determined under the Senior Credit Facility) plus a margin ranging from
1.50% to 1.75% or (b) the prime rate plus a margin not to exceed 0.75%. The
Senior Credit Facility contains a number of covenants and events of default
customary for credit facilities of this nature, including covenants related to
the financial performance of the Company and restrictions on payment of
dividends by the Company. A breach of such covenants or any other default by the
Company under the Senior Credit Facility could prevent the Company from making
borrowings or issuing letters of credit or bankers' acceptances thereunder and
result in the acceleration of the Company's obligations thereunder. The Company
will be subjected to a prepayment penalty if it terminates the Senior Credit
Facility prior to maturity.
85
<PAGE>
The Company's obligations under the Senior Credit Facility are secured by a
lien on substantially all of the Company's assets except real property and
property in the Security Account. The Senior Credit Facility will be
cross-defaulted to the Private Notes and any other material indebtedness of the
Company.
On the Effective Date, the Company borrowed approximately $6.8 million under
the Senior Credit Facility and utilized such amount, together with the net
proceeds of the Private Note Offering, to repay all amounts outstanding under
the Existing Credit Facility, to satisfy certain claims under the Plan of
Reorganization and to pay fees and expenses related to the Plan of
Reorganization and the Offering.
PRE-PETITION TAX CLAIMS
Certain of the Company's tax liabilities incurred prior to the Chapter 11
Filing have been restructured pursuant to the Plan of Reorganization as
"Priority Tax Claims." Such Priority Tax Claims have an aggregate value of
approximately $1.68 million. Under the Plan of Reorganization, Priority Tax
Claims are payable (i) in equal installments every three months over a period of
six years with interest accruing at the rate available on 90-day United States
Treasuries on the date the Plan of Reorganization is consummated or (ii) with
Bankruptcy Court approval, (a) on other terms that are less favorable than those
set forth in clause (i), or (b) in full on the date the Plan of Reorganization
is consummated. The Company paid in full approximately $235,000 of Priority Tax
Claims on the date the Plan of Reorganization was consummated and the remainder
will be paid over six years in accordance with clause (i) above.
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
The Company's authorized capital stock consists of 40,000,000 shares of
Common Stock, par value $0.01 per share and 1,000,000 shares of Preferred Stock,
par value $.01 per share. Marine Midland Bank is the transfer agent and
registrar for the Common Stock. As of , 1998, the 20,000,000 shares of
Common Stock issued pursuant to the Plan of Reorganization constituted all of
the shares of Common Stock outstanding. Under the terms of the Plan of
Reorganization, the shares were issued to a Disbursing Agent to be disbursed to
creditors upon final settlement of their respective claims. As of ,
1998, shares have been disbursed to creditors who have settled their
claims.
Under the Plan of Reorganization, the Company also issued (i) Series A
Warrants to purchase up to 2,857,147 shares of Common Stock, (ii) Series B
Warrants to purchase up to an aggregate of 3,000,000 shares of Common Stock
(subject to dilution by the Series A Warrants, the Series C Warrants described
below, and options to purchase Common Stock granted to certain employees (the
"Employee Options")), and (iii) Series C Warrants to Mr. Sam Forman to purchase
an aggregate of 15% of Common Stock (subject to dilution by the Series A
Warrants and certain Employee Options). As of the date hereof, none of the
holders of the foregoing warrants or options have exercised their rights to
acquire shares of Common Stock.
PREFERRED STOCK
The Board of Directors has the authority, without further action by the
stockholders, to issue up to 1,000,000 shares of Preferred Stock in one or more
series and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences and the number of shares constituting any
series or the designation of such series. The issuance of Preferred Stock could
adversely affect the voting power of holders of Common Stock and could have the
effect of delaying, deferring or preventing a change in control of the Company.
The Company has no present plan to issue any shares of preferred stock. In
addition, the Indenture and the Senior Credit Facility contain restrictions on
the Company's ability to issue certain types of redeemable or convertible
capital stock.
86
<PAGE>
COMMON STOCK
The holders of the Common Stock are entitled to one vote for each share held
of record and shall vote as a single class on all matters as to which
stockholders are entitled to vote. There are no cumulative voting rights in the
election of directors. The quorum required at any stockholders' meeting for
consideration of any matter is a majority of all outstanding shares entitled to
vote, represented in person or by proxy. All matters will be decided by a
majority of the votes cast at stockholder meetings by holders of shares present
in person or by proxy who are entitled to vote.
Holders of the Common Stock are entitled to receive dividends when, as and
if declared by the Board of Directors out of funds legally available for
dividends. In the event of any liquidation, dissolution or winding up of the
Company, the holders of the Common Stock are entitled to receive pro rata any
assets distributable to stockholders in respect of shares held by them, after
payment of all obligations of the Company. The holders of Common Stock are not
entitled to pre-emptive rights to any securities issued by the Company.
The Company is authorized to issue additional shares of capital stock from
time to time. There are no specific restrictions upon such issuances, except
that the Company's Certificate prohibits the issuance of non-voting equity
securities if, and only to the extent that and so long as, Section 1123 of the
Bankruptcy Code is applicable and would prohibit such issuance.
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 any Exchange Notes
received in exchange for Private Notes acquired by such broker-dealer as a
result of market-making or other trading activities. Each such broker-dealer
that receives Exchange Notes for its own account in exchange for such Private
Notes pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. The Company has
agreed that for a period of time as is necessary for such persons to comply with
the prospectus delivery requirements of the Securities Act in order to resell
the Exchange Notes, it will make this Prospectus, as amended or supplemented,
available to any such broker-dealer that requests copies of this Prospectus in
the Letter of Transmittal for use in connection with any such resale.
The Company will not receive any proceeds from any sale of Exchange Notes by
broker-dealers or any other persons. Exchange Notes received by broker-dealers
for their own account pursuant to the Exchange Offer may be sold from time to
time in one or more transactions in the over-the-counter market, in negotiated
transactions or through the writing of options on the Exchange Notes, or a
combination of such methods of resale, at market prices prevailing at the time
of resale or negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such broker-dealer and/or the
purchasers of any such Exchange Notes. Any broker-dealer that resells Exchange
Notes that were received by it for its own account pursuant to the Exchange
Offer in exchange for Private Notes acquired by such broker-dealer as a result
of market-making or other trading activities and any broker-dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. The Letter of Transmittal states that by acknowledging that it will deliver
and by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act.
The Company has agreed to pay all expenses incident to the Company's
performance of, or compliance with, the Registration Rights Agreement and will
indemnify the holders of Private Notes (including any broker-dealers), and
certain parties related to such holders, against certain liabilities, including
liabilities under the Securities Act.
87
<PAGE>
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following summary describes certain United States federal income tax
consequences of an investment in the Exchange Notes and Series A Warrants as of
the date hereof. Except where noted, it deals only with Exchange Notes and
Series A Warrants held as capital assets by United States holders and does not
deal with special situations, such as those of foreign persons, dealers in
securities, financial institutions, life insurance companies, holders whose
"functional currency" is not the U.S. dollar, or special rules with respect to
integrated transactions of which the ownership of common stock is a part (such
as certain hedging transactions), or certain "straddle" transactions.
Furthermore, the discussion below is based upon the provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), and regulations, rulings and
judicial decisions thereunder as of the date hereof, and such authorities may be
repealed, revoked or modified (possibly with retroactive effect) so as to result
in federal income tax consequences different from those discussed below.
This discussion assumes that the Exchange Notes will be treated as debt and
not equity for U.S. federal income tax purposes. The holders of the Exchange
Notes and the Company must report the Exchange Notes as debt for such purposes.
THE FOLLOWING DISCUSSION IS FOR GENERAL INFORMATION ONLY. PERSONS
CONSIDERING THE EXCHANGE OF THE PRIVATE NOTES FOR EXCHANGE NOTES ARE URGED TO
CONSULT THEIR TAX ADVISORS CONCERNING THE U.S. FEDERAL INCOME TAX CONSIDERATIONS
THAT MAY BE SPECIFIC TO THEM AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE
LAWS OF ANY OTHER TAXING JURISDICTION.
REGISTRATION OF THE NOTES
The exchange of Private Notes for Exchange Notes should not be treated as a
taxable transaction for United States Federal income tax purposes because the
Exchange Notes will not be considered to differ materially in kind or in extent
from the Private Notes. Rather, the Exchange Notes received by a holder of
Private Notes should be treated as a continuation of such holder's investment in
the Private Notes. As a result, there should be no material United States
Federal income tax consequences to holders exchanging Private Notes for Exchange
Notes.
ISSUE PRICE OF THE ORIGINAL UNITS
The issue price of the units consisting of the Private Notes and the Series
A Warrants was the initial price at which a substantial portion of the units
were sold to the public (not including sales to bond houses, brokers or similar
persons or organizations acting in the capacity of underwriters or wholesalers).
The Company allocated a portion of the issue price of the units to the Private
Notes for purposes of calculating the yield-to-maturity of the Private Notes.
The issue price of the Private Notes was determined by allocating the issue
price of the units between the Private Notes and the Series A Warrants based on
their relative fair market values. This allocation reflected the Company's
judgment as to the relative values of those instruments at the time of issuance.
The allocation is binding on a holder unless such holder explicitly discloses on
its tax return for the taxable year that includes the acquisition date of the
unit that its allocation is different from that of the Company. The allocation
was not, however, binding on the Internal Revenue Service (the "IRS"). If the
Company's allocation were successfully challenged by the IRS, the issue price,
original issue discount accrual on a Note, and gain or loss on the sale or
disposition of a Note or Series A Warrant would be different from that resulting
under the allocation determined by the Company.
TAXATION OF THE NOTES
TAXATION OF INTEREST. Stated interest payments on the Exchange Notes will
be taxable to a holder when received or accrued in accordance with such holder's
method of accounting.
88
<PAGE>
ORIGINAL ISSUE DISCOUNT. The allocation of a portion of the issue price of
the original units consisting of the Private Notes and Series A Warrants to such
Series A Warrants resulted in the Notes having an issue price less than their
principal amount. The Private Notes were therefore treated as having been issued
at a discount. If a debt instrument is originally issued at a discount that is
equal to or greater than a DE MINIMIS amount, the debt instrument will be
treated as having OID for U.S. federal income tax purposes. The DE MINIMIS
amount is an amount equal to 0.25% multiplied by the product of the debt
instrument's "stated redemption price at maturity" (as defined below) and the
number of complete years to maturity from the issue date. If notes are issued
with OID, then each holder of notes generally will be required to include OID in
income as it accrues on a yield-to-maturity basis over the term of the notes in
advance of cash payments attributable to such income (regardless of whether the
holder is a cash or accrual basis taxpayer). The amount of OID with respect to a
note will be the excess of the stated redemption price at maturity of such note
over its issue price. The stated redemption price at maturity will include all
payments required to be made on the notes, whether denominated as principal or
interest (other than qualified stated interest (defined generally as stated
interest that is unconditionally payable in cash or property (other than debt
instruments of the issuer) at least annually at a single fixed rate that
appropriately takes into account the length of intervals between payments) and
other than payments subject to remote or incidental contingencies). The Company
intends to treat the payment of additional interest payable if the Company fails
to comply with its obligations under the Registration Rights Agreement as
subject to contingencies, which treatment is binding on holders unless a holder
explicitly discloses on its tax return for the taxable year that includes the
acquisition date of the Private Notes that its treatment is different. The
Company's treatment is not, however, binding on the IRS. The issue price of the
Private Notes was determined as described above under "Issue Price of the
Original Units." Such issue price carries over to the Exchange Notes upon the
exchange under the Exchange Offer.
A holder of a debt instrument that bears OID is required to include in gross
income an amount equal to the sum of the daily portions of OID for each day
during the taxable year in which the debt instrument is held. The daily portions
of OID are determined by allocating to each day in an accrual period the pro
rata portion of the OID that is allocable to the accrual period. The amount of
OID that is allocable to a future accrual period is generally equal to the
excess of (i) the product of the adjusted issue price of the Exchange Notes at
the beginning of the accrual period (the issue price of the Exchange Notes
determined as described above, generally increased by all prior accruals of OID
and decreased by the amount of any cash payment (other than qualified stated
interest) previously made on the Private or Exchange Notes) and the Exchange
Notes' yield-to-maturity (the discount rate, which, when applied to all payments
under the Private or Exchange Notes, results in a present value equal to the
issue price of the Exchange Notes) over (ii) the qualified stated interest
allocable to the accrual period. In the case of the final accrual period, the
allocable OID generally is the difference between the amount payable at maturity
and the adjusted issue price at the beginning of the accrual period.
The Company will furnish annually to the IRS and to holders (other than with
respect to certain exempt holders, including, in particular, corporations)
information with respect to the OID accruing while the Exchange Notes were held
by holders.
PREMIUM. If a holder purchased a Private Note for an amount that is greater
than the Private Note's stated redemption price at maturity, such holder will be
considered to have purchased such Private Note with "amortizable bond premium"
equal in amount to such excess, and generally will not be required to include
OID in income. A holder who has exchanged a Private Note for an Exchange Note
may elect to amortize such premium, using a constant yield method, over the
remaining term of the Exchange Note with reference to either the amount payable
on maturity or, if it results in a smaller premium attributable to the period
through the earlier call date, with reference to the amount payable on the
earlier call date. An election to amortize bond premium applies to all taxable
debt obligations then owed and thereafter acquired by the holder and may be
revoked only with the consent of the IRS.
89
<PAGE>
If a holder of an Exchange Note purchased the Private Note for an amount
greater than the Private Note's adjusted issue price but less than the Private
Note's stated redemption price at maturity, the holder will be required to
include annual accruals of OID in gross income in accordance with the rules
described above; however, the amount of OID includable in income will be reduced
to reflect such acquisition premium. The includable OID (as otherwise
determined) will be reduced by an amount equal to the OID multiplied by a
fraction, the numerator of which is such excess and the denominator of which is
the OID for the period from the date of acquisition until the maturity date.
MARKET DISCOUNT. If a holder of an Exchange Note purchased the Private Note
for an amount that is less than the "revised issue price" of the Private Note at
the time of acquisition, the amount of such difference will be treated as
"market discount" for federal income tax purposes, unless such difference is
less than a specified DE MINIMIS amount. The "revised issue price" of a debt
obligation generally equals the sum of its issue price and the total amount of
OID includable in the gross income of all holders for periods before the
acquisition of the debt obligation by the current holder (without regard to any
reduction in such income resulting from acquisition premium) and less any cash
payments in respect of such debt obligation (other than qualified stated
interest). Under the market discount rules, a holder of an Exchange Note will be
required to treat any principal payment on, or any gain on the sale, exchange,
retirement or other disposition of, an Exchange Note as ordinary income to the
extent of the market discount that has not previously been included in income
and is treated as having accrued on such Exchange Note at the time of such
payment or disposition. If a holder makes a gift of an Exchange Note, accrued
market discount, if any, will be recognized as if such holder had sold such Note
for a price equal to its fair market value. In addition, the holder may be
required to defer, until the maturity of the Note or, in certain circumstances,
the earlier disposition of the Note in a taxable transaction, the deduction of a
portion of the interest expense on any indebtedness incurred or continued to
purchase or carry such Note.
Any market discount will be considered to accrue on a straight-line basis
during the period from the date of acquisition to the maturity date of the
Exchange Note, unless the holder elects to accrue market discount on a constant
interest method. A holder of a Note may elect to include market discount in
income currently as it accrues (on either a straight-line basis or constant
interest method), in which case the rules described above regarding the deferral
of interest deductions will not apply. This election to include market discount
in income currently, once made, is irrevocable and applies to all market
discount obligations acquired on or after the first day of the first taxable
year to which the election applies and may not be revoked without consent of the
IRS.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES TO THE COMPANY AND TO CORPORATE
HOLDERS. The Exchange Notes will constitute applicable high yield discount
obligations ("AHYDOs") since the yield-to-maturity of the Private Notes was
equal to or greater than the sum of the relevant applicable federal rate (the
"AFR") plus five percentage points and the Private Notes were issued with
significant OID. The Company, therefore, will not be entitled to deduct OID that
accrues with respect to the Notes until amounts attributable to such OID are
paid. In addition, if, as may occur, the yield-to-maturity of the Notes exceeds
the sum of the relevant AFR plus six percentage points (such excess portion
being the "Excess Yield"), the Company's deduction for the "disqualified
portion" of the OID accruing on the Notes will be disallowed. In general, the
"disqualified portion" of the OID for any year will be equal to the lesser of
(i) the total yield for the year times a fraction, the numerator of which is the
Excess Yield and the denominator of which is the yield-to-maturity on the Notes,
and (ii) the OID for the year. Subject to otherwise applicable limitations,
holders that are U.S. corporations will be entitled to a dividends-received
deduction (generally at a current rate of 70%) with respect to any disqualified
portion of the accrued OID to the extent that the Company has sufficient current
or accumulated earnings and profits. If the disqualified portion exceeds the
Company's current and accumulated earnings and profits, the excess will continue
to be taxed as ordinary OID income in accordance with the rules described above
in "Original Issue Discount."
90
<PAGE>
DISPOSITION OF NOTES. A holder will generally recognize gain or loss upon
the sale, exchange, retirement or other disposition of Exchange Notes equal to
the difference between the amount realized on the disposition and the holder's
adjusted tax basis in the Notes. A holder's adjusted tax basis in an Exchange
Note will generally be the cost of such Note, increased by any OID previously
included in income by such holder and decreased by the amount of any amortizable
bond premium used to reduce interest on the Note. Such gain or loss generally
would be capital gain or loss and would be mid-term capital gain or loss if the
Note was held more than one year but not more than eighteen months at the time
of disposition, and long-term capital gain or loss if the Note was held for more
than eighteen months at the time of disposition.
BACKUP WITHHOLDING. Under certain circumstances, a holder may be subject to
backup withholding at a 31% rate on payments received with respect to the
Exchange Notes. This withholding generally applies only if the holder (i) fails
to furnish his or her social security or other taxpayer identification number
("TIN"), (ii) furnishes an incorrect TIN, (iii) is notified by the IRS that he
or she has failed to report payment of interest and dividends properly and the
IRS has notified the Company that he or she is subject to backup withholding or
(iv) fails, under certain circumstances, to provide a certified statement,
signed under penalty of perjury, that the TIN provided is his or her correct
number and that he or she is not subject to backup withholding. Any amount
withheld from a payment to a holder under the backup withholding rules is
allowable as a credit against such holder's federal income tax liability,
provided that the required information is furnished to the IRS. Certain holders
(including, among others, corporations and foreign individuals who comply with
certain certification requirements) are not subject to backup withholding.
Holders should consult their tax advisors as to their qualification for
exemption from backup withholding and the procedure for obtaining such an
exemption.
LEGAL MATTERS
The validity of the Exchange Notes will be passed upon for the Company by
Eaton & Van Winkle, 600 Third Avenue, New York, New York 10016.
EXPERTS
The consolidated financial statements of the Company as of January 31, 1998,
November 1, 1997, February 1, 1997 and February 3, 1996, and for the 13 weeks
ended January 31, 1998, the 39 weeks ended November 1, 1997, and for the years
ended February 1, 1997 and February 3, 1996, included in this prospectus and
elsewhere in the registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said report.
91
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS
13 WEEKS ENDED JANUARY 31, 1998, 39 WEEKS ENDED NOVEMBER 1, 1997, 52 WEEKS ENDED
FEBRUARY 1, 1997, AND THE 53 WEEKS ENDED FEBRUARY 3, 1996
Report of Independent Public Accountants.......................................... F-1
Consolidated Balance Sheets....................................................... F-2
Consolidated Statements of Operations............................................. F-3
Consolidated Statements of Shareholders' Equity (Deficit)......................... F-4
Consolidated Statements of Cash Flows............................................. F-5
Notes to Consolidated Financial Statements........................................ F-7
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited Pro Forma Consolidated Statement of Operations for the 52 Weeks Ended
February 1, 1997................................................................ PF-1
Unaudited Pro Forma Consolidated Statement of Operations for the 52 Weeks Ended
January 31, 1998................................................................ PF-2
</TABLE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
County Seat Stores, Inc.:
We have audited the accompanying consolidated balance sheets of County Seat
Stores, Inc. (a Minnesota corporation) and subsidiary (the "Successor Company"
see Notes 1 and 2) as of January 31, 1998 and November 1, 1997, and the related
consolidated statements of operations and shareholders' equity and cash flows
for the 13 weeks ended January 31, 1998. We have also audited the accompanying
consolidated balance sheet of the Predecessor Company as of February 1, 1997 and
the related consolidated statements of operations and cash flows for the 39
weeks ended November 1, 1997, the 52 weeks ended February 1, 1997, and the 53
weeks ended February 3, 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.
As more fully described in Notes 1 and 2 to the consolidated balance sheet,
effective October 29, 1997, the Successor Company emerged from protection under
Chapter 11 of the U.S. Bankruptcy Code pursuant to a Reorganization Plan which
was confirmed by the Bankruptcy Court on October 1, 1997. In accordance with
AICPA Statement of Position 90-7, the Successor Company adopted "Fresh Start
Accounting" whereby its assets, liabilities and new capital structure were
adjusted to reflect estimated fair values as of November 1, 1997. As a result,
the consolidated financial statements for the periods subsequent to November 1,
1997 reflect the Successor Company's new basis of accounting and are not
comparable to the Predecessor Company's pre-reorganization financial statements.
In our opinion, the financial statements referred to above present fairly,
in all material respects, (a) the financial position of the Successor Company as
of January 31, 1998 and November 1, 1997 and the results of their operations and
their cash flows for the 13 weeks ended January 31, 1998, and (b) the financial
position of the Predecessor Company as of February 1, 1997, and the results of
their operations and their cash flows for the 39 weeks ended November 1, 1997,
the 52 weeks ended February 1, 1997, and as of and for the 53 weeks ended
February 3, 1996, all in conformity with generally accepted accounting
principles.
New York, New York
April 17, 1998
F-1
<PAGE>
COUNTY SEAT STORES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
-----------
JANUARY 31, NOVEMBER 1, FEBRUARY 1,
1998 1997 1997
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................................... $ 22,235 $ 9,370 $ 6,356
Restricted cash in security account..................................... 11,830 11,687 --
Receivables............................................................. 3,530 2,736 1,983
Merchandise inventories................................................. 55,785 74,701 72,628
Prepaid expenses........................................................ 6,291 7,017 8,347
----------- ----------- -----------
Total current assets.................................................. 99,671 105,511 89,314
----------- ----------- -----------
Property and equipment, net............................................... 32,651 32,360 41,881
----------- ----------- -----------
Other Assets:
Debt issuance costs..................................................... 8,013 7,384 1,159
Restricted cash in security account..................................... 5,396 5,317 --
Reorganization value in excess of amounts allocated to identified
assets................................................................ 62,961 69,643 --
Other................................................................... 384 420 528
----------- ----------- -----------
Total other assets.................................................... 76,754 82,764 1,687
----------- ----------- -----------
$ 209,076 $ 220,635 $ 132,882
----------- ----------- -----------
----------- ----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilites:
Borrowings under credit agreement....................................... $ -- $ 12,276 $ 38,600
Current maturities of long-term debt.................................... 2,475 292 --
Accounts payable........................................................ 21,252 24,581 30,009
Accrued expenses........................................................ 16,462 13,532 11,565
Accrued income taxes.................................................... -- -- --
Accrued reorganization costs............................................ 7,036 13,136 3,838
----------- ----------- -----------
Total current liabilites.............................................. 47,225 63,817 84,012
----------- ----------- -----------
Long-Term Liabilities:
Long-term debt.......................................................... 77,632 77,353 --
Other long-term liabilities............................................. 1,600 1,400 9,118
Liabilities Subject to Compromise:
Accounts payable and accrued liabilities................................ -- -- 16,089
Reserves for lease settlements.......................................... -- -- 25,600
Long-term debt.......................................................... -- -- 105,007
Redeemable preferred stock.............................................. -- -- 50,347
Shareholders' Equity:
New common stock: par value $.01 per share; 40,000,000 shares
authorized, 20,000,000 issued and outstanding......................... 200 200 --
Old common stock: par value $1.00 per share; 1,000 shares authorized,
issued and outstanding................................................ -- -- 1
Paid-in capital in excess of par value.................................. 77,865 77,865 49,789
Retained earnings (accumulated deficit)................................. 4,554 -- (207,081)
----------- ----------- -----------
Total shareholders' equity (deficit).................................. 82,619 78,065 (157,291)
----------- ----------- -----------
$ 209,076 $ 220,635 $ 132,882
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-2
<PAGE>
COUNTY SEAT STORES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
-------------------------------------
13 WEEKS 39 WEEKS 52 WEEKS 53 WEEKS
ENDED ENDED ENDED ENDED
JANUARY 31, NOVEMBER 1, FEBRUARY 1, FEBRUARY 3,
1998 1997 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales........................................ $ 117,447 $ 277,137 $ 538,260 $ 619,225
Cost of sales, includes buying and occupancy
costs, and includes a special charge of $11,975
in the 39 weeks ended November 1, 1997 and
$4,311 inventory write-down charges related to
restructuring in fiscal 1996................... 73,356 214,799 416,389 452,014
----------- ----------- ----------- -----------
Gross profit............................... 44,091 62,338 121,871 167,211
Selling, general and administrative expenses..... 29,189 71,465 126,561 132,699
Depreciation and amortization.................... 2,955 6,136 11,051 13,237
Write-off of certain long-lived assets........... -- -- -- 80,241
Reorganization costs............................. -- 38,405 43,752 --
Interest expense, net............................ 3,293 4,019 15,445 20,435
----------- ----------- ----------- -----------
Income (loss) before income taxes (benefit) and
extraordinary item........................... 8,654 (57,687) (74,938) (79,401)
Income taxes (benefit)........................... 4,100 -- (762) 7,632
----------- ----------- ----------- -----------
Income (loss) before extraordinary items....... 4,554 (57,687) (74,176) (87,033)
Extraordinary items, net of tax benefit.......... -- -- 2,692 9,997
----------- ----------- ----------- -----------
Net income (loss).............................. $ 4,554 $ (57,687) $ (76,868) $ (97,030)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Basic earnings per share......................... $ .23
-----------
-----------
Diluted earnings per share....................... $ .20
-----------
-----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
COUNTY SEAT STORES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ACCUMULATED TOTAL
PAID-IN EARNINGS SHAREHOLDERS'
SHARES PAR VALUE CAPITAL (DEFICIT) EQUITY (DEFICIT)
------------ ----------- ---------- ------------ ------------------
<S> <C> <C> <C> <C> <C>
Balance, February 3, 1996................. 1 $ 1 $ 49,789 $ (122,989) $ (73,199)
Net loss................................ -- -- -- (76,868) (76,868)
Redeemable preferred stock
dividends and accretion............... -- -- -- (6,029) (6,029)
Dividend to parent...................... -- -- -- (1,051) (1,051)
Receivable from parent.................. -- -- -- (144) (144)
------------ ----- ---------- ------------ ----------
Balance, February 1, 1997................. 1 1 49,789 (207,081) (157,291)
Net loss................................ -- -- -- (57,687) (57,687)
------------ ----- ---------- ------------ ----------
Balance, November 1, 1997 (Predecessor
Company).................................. 1 $ 1 $ 49,789 $ (264,768) $ (214,978)
------------ ----- ---------- ------------ ----------
------------ ----- ---------- ------------ ----------
Retirement of old common stock and paid
in capital and write-off of
accumulated deficit................... (1) $ (1) $ (49,789) $ 264,768 $ 214,978
Issuance of New Common Stock at Par
Value................................. 20,000 0.01 -- -- 200
Paid-in Capital in Excess of Par
Value................................. -- -- 66,711 -- 66,711
Series A warrants....................... 7,647 7,647
Series B warrants....................... 1,595 1,595
Additional warrants..................... 1,912 1,912
------------ ----- ---------- ------------ ----------
Balance, November 1, 1997................. 20,000 $ 0.01 77,865 -- 78,065
Net Income.............................. -- -- -- 4,554 4,554
------------ ----- ---------- ------------ ----------
Balance, January 31, 1998................. 20,000 $ 0.01 $ 77,865 $ 4,554 $ 82,619
------------ ----- ---------- ------------ ----------
------------ ----- ---------- ------------ ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
COUNTY SEAT STORES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
---------------------------------------------------
52 WEEKS ENDED 53 WEEKS ENDED
13 WEEKS ENDED 39 WEEKS ENDED FEBRUARY 1, FEBRUARY 3,
JANUARY 31, 1998 NOVEMBER 1, 1997 1997 1996
----------------- ----------------- --------------- ---------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................... $ 4,554 $ (57,687) $ (76,868) $ (97,030)
Adjustment to reconcile net income
(loss) to cash provided by (used in)
operating activities:
Reorganization costs.................. -- 20,156 33,563 --
Extraordinary item.................... -- -- 2,692 9,997
Write-off of certain long-lived
assets.............................. -- -- -- 80,241
Depreciation and amortization......... 2,955 6,136 11,051 13,237
Amortization of debt issuance costs
and discount........................ 648 538 835 1,272
Loss on disposal of property and
equipment........................... -- 4,915 -- --
Rent expense in excess of cash
outlays............................. 613 1,215 460 494
Deferred tax (provision) benefit...... 4,100 -- (762) 6,500
Changes in operating assets and
liabilities:
Receivables......................... (794) (960) (141) 1,534
Merchandise inventories............. 18,916 (2,073) 38,116 (14,473)
Prepaid expenses.................... 726 1,268 2,841 (1,300)
Accounts payable.................... (3,329) (5,373) (6,290) (3,307)
Accrued expenses.................... (266) (1,190) (5,610) (2,522)
Accrued income taxes................ (20) -- 361 1,263
Current maturities of long-term
debt.............................. 2,183 292 -- --
Other non-current assets and
liabilities....................... 9 -- (68) (1,673)
Operating liabilities subject to
compromise........................ -- -- 16,089 --
------- -------- --------------- ---------------
Net cash provided by (used in)
operating activities............ 30,295 (32,763) 16,269 (5,767)
------- -------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayments) borrowings under credit
agreement............................. (12,276) (26,324) (13,400) 52,000
Issuance of long-term debt.............. -- 85,000 -- 104,943
Notes payable, taxes.................... (235) 1,400 -- --
Debt and equity issuance costs.......... (998) (5,872) (1,649) (6,998)
Principal payments on long-term debt.... -- -- (25) (150,836)
Dividend to parent...................... -- -- (1,051) (2,102)
Advance to parent....................... -- -- (237) (350)
Restricted cash in security account..... (222) (17,004) -- --
------- -------- --------------- ---------------
Net cash provided by financing
activities.......................... (13,731) 37,200 (16,362) (3,343)
------- -------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................... (3,699) (1,423) (1,841) (13,199)
Proceeds from disposal of property and
equipment............................. -- -- 124 16
------- -------- --------------- ---------------
Net cash used for investing
activities........................ (3,699) (1,423) (1,717) (13,183)
------- -------- --------------- ---------------
Net increase (decrease) in cash and cash
equivalents............................... 12,865 3,014 (1,810) (22,293)
Cash and cash equivalents:
Beginning of period..................... 9,370 6,356 8,166 30,459
------- -------- --------------- ---------------
End of period........................... $ 22,235 $ 9,370 $ 6,356 $ 8,166
------- -------- --------------- ---------------
------- -------- --------------- ---------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
COUNTY SEAT STORES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR
13 WEEKS ENDED COMPANY
SUPPLEMENTAL SCHEDULE OF NONCASH OPERATING, INVESTING AND JANUARY 31, 39 WEEKS ENDED
FINANCING ACTIVITIES 1998 NOVEMBER 1, 1997
--------------- ------------------
<S> <C> <C>
NONCASH OPERATING ACTIVITIES:
Elimination of current assets upon emergence from bankruptcy.... $ -- $ 269
Elimination of debt issuance costs upon emergence from
bankruptcy.................................................... -- (1,021)
Elimination of liabilities subject to compromise upon emergence
from bankruptcy............................................... -- (197,043)
Other current liabilities upon emergence from bankruptcy........ -- (15,088)
Other long-term liabilities upon emergence from bankruptcy...... -- (9,118)
Change in estimate of current liabilities....................... (2,725) --
Elimination of valuation allowance on deferred tax assets
realized...................................................... (4,098) --
NONCASH INVESTING ACTIVITIES:
Elimination of property and equipment in connection with the
reorganization................................................ $ 1,640 $ 8,160
Establishment of reorganization value in excess of amounts
allocated to identified assets................................ -- (69,643)
Elimination of accumulated deficit upon emergence from
bankruptcy.................................................... -- 214,978
Adjustment of reorganization value in excess of amounts
allocated to identified assets................................ 5,183 --
NONCASH FINANCING ACTIVITIES:
Issuance of common stock to unsecured creditors upon emergence
from bankruptcy............................................... $ -- $ 66,911
Issuance of Series B warrants to preferred shareholders......... -- 1,595
</TABLE>
F-6
<PAGE>
COUNTY SEAT STORES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. REORGANIZATION AND NATURE OF BUSINESS
The accompanying consolidated financial statements represent those of County
Seat Stores, Inc. (County Seat) and its wholly-owned subsidiary, CSS Trade
Names, Inc. (Trade Names) (together, the Company). The Company is a specialty
apparel retailer selling both brand name and private-label jeans and jeanswear.
The Company currently operates 413 stores in 41 states. The Company's 375 County
Seat stores, located almost exclusively in regional shopping malls, offer
one-stop shopping for daily casual wear featuring a contemporary jeanswear look.
The Company's selection of popular brands includes Levi's, and its proprietary
brands, County Seat, Nuovo and Ten Star. The Company also operates 14 County
Seat Outlet stores offering discount pricing on special purchase and clearance
merchandise and 22 Levi's Outlet stores under license from Levi Strauss & Co.
(Levi Strauss) offering a full range of Levi's and Docker's off-price
merchandise for both adults and children. The Company operates two Old Farmer's
Almanac General Stores, a new retail concept selling products associated with
American country living, under license from Yankee Publishing, Inc., the
publisher of The Old Farmer's Almanac.
The activities of Trade Names consist principally of licensing the rights to
the County Seat service marks to these stores.
On October 17, 1996, County Seat and Trade Names filed voluntary petitions
for relief under Chapter 11 (Chapter 11) of Title 11 of the United States Code
(the Bankruptcy Code) in the United States Bankruptcy Court for the District of
Delaware (the Court). The Company operated as debtors-in-possession under the
jurisdiction of the Court.
Following approval by the Court on October 17, 1996, the Company entered
into a debtor-in-possession credit agreement (the DIP Credit Agreement) with a
syndicate of commercial banks to provide working capital and longer-term
financing through the Chapter 11 process.
On August 22, 1997, the Company filed the "First Amended Disclosure
Statement with Respect to Plan of Reorganization of County Seat Stores, Inc."
(The Plan) with the Court, which was confirmed on October 1, 1997 and
consummated on October 29, 1997 (Effective Date). The Plan segregated creditors
into three classes--unclassified claims, unimpaired claims and impaired claims.
Unclassified and unimpaired claims were satisfied by cash payments totaling
$4,234,286. Additionally, a $1,520,664 security account was established to pay
lease cures, disputed claims and holdback professional fees. In exchange for
impaired claims of approximately $151.0 million, creditors received 20,000,000
shares of new common stock (100% of the Company's Stock) valued at $66.9 million
representing 44% recovery of their claims. Previous preferred stockholders
received warrants valued at $1.6 million in exchange for their claims of $50.3
million.
As provided for in the Plan, the Company sold $85,000,000 of 12 3/4% Senior
Notes due November 1, 2004 with Series A warrants to purchase common stock
(Notes). Each unit consisting of a principal amount of $1,000 contains one
Series A Warrant to purchase 26.8908 shares of the Company's common stock, par
value $.01 per share, at an exercise price of $.01 per share. Net proceeds from
the Notes were $65,142,000 after the initial discount to the underwriters of
$4,250,000, a deposit into a security account to satisfy interest on the Notes
to May 1, 1999 of $15,482,100, and a $125,000 fee paid to the underwriters.
Additionally, the Company secured a New Credit Facility (Credit Agreement) with
a syndicate of banks led by Bank Boston (Banks). The Company used the proceeds
from the Notes and initial borrowings under the Credit Facility to pay
$65,515,531 to satisfy the obligations from the DIP Credit Agreement and pay
claims as described above. Also, under the Plan, the old stockholders of the
Company did not receive assets of the reorganized company. Due to the Company's
reorganization and the implementation of fresh start
F-7
<PAGE>
COUNTY SEAT STORES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. REORGANIZATION AND NATURE OF BUSINESS (CONTINUED)
accounting, (see Note 2), the consolidated balance sheets as of January 31, 1998
and November 1, 1997, are not comparable to those of the predecessor company.
NOTE 2. FRESH START ACCOUNTING
The effects of the Company's reorganization under Chapter 11 have been
accounted for in the Company's financial statements using principles required by
the American Institute of Certified Public Accountants' Statement of Position
90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code" (Fresh Start Accounting). Fresh Start Accounting results in a revaluation
of the Company's assets and liabilities as of the Effective Date, to reflect the
estimated fair market values of those assets and liabilities in conformity with
the procedures specified by Accounting Principles Board (APB) No. 16, "Business
Combinations". The valuation differences are charged to the Reorganization Value
in Excess of Amounts Allocated to Identified Assets account (Excess
Reorganization Value). This balance is being amortized on a straight-line basis
over 15 years. After Fresh Start Accounting is applied, the Company is in effect
a new entity (Reorganized Company).
The estimated reorganization value has been based upon an equity valuation
and represents a hypothetical value that reflects the estimated intrinsic value
assigned by the public markets for debt and equity securities. The estimated
equity value of the Company as of the Effective Date was derived from an entity
equity valuation of the Company, through various valuation methodologies,
prepared by an independent appraiser, including (i) an analysis of comparable
publicly-traded specialty apparel retailers and (ii) a discounted cash flow
analysis. The discounted cash flow analysis utilizes projected future cash flows
of the Company through 2002, which were provided by the Company, and a remaining
terminal value. The cash flow projections were based on estimates and
assumptions about circumstances and events that have not yet occurred. As such,
these estimates and assumptions are inherently subject to significant economic
uncertainties beyond the control of the Company, which prevent the Company from
making assurances in achieving these projections.
The consolidated balance sheet presented as of November 1, 1997 differs from
the Effective Date of the Company's emergence from bankruptcy. Management
believes that the three days between October 29, 1997 and November 1, 1997 did
not materially impact the presentation of Fresh Start Accounting, and as a
matter of expedience and practicality reported Fresh Start Accounting as if it
occurred on November 1, 1997. Since the fresh start balance sheet as of November
1, 1997, presented herein, is in effect, that of the Reorganized Company, the
comparable balance as of November 2, 1996 is not presented. Furthermore, the
fresh start balance sheet as of November 1, 1997 is not comparable to prior
periods.
The effect of the Plan on the Company's interim balance sheet using Fresh
Start Accounting to the Company's consolidated balance sheet at November 1,
1997, is presented as follows:
F-8
<PAGE>
COUNTY SEAT STORES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. FRESH START ACCOUNTING (CONTINUED)
COUNTY SEAT STORES, INC. AND SUBSIDIARY
REORGANIZING BALANCE SHEET
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR REORGANIZATION FRESH REORGANIZED
COMPANY START ADJUSTMENTS COMPANY
NOVEMBER 1, ---------------------- NOVEMBER 1,
1997 DEBIT CREDIT 1997
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
ASSETS
Total current assets....................................... $ 94,094 $ 11,687(a) $ 270(b) $ 105,511
Property and equipment, net................................ 32,439 79(c) 32,360
Other assets............................................... 1,821 12,321(d) 1,021(e) 13,121
Reorganization value in excess of amounts allocated to
identified assets........................................ -- 69,643(f) -- 69,643
----------- ---------- ---------- -----------
TOTAL ASSETS............................................... $ 128,354 $ 93,651 $ 1,370 $ 220,635
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Borrowings under credit agreement.......................... $ 70,561 $ 58,285(g) $ 12,276
Current liabilities........................................ 59,382 10,749(h) 2,908(i) 51,541
----------- ---------- ---------- -----------
Total current liabilities.................................. 129,943 69,034 2,908 63,817
Long-term liabilities...................................... 10,190 17,837(j) 86,400(k) 78,753
Liabilities subject to compromise.......................... 201,390 201,390(l) -- --
----------- ---------- ---------- -----------
341,523 288,261 89,308 142,570
Shareholders' equity....................................... (213,169) -- 291,234(m) 78,065
----------- ---------- ---------- -----------
Total Liabilities and Shareholders' Equity................. $ 128,354 $ 288,261 $ 380,542 $ 220,635
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
</TABLE>
- ------------------------
(a) Cash resulting from the Offering restricted for payment of current interest
related to the debt, lease cures, disputed claims and holdback professional
fees.
(b) To reflect the fair market value of current assets, pursuant to Fresh Start
Accounting.
(c) To reflect the fair value of property and equipment, pursuant to Fresh Start
Accounting.
(d) Reflects debt issuance costs related to the Offering, as well as cash
resulting from the Offering restricted for long-term interest payments.
(e) Reflects the write-off of deferred financing fees associated with
retired/extinguished debt.
(f) Reflects the reorganization value of the Company not allocable to specific,
identified assets that is recorded as an intangible asset in accordance with
guidance provided by the American Institute of Certified Public Accountants
in Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code". The Company has estimated a
useful life of 15 years for amortization purposes.
(g) Reflects the repayment of the Company's Debtor in Possession Credit
Agreement with funds obtained through the Offering.
F-9
<PAGE>
COUNTY SEAT STORES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. FRESH START ACCOUNTING (CONTINUED)
(h) Reflects the repayment of undisputed administrative claims and expenses
pursuant to the Plan of Reorganization and the write-off of the straight
line-rent liability.
(i) To record additional liabilities and reclassify certain liabilities not
subject to compromise.
(j) Reflects the debt discount of approximately $7.6 million attributable to the
value of the Series A warrants, which are attached to the debt, and the
write-down of long-term liabilities to their fair value pursuant to Fresh
Start Accounting.
(k) Recording of $85.0 million of seven year Senior Notes that bear interest at
12 3/4% per annum with interest payable semiannually in November and May,
and long-term taxes payable.
(l) Pursuant to Fresh Start Accounting, the Company eliminated its liabilities
subject to compromise, including claims of preferred stockholders.
(m) Reflects the issuance of new common stock and warrants in accordance with
the Plan of Reorganization, as well as the elimination of the Old Common
Stock and accumulated deficit pursuant to Fresh Start Accounting.
SECURED DEBT--The Company's secured obligation of $65,515,531 under the DIP
Credit Agreement was paid in full from the proceeds of the bond sale and initial
borrowings under the New Credit Facility.
UNCLASSIFIED AND UNIMPAIRED CLAIMS--The holders of unclassified and
unimpaired claims were paid $4,234,286. An escrow of $1,520,664 was established
for lease cures, disputed claims and professional fee holdback, which will be
paid by order of the Court through a distribution agent of the Company.
IMPAIRED CLAIMS--Holders of $151,043,087 in impaired claims, which include
$105,000,000 from old senior debt holders, $35,997,407 in lease cure claims from
lessors and $10,045,680 from other general creditors, are entitled to receive
20,000,000 shares of new common stock in exchange for their claims. The
20,000,000 shares represent 100% of the Company's outstanding stock. The new
common stock is valued at $66,911,000 and represents a 44% recovery of their
claims.
NEW SENIOR DEBT--The Company secured Notes on the Effective Date with
interest payable each May 1 and November 1, through November 1, 2004 when the
principal amount, $85,000,000 is due. After the discount to the initial
purchaser of $4,250,000, associated expenses of $125,000, and $15,482,100 placed
in escrow to pay the first 18 months of interest, the net proceeds from the
offering are $65,142,900. Each unit has a face value of $1,000 with a stated
interest rate of 12 3/4%. Additionally, Series A Warrants issued as attachments
to the Notes are valued at $7.6 million and are reflected as a debt discount to
the Notes and a component of paid-in capital in excess of par value in the
accompanying balance sheet. The discount will be amortized as additional
interest expense over the life of the debt, utilizing the effective interest
rate method of accounting.
PREFERRED STOCK--The old preferred stock of the Company was retired in
exchange for Series B Warrants, exercisable for an aggregate of up to 3,000,000
shares of the new common stock in three equal tranches, exercisable over a
seven-year period after the Effective Date. The exercise price for the first
tranche will be equal to the price per share of the stock granted to the holders
of impaired claims plus an amount equal to 12% per annum from the Effective
Date. The exercise price for the second and third tranches will represent a 120%
and 140%, respectively, recovery to the holders of impaired claims. In the event
of a sale, merger or other business combination of the Reorganized Company for
cash within two years following the Effective Date, the Series B warrants will
convert into the right to receive cash. The
F-10
<PAGE>
COUNTY SEAT STORES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. FRESH START ACCOUNTING (CONTINUED)
Series B Warrants are valued at $1.6 million and are included in paid-in capital
in excess of par value in the accompanying schedule of Shareholders' Equity.
NOTE 3: SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
All significant intercompany accounts and transactions have been eliminated.
Certain prior year amounts have been reclassified to conform to the current year
presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
YEAR-END
The Company's fiscal year ends on the Saturday closest to January 31 of each
year. References to 1997, 1996 and 1995 relate to the fiscal years ended on
January 31, 1998, February 1, 1997 and February 3, 1996 which include 52, 52 and
53 weeks, respectively. The Company's tax year-end is the Saturday closest to
July 31.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards (SFAS) No. 107 requires
disclosure about the fair value of certain financial instruments. Cash and cash
equivalents, accounts receivable, accounts payable and accrued liabilities are
presented at fair value.
CASH AND CASH EQUIVALENTS
Short-term investments having original maturities of three months or less
are considered cash equivalents.
MERCHANDISE INVENTORIES
Merchandise inventories are stated at the lower of first-in, first-out
(FIFO) cost or market, using the retail inventory method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives of the
assets. The useful lives are generally 25 years for buildings and improvements,
3 to 10 years for furniture, fixtures and equipment, and the remaining lease
term for leasehold improvements. The cost of assets sold or retired and the
related accumulated depreciation are removed from the accounts with any
resulting gain or loss included in income.
F-11
<PAGE>
COUNTY SEAT STORES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Effective October 28, 1995, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of". SFAS No. 121 establishes accounting standards for recognizing and recording
the impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets. The Company evaluates the recoverability of
the net book value of property and equipment based on an analysis of expected
cash flows. In fiscal 1997, the Company closed 137 stores as part of the
Company's reorganization. Reorganization costs of $8.2 million were recorded in
fiscal 1997 for the write-off of the net book value of assets disposed of,
including $6.8 million related to store closings.
Fresh Start Accounting results in a revaluation of the Company's assets and
liabilities as of the Effective Date to reflect the estimated fair market values
of those assets and liabilities in conformity with the procedures specified by
APB Opinion 16, "Business Combinations". When fresh start accounting was applied
to the property and equipment of the Company, the net book value fairly
represented the fair value.
OTHER ASSETS
Other assets consist principally of Excess Reorganization Value, debt
issuance costs, restricted cash, deferred income taxes and other deferred
charges. Excess Reorganization Value is amortized on a straight-line basis over
15 years. Debt issuance and credit acquisition costs are amortized into interest
expense utilizing the effective interest rate method.
STORE OPENING AND CLOSING COSTS
Store opening costs are expensed as incurred. Costs of store closings,
principally lease commitment costs, estimated future store fixed expenses and
estimated losses on store asset dispositions, are provided for in the period
when the decision is made to close the store.
PROVISION FOR INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes". SFAS No. 109 utilizes an asset and liability
approach to deferred taxes which are determined based on the estimated future
tax effects of differences between the financial statement and tax bases of
assets and liabilities given the provisions of the enacted tax laws.
EQUITY BASED COMPENSATION
The Financial Accounting Standards Board (FASB) issued SFAS No. 123
(effective for fiscal years beginning after December 15, 1996), "Accounting for
Stock-Based Compensation", which gave companies the choice to use either the
fair market valuation method for accounting for stock-based compensation or the
alternative method as provided by APB No. 25. Instead of assigning a fair value
to the stock-based compensation, APB No. 25 records compensation expense when
the first date that both the number of shares that may be issued upon exercise
of the options and the exercise price are known. SFAS No. 123 disclosure
requirements, however, supersede APB No. 25.
The Company has elected to account for stock-based compensation under the
provisions of APB No. 25, and provide disclosures as required by SFAS No. 123.
F-12
<PAGE>
COUNTY SEAT STORES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
In 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
This statement, which is effective for periods beginning after December 15,
1997, expands and modifies disclosure and will have no impact on the Company's
reported financial position, results of operations, or cash flows.
In 1997, the FASB issued SFAS No. 128, "Earnings Per Share," which revises
the manner in which earnings per share is calculated. This statement is
effective for both interim and annual periods after December 15, 1997. The
Company has adopted the provisions of this statement.
NOTE 4: COUNTY SEAT, INC.
On December 4, 1989, County Seat, Inc. (CSI), formed by Donaldson, Lufkin &
Jenrette Securities Corporation (DLJ) and certain members of the Company's
management, acquired all of County Seat's outstanding capital stock from Carson
Pirie Scott & Company. The activities of CSI consisted principally of its
investment in the Company. Since the old common stock of the Company was
canceled under the Plan and no distributions were made to CSI with respect to
such interests, the Company, in effect, is no longer a subsidiary of CSI. CSI,
as of the Effective Date, owed the Company $4.6 million. CSI filed for Chapter
11 bankruptcy protection on the same day as the Company. The case is currently
being converted to a Chapter 7 filing, and it is unlikely that there will be
assets to distribute to creditors to satisfy claims after the liquidation,
including the Company's claim. Accordingly, this amount has been eliminated from
the Company's assets in Fresh Start Accounting.
NOTE 5: MERCHANDISE INVENTORIES
Merchandise inventories, net of reserves, consist of finished goods.
NOTE 6: PROPERTY AND EQUIPMENT
Property and equipment, consisted of the following (in thousands):
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
JANUARY 31, NOVEMBER 1, FEBRUARY 1,
1998 1997 1997
----------- ----------- -----------
<S> <C> <C> <C>
Land.................................................. $ 766 $ 766 $ 766
Buildings and improvements............................ 2,897 2,897 4,234
Leasehold improvements................................ 12,185 13,301 42,175
Furniture, fixtures and equipment..................... 14,743 14,342 43,376
Construction in progress.............................. 3,828 1,054 117
----------- ----------- -----------
34,419 32,360 90,668
Less--Accumulated depreciation and amortization....... (1,768) -- (48,787)
----------- ----------- -----------
Net................................................... $ 32,651 $ 32,360 $ 41,881
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
F-13
<PAGE>
COUNTY SEAT STORES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7: RESERVE FOR REORGANIZATION COSTS
Reorganization costs of $38.4 million recognized during 1997 consist of
store closing costs ($22.8 million), corporate office and distribution center
facility exit costs, ($6.1 million), and professional fees ($9.5 million), as
described below. Of this amount, approximately, $13.1 million and $7.0 million
is reflected as a liability in the consolidated balance sheets at November 1,
1997 and January 31, 1998, respectively, for reorganization costs to be incurred
as a result of the Company's reorganization plan in connection with and upon the
Company's emergence from bankruptcy.
Store closing costs--Store closing costs include 137 stores operating in
a going out of business mode (GOB) in conjunction with the Company's plan of
reorganization. Management records store closings in the period in which the
decision to close is made. Store closing costs of $22.8 million consisted of
lease rejection claims, write-off of fixed assets and other GOB store
expenses. An accrual of approximately $1.9 million and $.2 million is
included in accrued restructuring expenses at November 1, 1997 and January
31, 1998, respectively.
Facility exit costs--These costs represent the Company's decision to
relocate its Minneapolis distribution center to Baltimore, Maryland and its
Dallas and Minneapolis administrative operations to New York. Facility exit
costs include severance to terminated employees ($2.7 million), incremental/
duplicative operating costs and wages ($1.7 million), operating lease
cancellations and fixed asset write-offs ($1.7 million). The relocation of
these facilities is expected to be completed during fiscal 1998. An accrual
of approximately $9.5 million and $5.5 million is included in accrued
reorganization costs at November 1, 1997 and January 31, 1998, respectively
for facility exit costs.
Professional fees--These costs include legal, accounting and consulting
fees incurred in connection with the Company's reorganization. Accrued
professional fees of approximately $1.7 million and $1.3 million are
included in accrued reorganization costs at November 1, 1997 and January 31,
1998, respectively.
NOTE 8: SPECIAL CHARGE
A special charge of approximately $12.0 million recorded within cost of
goods sold during 1997 relates to the liquidation of excess inventory.
Non-cancelable purchase commitments made by management for 1997 Fall merchandise
were based on a chain of over 500 County Seat stores. As a result of
management's reorganization plan in which it closed a substantial number of
unprofitable stores, the Company owned and operated only 375 County Seat stores
by the Fall season of 1997. This resulted in significantly more merchandise
on-hand than was needed to sell through remaining store channels. In order to
liquidate this excess merchandise, the Company will recognize lower than
anticipated recovery rates on this merchandise. The additional markdowns
anticipated to liquidate this excess inventory represent an incremental
provision in excess of the original provision normally included in cost of goods
sold. The Company utilizes various methods to dispose of excess inventory,
including clearance sales in existing and going out of business stores,
warehouse sales and sales through jobbers. Management anticipates substantially
completing this liquidation process during fiscal 1998. The unused portion of
the reserve as of January 31, 1998 was approximately $8.0 million.
F-14
<PAGE>
COUNTY SEAT STORES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9: DEBT
A.) CREDIT AGREEMENT
On October 29, 1997, the Company entered into the Credit Agreement with a
syndicate of banks, led by Bank Boston (Banks). The Credit Agreement is funded
through the Banks to provide working capital and longer-term financing. The
Credit Agreement matures October 29, 2000.
The commitment under the Credit Agreement provides for a revolving credit
facility up to $115,000,000, including a $90,000,000 letter of credit facility.
Availability under the Credit Agreement is limited to certain percentages of
eligible inventory. Availability is reduced by any amounts drawn under the
facility as well as outstanding letters of credit and bank acceptances.
Borrowings under the facility are secured by the Company's assets and guaranteed
by Trade Names. Trade Names was formed to hold trade names and service marks of
the Company.
Borrowing capacity under the Credit Agreement is subject to inventory levels
which change during periods of the year as defined below:
<TABLE>
<CAPTION>
FROM TO RATE
- --------------------------------------------------------------- ---------------------- -----
<S> <C> <C>
October 29, 1997............................................... December 15, 1997 75%
December 16, 1997.............................................. January 31, 1998 65%
Each February 1................................................ Each June 30 70%
Each July 1.................................................... Each December 15 73%
Each December 16............................................... Each January 31 65%
</TABLE>
At the option of the Company, interest is payable on borrowings under the
Credit Agreement at a prime rate plus .75% or the London Interbank Offer Rate
(LIBOR) plus 1.75%.
The Credit Agreement contains a financial covenant which requires a fixed
charge coverage ratio of 1.25:1.00 (defined as earnings before interest, taxes,
depreciation and amortization (EBITDA) divided by the sum of interest paid, cash
dividend payments, principal payments on capitalized leases, cash payment of
taxes and capital expenditures). The fixed charge coverage ratio is to be
measured quarterly, commencing with the fiscal quarter ended January 31, 1998,
using the preceding twelve month rolling average, provided that, for the first
three such fiscal quarters ending after November 2, 1997, the calculation period
for the ratio shall be the period commencing on November 3, 1997 and ending as
of the end of each of such first three fiscal quarters. The Company is in
compliance with this covenant as of January 31, 1998. The covenant was amended
for the second and third quarters of fiscal 1998 to require a fixed charge
coverage ratio of 1.00 : 1.00. Other non-financial covenants limit the amount of
debt of the Company and limit acquisitions.
F-15
<PAGE>
COUNTY SEAT STORES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9: DEBT (CONTINUED)
Loans, borrowing base and letter of credit commitments under the Credit
Agreement as of January 31, 1998 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
AT PERIOD-END
<S> <C>
Loans outstanding.................................................................. $ 0
Borrowing base..................................................................... 52,002
Available borrowing base........................................................... 31,101
Letter of credit commitments outstanding........................................... 15,674
Bank Acceptances outstanding....................................................... 1,835
DURING THE 52 WEEK PERIOD
Days loans were outstanding........................................................ 323
Maximum loan borrowing............................................................. $ 66,400
Average loan borrowing............................................................. 41,135
Weighted average interest rate..................................................... 8.72%
</TABLE>
In connection with securing the credit line, the Company incurred costs of
$1.3 million, which will be amortized on a straight-line basis over the life of
the Credit Agreement.
B.) LONG-TERM DEBT
GENERAL--As provided for in the Plan, the Company sold 85,000 units of
"12 3/4% Senior Notes due 2004 with Series A warrants to purchase shares of
common stock" on the Effective Date. Each unit has a face value of $1,000 with
interest payable each May 1 and November 1, through November 1, 2004 when the
principal amount, $85,000,000 is due. The Company deposited $15,482,100 of the
net proceeds of the Offering into an escrow account, which, together with the
proceeds from the investment thereof will pay the interest on the Notes to May
1, 1999. The net proceeds from the offering after the initial purchaser discount
of $4,250,000, fees of $125,000 and the payment to the escrow account is
$65,142,900.
The value assigned to the Series A warrants represents a discount to the
Notes of $7,647,000. In addition, the Company incurred debt issuance costs of
$6.3 million. Both the discount to the Notes and debt issuance costs will be
amortized as interest expense utilizing the effective interest rate method over
the life of the Notes.
The Notes are senior unsecured obligations of the Company, that rank senior
in right of payment to all present and future subordinated indebtedness, except
to the extent collateralized by a first priority security interest in the
security account. The Notes were issued as a private offering, and as such
cannot be traded publicly. The Company has agreed, for the benefit of all
holders of the Notes, to register the Notes under the Securities Act of 1933
within 180 days of their issuance on the necessary form to effect an exchange of
the private notes for public notes (Exchange Offer).
If the Exchange Offer registration statement is not filed within 120 days
following the Effective Date of the Plan, an additional interest of 0.50 % per
annum over and above the stated interest of 12.75% will accrue on the Notes for
the first 90 days commencing on the 120th day after the Effective Date.
Additional interest of 0.50% per annum for each subsequent 90-day period will
accrue. Further, if the Exchange Offer does not become effective 180 days after
the Effective Date, additional interest of 0.50% per annum over and above the
stated interest of 12.75% will accrue on the Notes for the first 90 days
commencing on the 180th day after the Effective Date.
F-16
<PAGE>
COUNTY SEAT STORES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9: DEBT (CONTINUED)
The additional interest penalty for failing to file within 120 days and
failing to become effective within 180 days may not exceed 1.50% per annum in
the aggregate; and provided further, that as soon as all registration defaults
have been cured additional interest on the Notes shall cease to accrue. The
penalty for failing to file within 120 days began accruing February 25, 1998 and
was cured with the filing of the S-4 on March 16, 1998. The penalty for failing
to become effective within 180 days began accruing April 26, 1998.
REDEEMABLE OPTION--The Notes will be redeemable at the option of the
Company, in whole or in part, at any time on or after November 1, 2001 at
redemption prices set below, plus accrued and unpaid interest, if any, to the
date of redemption. In addition, prior to November 1, 2001, the Company may,
subject to certain conditions, redeem up to one-third of the principal amount of
outstanding Notes with proceeds of one or more offerings of capital stock at
112.75% of the principal amount, plus accrued and unpaid interest, if any, to
the date of redemption. Upon a change of control, the Company is required to
offer to repurchase all the then outstanding Notes at 101% of the principal
amount, plus accrued and unpaid interest, if any, to the date of repurchase.
Optional Redemption:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---------------------------------------------------------------------------------- -----------
<S> <C>
2001.............................................................................. 106.3750%
2002.............................................................................. 103.1875%
2003 and thereafter............................................................... 100%
</TABLE>
Certain Covenants--The Company has agreed to certain covenants upon the sale
of the Notes, including the inability to declare or pay a dividend, or purchase
equity of the Company. The Company will not acquire additional indebtedness or
issue preferred stock. The Company is also restricted in its ability to sell the
assets of the Company, and is not permitted to sell any capital stock.
The Company's wholly-owned subsidiary, Trade Names, has guaranteed the
payment of the Notes.
F-17
<PAGE>
COUNTY SEAT STORES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEET (CONTINUED)
NOTE 10: INCOME TAXES
The Company's tax year-end is the Saturday closest to July 31. A
consolidated federal income tax return is filed. For the purpose of these
financial statements, the Company has calculated income taxes as if it filed
federal and state income tax returns for its fiscal years.
The provision (benefit) for income taxes, excluding the income tax benefit
of the extraordinary items, includes the following (in thousands):
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
13 WEEKS -------------------------------------------------
ENDED 39 WEEKS ENDED 52 WEEKS ENDED 53 WEEKS ENDED
JANUARY 31, NOVEMBER 1, FEBRUARY 1, FEBRUARY 3,
1998 1997 1997 1996
------------- --------------- --------------- ---------------
Current
<S> <C> <C> <C> <C>
Federal........................ $ 3,388 -- $ -- $ 900
State.......................... 712 -- -- 232
------------- ----- ------ ------
4,100 -- -- 1,132
------------- ----- ------ ------
------------- ----- ------ ------
Deferred
Federal........................ -- -- (664) 5,805
State.......................... -- -- (98) 695
------------- ----- ------ ------
-- -- (762) 6,500
------------- ----- ------ ------
------------- ----- ------ ------
Total............................
Federal........................ $ 3,388 -- (664) 6,705
State.......................... 712 -- (98) 927
------------- ----- ------ ------
$ 4,100 -- $ (762) $ 7,632
------------- ----- ------ ------
------------- ----- ------ ------
</TABLE>
As of October 29, 1997, the company had a net operating loss carryforward of
approximately $90,000,000. Due to the restructuring of the Company's debt and
ownership as a result of the bankruptcy proceedings, the Company's ability to
utilize the net operating losses from prior periods is significantly impaired.
Under tax law, debt forgiven in excess of value received by the lender generally
results in a reduction of the attributes (i.e. NOL's) being carried forward. In
addition, under IRC Section 382, the use of net operating loss carryover
following a change in ownership of the Company is subject to significant
limitations generally based on the value of the business before the
restructuring. Because of these limitations on the NOL's, the Company is not
anticipating the ability to use any of the loss carryovers going forward and has
not reflected any asset on the balance sheet for these NOL's.
Under SFAS No. 109, deferred taxes are determined based on the estimated
future tax effects of differences between the financial reporting and tax bases
of assets and liabilities given the provisions of the enacted laws. The Company
evaluates the recoverability of its deferred tax assets based on estimates of
future operating income. Based on these estimates and in consideration of the
Company's Chapter 11 filing, the Company recorded a valuation reserve against
the entire balance of deferred tax assets as of
F-17
<PAGE>
COUNTY SEAT STORES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEET (CONTINUED)
NOTE 10: INCOME TAXES (CONTINUED)
January 31, 1998, November 1, 1997 and February 1, 1997. The net deferred tax
asset is comprised of the following (in thousands):
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
-----------
JANUARY 31, NOVEMBER 1, FEBRUARY 1,
1998 1997 1997
----------- ----------- -----------
Current deferred taxes:
<S> <C> <C> <C>
Gross assets............................................... $ 8,241 $ 12,242 $ 35,973
Gross liabilities.......................................... -- -- (227)
Valuation allowance........................................ (8,241) (12,242) (35,746)
----------- ----------- -----------
Total current deferred taxes......................... -- -- --
----------- ----------- -----------
----------- ----------- -----------
Non-current deferred taxes:
Gross assets............................................... 3,291 3,365 6,492
Gross liabilities.......................................... (23) -- --
Valuation allowance........................................ (3,268) (3,365) (6,492)
----------- ----------- -----------
Total non-current deferred taxes..................... -- -- --
----------- ----------- -----------
Total deferred taxes................................. -- -- --
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The tax effect of significant temporary differences representing deferred
tax assets and liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
-----------
JANUARY 31, NOVEMBER 1, FEBRUARY 1,
1998 1997 1997
----------- ----------- -----------
Net operating losses....................................... -- -- $ 20,885
<S> <C> <C> <C>
Lease settlement reserve................................... 115 39 9,984
Depreciation............................................... 3,007 3,182 2,999
Accrued rent............................................... 69 0 2,458
Other restructuring reserves............................... 2,660 6,020 1,814
Book accruals.............................................. 1,153 1,171 1,506
Acquisition related reserves............................... -- 0 1,170
Inventory valuation........................................ 3,869 4,638 817
Deferred revenue........................................... 375 375 400
Other...................................................... 261 182 205
----------- ----------- -----------
Temporary differences...................................... 11,509 15,607 42,238
Valuation allowance........................................ (11,509) 15,607 (42,238)
----------- ----------- -----------
Net deferred tax assets.................................... -- -- --
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
F-18
<PAGE>
COUNTY SEAT STORES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEET (CONTINUED)
NOTE 10: INCOME TAXES (CONTINUED)
The Company's effective income tax rate was different than the statutory
federal income tax rate for the following reasons (in thousands):
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
-------------------------------------------
39 WEEKS 52 WEEKS 53 WEEKS
13 WEEKS ENDED ENDED ENDED ENDED
JANUARY 31, NOVEMBER 1, FEBRUARY 1, FEBRUARY 3,
1998 1997 1997 1996
--------------- ------------- ------------- -------------
Federal income taxes (benefit) at
statutory rate.................. $ 2,981 $ (20,190) $ (25,479) $ (26,996)
<S> <C> <C> <C> <C>
State taxes (benefit), net of
federal income tax benefit...... 712 (1,731) (3,747) (3,970)
Valuation allowance............... -- 21,875 28,476 8,605
Tax effect of nondeductible
amortization expense and
write-off related to goodwill... 395 -- 29,762
Tax effect of amortization of
discount on long-term debt...... -- -- 131
Other............................. 12 46 (12) 100
------ ------------- ------------- -------------
Income tax provision (benefit).... $ 4,100 $ 0 $ (762) $ 7,632
------ ------------- ------------- -------------
------ ------------- ------------- -------------
</TABLE>
NOTE 11: SHAREHOLDERS' EQUITY
Pursuant to the Plan the Company has amended and restated the articles of
incorporation and bylaws of the Company. As such, the Company's authorized
capital stock consists of 40,000,000 shares of common stock and 1,000,000 shares
of preferred stock, par value $.01 per share.
COMMON STOCK--20,000,000 shares of common stock were granted to creditors
holding impaired claims (see Note 2 for a further explanation). In addition, (i)
2,285,718 shares of common stock are reserved for issuance upon the exercise of
the Series A warrants, (ii) 3,000,000 shares of common stock are reserved for
issuance upon the exercise of the Series B warrants, subject to dilution by the
Series A warrants, the additional warrant, the Series C warrants, and options to
purchase common stock to be granted to certain employees and directors of the
Company, (iii) shares of common stock constituting 15% of the common stock are
reserved for issuance upon exercise of the Series C warrants (as defined
herein), subject to dilution by the Series A warrants, the additional warrant,
and options to purchase common stock to be granted to certain employees and
directors of the Company, and (iv) 571,429 shares of common stock are reserved
for issuance upon the exercise of the additional warrant. The holders of the
common stock are
entitled to one vote for each share of common stock.
PREFERRED STOCK--Preferred stock may be issued from time to time by the
board of directors as shares of one or more series, subject to the provisions of
the articles of incorporation. Currently, the Company has no plans to issue any
shares of preferred stock.
WARRANTS
a) SERIES A WARRANTS--Each unit of the Notes have attached a Series A
warrant to purchase 26.8908 shares of the Company's common stock at an exercise
price of $.01 (See Note 9: Debt, b) Long-Term Debt
F-19
<PAGE>
COUNTY SEAT STORES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEET (CONTINUED)
NOTE 11: SHAREHOLDERS' EQUITY (CONTINUED)
for further discussion). The value of these warrants of $7.6 million is
presented as a discount to the Notes and as paid-in capital in the accompanying
consolidated balance sheet.
b) SERIES B WARRANTS--As provided for in the Plan, old preferred
stockholders are entitled to receive warrants to purchase up to 3,000,000 shares
of the Company's common stock, exercisable over a seven-year period in three
equal tranches (See Note 2 for further discussion). The value of these warrants
of $1.6 million is included in Excess Reorganization Value and paid-in capital
in excess of par value in the accompanying consolidated balance sheet.
c) SERIES C WARRANTS--Pursuant to a warrant agreement between the Company
and Mr. Sam Forman (Mr. Forman), Mr. Forman received on the Effective Date,
warrants to purchase 15% of the common stock, subject to dilution only by the
Series A Warrants and by certain options to purchase common stock that may be
granted to certain directors of the Company. The warrants vest in three equal
tranches. The first vested on the Effective Date, the second on the first
anniversary of the Effective Date and the third on the third anniversary date.
The exercise price of the Series C warrants for the three tranches will
represent a recovery to the holders of general unsecured claims under the Plan
of 40%, 70% and 90%, respectively. However, if for any consecutive ten trading
days during the term of the Series C warrant the product of (i) the average
value per share of the common stock and (ii) the number of shares of common
stock outstanding (including shares reserved for warrants other than the Series
C warrants) exceeds $200 million, the exercise price for the first tranche of
Series C warrants shall be $0. (See Note 15: Stock-Based Employee Compensation)
d) ADDITIONAL WARRANT--In connection with the offering, the Company issued
to the initial purchaser of the senior debt an additional Series A warrant to
purchase up to 571,429 shares of the Company's common stock. The value of this
warrant of $1.9 million is included in debt issuance costs and paid-in capital
in excess of par value in the accompanying consolidated balance sheet.
NOTE 12: COMMITMENTS AND CONTINGENCIES
a) LEASES--The Company's leases are principally for the use of retail store
facilities and equipment and certain non-store equipment and are generally for a
period of up to ten years. Most store leases are net leases which require the
Company to pay real estate taxes, maintenance costs, insurance and other
operating costs. Rent payments are based upon a combination of fixed rentals
(subject to escalation) and rentals contingent upon sales levels.
The Company can reject executory contracts, including leases, under the
relevant provisions of the Bankruptcy Code. Prior to the Effective Date, the
Company rejected certain leases on stores, which they
F-20
<PAGE>
COUNTY SEAT STORES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEET (CONTINUED)
NOTE 12: COMMITMENTS AND CONTINGENCIES (CONTINUED)
intend to close subsequent to January 1998. The minimum annual rental
commitments, giving effect to rejected leases, at January 31, 1998 are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
YEAR PAYMENTS
- ----------------------------------------------------------------------------------- -----------
<S> <C>
1998............................................................................... $ 31,451
1999............................................................................... 30,229
2000............................................................................... 26,164
2001............................................................................... 22,089
2002............................................................................... 17,596
Thereafter......................................................................... 29,769
</TABLE>
LITIGATION--The Company has been named as a defendant in certain legal
proceedings. Although the outcome of these matters cannot be determined, the
Company believes the disposition of these proceedings will not materially affect
the financial position or results of operations of the Company.
On or about September 29, 1997, RAI Credit Corporation (RAI) filed an
adversary proceeding against the Company in the Court. The Company and RAI had
entered into an Account Purchase and Service Agreement dated July 11, 1997
(Agreement) pursuant to which RAI had agreed to establish and service a
private-label credit card program for the Company. In September 1997, the
Company notified RAI that it was terminating the Agreement on the ground that
RAI had materially breached and failed to perform under the Agreement. RAI's
complaint alleges that the Company wrongfully terminated the Agreement and seeks
compensatory damages of not less than $10,741,960 and an injunction prohibiting
the Company from entering into a private-label credit card program with any
entity other than RAI prior to the beginning of 1999, as well as attorneys' fees
and costs.
The Company believes that it has meritorious defenses to RAI's complaint and
counterclaims against RAI, which it intends to pursue vigorously. Although the
ultimate outcome of the litigation cannot be predicted at this time, management
believes that any resolution of this matter will not have a material adverse
effect on the Company's financial position or future results of operations.
NOTE 13: RELATED PARTY TRANSACTIONS
Mr. Forman is chairman of the board of directors and owns, together with his
family, 70% of the voting securities of Forman Enterprises. Forman Enterprises
owns and operates approximately 60 factory outlet stores that sell casual
apparel similar to that sold by the Company. Mr. Forman's sons, Brett Forman and
Richard Forman, and his daughter, Wendy Forman, have relationships with both the
Company and with Forman Enterprises.
The Company has engaged Forman Enterprises to perform certain consulting
services for the Company. The Company entered into a consulting agreement with
Forman Enterprises to provide the Company with sourcing, merchandising,
budgeting, store management, and related services for a payment of $40,000 per
month. Certain employees of Forman Enterprises will provide such services to the
Company, and the Company will reimburse Forman Enterprises for the salary of
these employees for the time spent working, based on a fixed percentage. In
1997, the Company purchased $1,666,827 of merchandise and paid consulting fees
and related expenses of $321,739 to Forman Enterprises.
Thirty percent of the equity of Forman Enterprises is owned by Mr. Larry
Ashinoff, (Mr. Ashinoff). Coronet, an entity controlled by Mr. Ashinoff, sells
merchandise to both the Company and Forman
F-21
<PAGE>
COUNTY SEAT STORES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEET (CONTINUED)
NOTE 13: RELATED PARTY TRANSACTIONS (CONTINUED)
Enterprises. In addition, Forman Enterprises and the Company utilize many of the
same suppliers. During 1997, payments for merchandise to Coronet totaled
approximately $762,000.
Felenstein, Koniver & Associates (FKA) was engaged by the Company in 1997 to
act as a real estate consultant to the Company for a fee of $3,000 a month, plus
a success fee of $3,000 for each lease completed by the Company and arranged by
FKA. In fiscal year 1997, the Company entered into 27 leases that were arranged
by FKA. Total payments to FKA in 1997 were $117,219. Mr. Felenstein, a member of
the Company's board of directors, is a principal of FKA.
The Company's legal counsel is Eaton & Van Winkle, who also provide personal
legal counsel to Mr. Forman. Work performed by Eaton & Van Winkle, includes Mr.
Forman's employment contract with the Company.
NOTE 14: RETIREMENT PLAN
The Company has an Employee 401(k) Savings Plan (the 401K Plan), which is
independently administered. All employees consistently working a minimum of
20-hour weeks and completing one year of service, as defined in the plan
document, are eligible to participate in the 401(K) Plan. The Company is
required to match 25% of the first 6% of compensation contributed by each
employee.
NOTE 15: STOCK-BASED EMPLOYEE COMPENSATION
Pursuant to the Plan and a warrant agreement, the Company granted Mr. Forman
warrants to purchase 15% of the common stock of the Company (See Note 11,
- --Series C Warrants). As such, these warrants represent Stock-Based Employee
Compensation (Stock Compensation) as defined by APB Opinion No. 25.
As the exercise price is not currently determinable and a measurement date
did not occur, the Company is unable to record compensation expense with respect
to the Series C Warrants in accordance with APB Opinion No. 25. In addition,
management is unable to provide the disclosures required by SFAS No. 123 as a
measurement date has not occurred.
NOTE 16: SUBSIDIARY GUARANTOR
CSS Trade Names, Inc. (Trade Names), a wholly-owned subsidiary, owns the
County Seat Stores, Inc.'s service marks and licenses the rights to the Company.
Trade Names guaranteed repayment of the Notes and indebtedness arising from
borrowings under the Company's Credit Agreement (see Note 9). Trade Names is not
an active Company, and as such, their financial statements are not presented
herein.
NOTE 17: EARNINGS PER SHARE
In 1997, the FASB issued SFAS No. 128, "Earnings Per Share." This statement
revises the manner in which earnings per share ("EPS") is calculated, replacing
the presentation of Primary EPS with a presentation of Basic EPS. For entities
with complex capital structures, the statement requires the dual presentation of
both Basic EPS and Diluted EPS on the face of the statement of operations. Under
this statement, Basic EPS is computed on the weighted average number of shares
actually outstanding during
F-22
<PAGE>
COUNTY SEAT STORES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEET (CONTINUED)
NOTE 17: EARNINGS PER SHARE (CONTINUED)
the year. Diluted EPS includes the effect of potential dilution from the
exercise of outstanding dilutive stock warrants into common stock using the
treasury stock method.
<TABLE>
<CAPTION>
FOR THE 13 WEEKS ENDED JANUARY 31, 1998
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
---------------------------------------------
INCOME SHARES
(NUMERATOR) (DENOMINATOR) PER SHARE
------------- --------------- -------------
<S> <C> <C> <C>
Basic EPS............................................................. $ 4,554 20,000 $ .23
---
---
Effect of Dilutive Stock Warrants..................................... 2,849
------ ------
Diluted EPS........................................................... $ 4,554 22,849 $ .20
------ ------ ---
------ ------ ---
</TABLE>
NOTE 18: REORGANIZATION IN EXCESS OF AMOUNTS ALLOCATED TO IDENTIFIED ASSETS
Fresh Start Accounting results in a revaluation of the Company's assets and
liabilities as of the Effective Date to reflect the estimated fair market values
of those assets and liabilities in conformity with the procedures specified by
Accounting Principles Board (APB) No. 16, "Business Combinations." The valuation
differences are charged to the Excess Reorganization Value account. The Excess
Reorganization Value is amortized over 15 years. The balance and changes to the
Excess Reorganization Value account is presented as follows:
<TABLE>
<CAPTION>
AMOUNT
----------
<S> <C>
November 1, 1997 Balance.......................................................... $ 69,643
Adjustments to Excess Reorganization Value:
Elimination of valuation allowance on deferred tax assets realized.............. (4,098)
Amortization of Excess Reorganization Value..................................... (1,161)
Other adjustments............................................................... (1,424)
----------
January 31, 1998 Balance.......................................................... $ 62,960
----------
----------
</TABLE>
NOTE 19: SUBSEQUENT EVENT
In connection with the closing of the Company's current distribution center
in Brooklyn Park, Minnesota during the early summer of 1998, on February 26,
1998 the Company signed a ten-year lease agreement for a new distribution center
located near Baltimore, Maryland. Aggregate base rental commitments are $11.3
million.
F-23
<PAGE>
COUNTY SEAT STORES, INC. AND SUBSIDIARY
(DEBTOR-IN-POSSESSION)
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE 52 WEEKS ENDED FEBRUARY 1, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA AS
HISTORICAL ADJUSTMENTS ADJUSTED
---------- ----------- ----------
<S> <C> <C> <C>
Net sales................................................................ $ 538,260 $(156,741)(a) $ 381,519
Cost of sales, including buying and occupancy............................ 416,389 (132,651)(a) 283,738
---------- ----------- ----------
Gross profit........................................................... 121,871 (24,090) 97,781
Selling, general and administrative expenses............................. 126,561 (39,118)(a) 82,243
(300)(b)
(4,900)(c)
Depreciation and amortization............................................ 11,051 (3,444)(d) 11,882
4,275(e)
Reorganization costs..................................................... 43,752 (43,752)(f) --
Interest expense, net.................................................... 15,445 (2,557)(g) 12,888
---------- ----------- ----------
Loss before income taxes and extraordinary item........................ (74,938) 65,706 (9,232)
Income taxes (benefit)................................................... (762) -- (762)
---------- ----------- ----------
Loss before extraordinary item......................................... $ (74,176) $ 65,706 (8,470)
---------- ----------- ----------
---------- ----------- ----------
Other Data:
EBITDA(h).............................................................. $ (4,690) $ 15,538
---------- ----------
---------- ----------
</TABLE>
- ------------------------
(a) Reflects the elimination of results related to the 341 closed or decided to
be closed stores from the beginning of 1996 through the end of 1997 and the
consolidation of certain regional offices.
(b) Reflects the planned closing of the Dallas and Minneapolis corporate offices
and the opening of the Company's new corporate headquarters in New York.
(c) Reflects the adjustment to rent expense to reflect leases modified pursuant
to the Plan of Reorganization.
(d) Reflects the reduction in depreciation expense related to property and
equipment of closed stores and the write-off of assets recorded as a
component of reorganization costs associated with closed stores, assuming
closure occurred February 4, 1996.
(e) Reflects the amortization of the Reorganization Value in Excess of Amounts
Allocated to Identified Assets over a 15 year period, assuming fresh start
accounting was recorded as of February 4, 1996.
(f) Reflects the elimination of the provision for reorganization costs
associated with store closures and professional fees and other expenses
associated with the Chapter 11 case, assuming the Plan of Reorganization was
implemented on February 4, 1996.
(g) Reflects the adjustment to interest expense, amortization of debt issuance
costs, and amortization of the debt discount to reflect restructured
capitalization of the Company related to the Private Note Offering and the
Senior Credit Facility.
(h) EBITDA represents income (loss) before interest, income taxes, depreciation
and amortization and reorganization costs. EBITDA is presented here to
provide additional information about the Company's operations. EBITDA is not
a measure of financial performance in accordance with Generally Accepted
Accounting Principles (GAAP) and should not be considered as an alternative
to (i) net income (loss) as a measure of performance (or any other measure
of performance under GAAP) or (ii) cash flows from operating, investing, or
financing activities as an indicator of cash flows or as a measure of
liquidity.
PF-1
<PAGE>
COUNTY SEAT STORES, INC. AND SUBSIDIARY
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE 52 WEEKS ENDED JANUARY 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA AS
HISTORICAL ADJUSTMENTS ADJUSTED
---------- ----------- ----------
<S> <C> <C> <C>
Net sales................................................................. $ 394,584 $ (52,360)(a) $ 342,224
Cost of sales, including buying and occupancy............................. 276,180 (41,926)(a) 234,254
Cost of sales, special charge............................................. 11,975 (11,975) --
---------- ----------- ----------
Gross profit.......................................................... 106,429 1,541 107,970
Selling, general and administrative expenses.............................. 100,654 (9,732)(a) 87,022
(300)(b)
(3,600)(c)
Depreciation and amortization............................................. 9,091 (4,403)(d) 8,963
4,275(e)
Reorganization costs...................................................... 38,405 (38,405)(f) --
Interest expense, net..................................................... 7,312 6,072(g) 13,384
---------- ----------- ----------
Loss before income taxes.............................................. (49,033) 47,634 (1,399)
Income taxes (benefit).................................................... 4,100 (4,100) --
---------- ----------- ----------
Net loss.............................................................. $ (53,133) $ 51,734 $ (1,399)
---------- ----------- ----------
---------- ----------- ----------
Other Data:
EBITDA (h).............................................................. $ 5,775 $ 20,948
---------- ----------
---------- ----------
</TABLE>
- ------------------------
(a) Reflects the elimination of results related to the 137 closed or decided to
be closed stores during the 52-week period and the consolidation of certain
regional offices.
(b) Reflects the planned closing of the Dallas and the Minneapolis corporate
offices and the opening of the Company's new corporate headquarters in New
York.
(c) Reflects the adjustment to rent expense to reflect leases modified pursuant
to the Plan of Reorganization.
(d) Reflects the reduction in depreciation expense related to property and
equipment of closed stores and the write-off of assets recorded as a
component of reorganization costs associated with closed stores, assuming
closure occurred February 2, 1997.
(e) Reflects the amortization of the Reorganization Value in Excess of Amounts
Allocated to Identified Assets, over a 15 year period, assuming fresh start
accounting was recorded as of February 2, 1997.
(f) Reflects the elimination of the provision for reorganization costs
associated with store closures and professional fees and other expenses
associated with the Chapter 11 case, assuming the Plan of Reorganization was
implemented on February 2, 1997.
(g) Reflects the adjustment to interest expenses, amortization of debt issuance
costs, and amortization of the debt discount to reflect restructured
capitalization of the Company related to the Private Note Offering and the
Senior Credit Facility.
(h) EBITDA represents income (loss) before interest, income taxes, depreciation
and amortization and reorganization costs. EBITDA is presented here to
provide additional information about the Company's operations. EBITDA is not
a measure of financial performance in accordance with GAAP and should not be
considered as an alternative to (i) net income (loss) as a measure of
performance (or any other measure of performance under GAAP) or (ii) cash
flows from operating, investing, or financing activities as an indicator of
cash flow or as a measure of liquidity.
PF-2
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY OF THE
NOTES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF.
UNTIL 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE EXCHANGE
NOTES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Notice to Investors....................................................... i
Special Note Regarding Forward-Looking Statements......................... ii
Available Information..................................................... iii
Summary................................................................... 1
Risk Factors.............................................................. 15
No Cash Proceeds to the Company........................................... 23
Price Range of the Private Notes.......................................... 23
Capitalization............................................................ 24
Use of Proceeds........................................................... 24
Selected Historical Financial Data........................................ 25
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 27
Business.................................................................. 35
Management................................................................ 43
Certain Relationships..................................................... 48
Principal Stockholders.................................................... 50
The Exchange Offer........................................................ 50
Description of the Notes.................................................. 57
Certain Provisions of the Articles of Incorporation and By-laws........... 83
Certain Provisions of the Minnesota Business Corporation Act.............. 84
Plan of Reorganization.................................................... 84
Description of Certain Indebtedness....................................... 85
Description of Capital Stock.............................................. 86
Plan of Distribution...................................................... 87
Certain U.S. Federal Income Tax Considerations............................ 88
Legal Matters............................................................. 91
Experts................................................................... 91
Index to Financial Statements, Pro Forma Financial Statements, and
Financial Projections................................................... I-1
Financial Statements...................................................... F-1
Pro Forma Financial Statements............................................ PF-1
</TABLE>
OFFER TO EXCHANGE
12 3/4% SENIOR NOTES
DUE 2004
FOR ALL OUTSTANDING
12 3/4% SENIOR NOTES
DUE 2004
($85,000,000 PRINCIPAL
AMOUNT OUTSTANDING)
OF
COUNTY SEAT STORES, INC. , 1998
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
MINNESOTA BUSINESS CORPORATION ACT
Under Section 302A.521 of the MBCA, a corporation shall indemnify a past or
present director, officer or employee who is made or threatened to be made a
party to a proceeding by reason of actions undertaken in the person's official
capacity. Such persons shall be indemnified against judgments, penalties, fines
(including, without limitation, excise taxes assessed against the person with
respect to an employee benefit plan), settlements, and reasonable expenses,
including attorneys' fees and disbursements, incurred in connection with the
proceeding, as long as the person: (1) has not been indemnified by another
organization or employee benefit plan against the same items arising out of the
same acts or omissions; (2) acted in good faith; (3) received no improper
personal benefit and, if there was a conflict of interest, statutory procedures
were followed; (4) in the case of a criminal proceeding, had no reasonable cause
to believe the conduct was unlawful; and (5) reasonably believed that his/her
conduct was in the best interests of the corporation (or where any such person
was acting on the behest of the corporation as a director, officer, employee or
agent of another entity, the person reasonably believed that the conduct was not
opposed to the best interests of the corporation). Eligibility for
indemnification is determined by the board, a committee or special legal counsel
under procedures specified by the statute.
Nothing in the statute shall be construed to limit the power of the
corporation to indemnify persons other than a director, officer, employee, or
member of a committee of the board of the corporation by contract or otherwise.
MBCA Section 302A.521 also permits the reimbursement of an indemnified
person by the corporation of reasonable expenses (including attorneys' fees and
disbursements) incurred by the person in advance of the final disposition of the
proceeding, upon compliance with certain statutory procedures. The corporation
may also reimburse expenses, including attorneys' fees and disbursements,
incurred by a person in connection with an appearance as a witness in a
proceeding at a time when the person has not been made or threatened to be made
a party to a proceeding.
A corporation's articles or bylaws may prohibit, limit or impose conditions
on indemnification or advances of expenses otherwise required by Section
302A.521 if the prohibition, limitation or conditions apply equally to all
persons or to all persons within a given class. No such prohibition or limit on
indemnification may affect the right of a person to indemnification or advances
of expenses with respect to any acts or omissions of the person occurring prior
to the effective date of the prohibition or limit on indemnification or
advances.
A corporation may purchase and maintain insurance on behalf of a person in
that person's official capacity against any liability asserted against and
incurred by the person in or arising from that capacity, whether or not the
corporation would have been required to indemnify the person against the
liability under the provisions of this section.
A corporation that indemnifies or advances expenses to a person in
accordance with Section 302A.521 in connection with a proceeding by or on behalf
of the corporation shall report to the shareholders in writing the amount of the
indemnification or advance and to whom and on whose behalf it was paid not later
than the next meeting of shareholders.
II-1
<PAGE>
AMENDED AND RESTATED ARTICLES OF INCORPORATION
The Company's Amended and Restated Articles of Incorporation provide that
the Company shall indemnify its directors and officers and any other permitted
persons to the fullest extent permitted by Section 302A.521 of the MBCA.
The Company maintains policies insuring its officers and directors against
certain civil liabilities, including liabilities under the Securities Act.
Pursuant to the Registration Rights Agreement, the Company has agreed to
indemnify holders of registrable Notes against certain liabilities. Also
pursuant to the Registration Rights Agreement, the Company and certain
broker-dealers, including certain persons associated with such broker-dealers,
have agreed to indemnify each other against certain liabilities.
ITEM 21. EXHIBITS AND FINANCIAL SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT PAGE
NO. DESCRIPTION NO.
- --------- ------------------------------------------------------------------------------------------------- -----
<C> <S> <C>
2.1+ First Amended Plan of Reorganization of County Seat Stores, Inc., dated August 22, 1997.
2.2+ Order of United States Bankruptcy Court, dated October 1, 1997, confirming First Amended Plan of
Reorganization of County Seat Stores, Inc.
3.1+ Articles of Amendment and Restatement of the Articles of Incorporation of County Seat Stores,
Inc.
3.2+ Amended and Restated Bylaws of County Seat Stores, Inc.
4.1+ Indenture, dated as of October 29, 1997 between County Seat Stores, Inc. and First Trust National
Association as Trustee, with respect to $85,000,000 principal amount of 12 3/4% Senior Notes due
November 1, 2004 and Series A Common Stock Purchase Warrants.
4.2+ Specimen Certificate of 12 3/4% Senior Notes due November 1, 2004 (the "Private Notes") (included
in Exhibit 4.1 hereto).
4.3+ Specimen Certificate of 12 3/4% Senior Notes due November 1, 2004 (the "Exchange Notes")
(included in Exhibit 4.1 hereto).
4.4+ Series A Warrant Agreement, dated as of October 29, 1997 between County Seat Stores, Inc. and
First National Trust.
4.5+ Form of Series A Warrant Certificate.
4.6+ Subsidiary Guarantee of CSS Trade Names, Inc. with Respect to Indenture dated as of October 29,
1997.
4.7+ Registration Rights Agreement dated October 29, 1997 between County Seat Stores, Inc. and
Jefferies & Company, Inc.
4.8+ Security Agreement dated October 29, 1997 between County Seat Stores, Inc. and First National
Trust Association.
*5.1 Opinion of Eaton & Van Winkle with respect to the validity of the Exchange Notes.
10.1+ Loan and Security Agreement dated October 29, 1997 between BankBoston Retail Finance, Inc. and
County Seat Stores, Inc.
10.2+ Revolving Credit Note dated December 11, 1997 between BankBoston Retail Finance, Inc. and Count
Seat Stores, Inc.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT PAGE
NO. DESCRIPTION NO.
- --------- ------------------------------------------------------------------------------------------------- -----
<C> <S> <C>
10.3+ Revolving Credit Note dated December 11, 1997 between BankAmerica Business Credit, Inc. and
County Seat Stores, Inc.
10.4+ Revolving Credit Note dated December 11, 1997 between Congress Financial Corporation Central and
County Seat Stores, Inc.
10.5+ Revolving Credit Note dated December 11, 1997 between Foothill Capital Corporation and County
Seat Stores, Inc.
10.6+ Revolving Credit Note dated December 11, 1997 FINOVA Capital Corporation and County Seat Stores,
Inc.
10.7+ Revolving Credit Note dated December 11, 1997 between The CIT Group/Business Credit, Inc. and
County Seat Stores, Inc.
10.8+ Non-Encumbrance Agreement dated October 29, 1997 between BankBoston Retail Finance, Inc. and
County Seat Stores, Inc.
10.9+ Trademark and Trademark Applications Security Agreement dated October 29, 1997 between BankBoston
Retail Finance, Inc. and County Seat Stores, Inc.
10.10+ Copyright and Copyright Applications Security Agreement dated October 29, 1997 between BankBoston
Retail Finance, Inc. and County Seat Stores, Inc.
10.11+ Form of Guaranty between BankBoston Retail Finance, Inc. and County Seat Stores, Inc.
10.12+ Form of Trademark and Trademark Applications Security Agreement between BankBoston Retail
Finance, Inc. and CSS Trade Names, Inc.
10.13+ Form of Trademark License Agreement between Levi Strauss & Co. and County Seat Stores, Inc.
10.14+ Lease Agreement dated June 30, 1990 by and between CB Institutional Fund VIII and County Seat
Stores, Inc. incorporated herein by reference to the Company's Registration Statement on Form
S-1. (No. 33-66868).
10.15+ Consulting Agreement dated November 14, 1997, between County Seat Stores, Inc. and Forman
Enterprises, Inc.
10.16+ Consulting Agreement dated July 30, 1996, between County Seat Stores, Inc. and Retail Consulting
Services, Inc.
10.17+ Amendment to Consulting Agreement dated March 12, 1997, between County Seat Stores, Inc. and
Retail Consulting Services, Inc.
10.18+ Employment Agreement dated August 11, 1997, between Sam Forman and County Seat Stores, Inc.
11.1 Statement re: Computation of Earnings per share of Common Stock.
12.1++ Statement re: Computation of Ratio of Earnings to Fixed Charges.
21.1+ Subsidiaries of the Registrant.
*23.1 Consent of Eaton & Van Winkle (included in their opinion filed as Exhibit 5.1 hereto).
23.2++ Consent of Arthur Andersen L.L.P.
24.1+ Power of Attorney of County Seat Stores, Inc. (included on signature page to this Registration
Statement on S-4).
25.2+ Statement of Eligibility and Qualification (Form T-1) under Trust Indenture Act of 1939 of First
Trust National Association.
27.1++ Financial Data Schedule.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT PAGE
NO. DESCRIPTION NO.
- --------- ------------------------------------------------------------------------------------------------- -----
<C> <S> <C>
*99.1 Form of Letter of Transmittal.
*99.2 Form of Notice of Guaranteed Delivery.
*99.3 Form of Exchange Agent Agreement.
</TABLE>
- ------------------------
* To be filed by amendment.
+ Previously filed.
++ Replaces a previously filed exhibit.
ITEM 22. UNDERTAKINGS
1. The undersigned registrants hereby undertake that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrants' 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.
2. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suite or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
offered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
3. The undersigned registrants hereby undertake 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.
4. The undersigned registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
Company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on May 29, 1998.
COUNTY SEAT STORES, INC.
BY: /S/ BRETT D. FORMAN, ATTORNEY IN FACT
------------------------------------------
Sam Forman
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
/s/ BRETT D. FORMAN, ATTORNEY President; Chief Executive
IN FACT Officer; Director
- ------------------------------ May 29, 1998
Sam Forman
/s/ BRETT D. FORMAN Executive Vice President;
- ------------------------------ Director May 29, 1998
Brett D. Forman
/s/ BRETT D. FORMAN, ATTORNEY Senior Vice President;
IN FACT Chief Financial Officer;
- ------------------------------ Treasurer May 29, 1998
Paul J. Kittner
/s/ BRETT D. FORMAN, ATTORNEY Director
IN FACT
- ------------------------------ May 29, 1998
John S. Belisle
/s/ BRETT D. FORMAN, ATTORNEY Director
IN FACT
- ------------------------------ May 29, 1998
Marshall Felenstein
/s/ BRETT D. FORMAN, ATTORNEY Director
IN FACT
- ------------------------------ May 29, 1998
Faith Larsen
/s/ BRETT D. FORMAN, ATTORNEY Director
IN FACT
- ------------------------------ May 29, 1998
John Meinert
/s/ BRETT D. FORMAN, ATTORNEY Director
IN FACT
- ------------------------------ May 29, 1998
M. Brent Stevens
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on May 29, 1998.
CSS TRADE NAMES, INC.
BY: /S/ BRETT D. FORMAN, ATTORNEY IN FACT
------------------------------------------
Sam Forman
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
/s/ BRETT D. FORMAN, ATTORNEY President; Chief Executive
IN FACT Officer; Director
- ------------------------------ May 29, 1998
Brett D. Forman, Attorney in
Fact
/s/ BRETT D. FORMAN Senior Vice President;
- ------------------------------ Director May 29, 1998
Brett D. Forman
/s/ BRETT D. FORMAN, ATTORNEY Senior Vice President;
IN FACT Chief Financial Officer;
- ------------------------------ Director May 29, 1998
Paul J. Kittner
/s/ BRETT D. FORMAN, ATTORNEY Executive Vice President;
IN FACT Director
- ------------------------------ May 29, 1998
Paul Roth
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NO. DESCRIPTION NO.
- ----------- ----------------------------------------------------------------------------------------------- -----------
<C> <S> <C>
2.1+ First Amended Plan of Reorganization of County Seat Stores, Inc., dated August 22, 1997.
2.2+ Order of United States Bankruptcy Court, dated October 1, 1997, confirming First Amended Plan
of Reorganization of County Seat Stores, Inc.
3.1+ Articles of Amendment and Restatement of the Articles of Incorporation of County Seat Stores,
Inc.
3.2+ Amended and Restated Bylaws of County Seat Stores, Inc.
4.1+ Indenture, dated as of October 29, 1997 between County Seat Stores, Inc. and First Trust
National Association as Trustee, with respect to $85,000,000 principal amount of 12 3/4% Senior
Notes due November 1, 2004 and Series A Common Stock Purchase Warrants.
4.2+ Specimen Certificate of 12 3/4% Senior Notes due November 1, 2004 (the "Private Notes")
(included in Exhibit 4.1 hereto).
4.3+ Specimen Certificate of 12 3/4% Senior Notes due November 1, 2004 (the "Exchange Notes")
(included in Exhibit 4.1 hereto).
4.4+ Series A Warrant Agreement, dated as of October 29, 1997 between County Seat Stores, Inc. and
First National Trust.
4.5+ Form of Series A Warrant Certificate.
4.6+ Subsidiary Guarantee of CSS Trade Names, Inc. with Respect to Indenture dated as of October 29,
1997.
4.7+ Registration Rights Agreement dated October 29, 1997 between County Seat Stores, Inc. and
Jefferies & Company, Inc.
4.8+ Security Agreement dated October 29, 1997 between County Seat Stores, Inc. and First National
Trust Association.
*5.1 Opinion of Eaton & Van Winkle with respect to the validity of the Exchange Notes.
10.1+ Loan and Security Agreement dated October 29, 1997 between BankBoston Retail Finance, Inc. and
County Seat Stores, Inc.
10.2+ Revolving Credit Note dated December 11, 1997 between BankBoston Retail Finance, Inc. and Count
Seat Stores, Inc.
10.3+ Revolving Credit Note dated December 11, 1997 between BankAmerica Business Credit, Inc. and
County Seat Stores, Inc.
10.4+ Revolving Credit Note dated December 11, 1997 between Congress Financial Corporation Central
and County Seat Stores, Inc.
10.5+ Revolving Credit Note dated December 11, 1997 between Foothill Capital Corporation and County
Seat Stores, Inc.
10.6+ Revolving Credit Note dated December 11, 1997 FINOVA Capital Corporation and County Seat
Stores, Inc.
10.7+ Revolving Credit Note dated December 11, 1997 between The CIT Group/Business Credit, Inc. and
County Seat Stores, Inc.
10.8+ Non-Encumbrance Agreement dated October 29, 1997 between BankBoston Retail Finance, Inc. and
County Seat Stores, Inc.
10.9+ Trademark and Trademark Applications Security Agreement dated October 29, 1997 between
BankBoston Retail Finance, Inc. and County Seat Stores, Inc.
10.10+ Copyright and Copyright Applications Security Agreement dated October 29, 1997 between
BankBoston Retail Finance, Inc. and County Seat Stores, Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT PAGE
NO. DESCRIPTION NO.
- ----------- ----------------------------------------------------------------------------------------------- -----------
<C> <S> <C>
10.11+ Form of Guaranty between BankBoston Retail Finance, Inc. and County Seat Stores, Inc.
10.12+ Form of Trademark and Trademark Applications Security Agreement between BankBoston Retail
Finance, Inc. and CSS Trade Names, Inc.
10.13+ Form of Trademark License Agreement between Levi Strauss & Co. and County Seat Stores, Inc.
10.14+ Lease Agreement dated June 30, 1990 by and between CB Institutional Fund VIII and County Seat
Stores, Inc. incorporated herein by reference to the Company's Registration Statement on Form
S-1. (No. 33-66868).
10.15+ Consulting Agreement dated November 14, 1997, between County Seat Stores, Inc. and Forman
Enterprises, Inc.
10.16+ Consulting Agreement dated July 30, 1996, between County Seat Stores, Inc. and Retail
Consulting Services, Inc.
10.17+ Amendment to Consulting Agreement dated March 12, 1997, between County Seat Stores, Inc. and
Retail Consulting Services, Inc.
10.18+ Employment Agreement dated August 11, 1997, between Sam Forman and County Seat Stores, Inc.
11.1 Statement re: Computation of Earnings per share of Common Stock
12.1++ Statement re: Computation of Ratio of Earnings to Fixed Charges
21.1+ Subsidiaries of the Registrant.
*23.1 Consent of Eaton & Van Winkle (included in their opinion filed as Exhibit 5.1 hereto).
23.2++ Consent of Arthur Andersen L.L.P.
24.1+ Power of Attorney of County Seat Stores, Inc. (included on signature page to this Registration
Statement on S-4).
25.2+ Statement of Eligibility and Qualification (Form T-1) under Trust Indenture Act of 1939 of
First Trust National Association.
27.1++ Financial Data Schedule.
*99.1 Form of Letter of Transmittal.
*99.2 Form of Notice of Guaranteed Delivery.
*99.3 Form of Exchange Agent Agreement.
</TABLE>
- ------------------------
* To be filed by amendment.
+ Previously filed.
++ Replaces a previously filed exhibit.
<PAGE>
EXHIBIT 11.1
County Seat Stores, Inc. and Subsidiary
Computation of Earnings Per Common Share
(Amounts in Thousands Except Per Share Amounts)
13 Weeks
Ended
January 31,
1998
-----------
BASIC
Net income $ 4,554
--------
--------
Weighted average shares outstanding 20,000
--------
--------
Earnings per common share, basic $ 0.23
--------
--------
DILUTED
Net income $ 4,554
--------
--------
Weighted average shares outstanding 20,000
--------
--------
Add assumed exercise of warrants reduced by the number
of shares purchased with the proceeds 2,849
--------
22,849
--------
--------
Earnings per common share, diluted $ 0.20
--------
--------
<PAGE>
<TABLE>
<CAPTION>
Exhibit 12.1
COUNTY SEAT STORES, INC. AND SUBSIDIARY
Computation of Earnings to Fixed Charges
(Amounts in Thousands)
| Predecessor Company
| ---------------------------------------------------------------
13 Weeks | 39 Weeks
Ended | Ended
January 31, | November 1,
1998 | 1997 1996 1995 1994 1993
----------- | ----------- ----------- ----------- ----------- -----------
<S> <C> | <C> <C> <C> <C> <C>
Income (loss) before Income Taxes and |
Extraordinary Items $ 8,654 | $ (57,687) $ (74,937) $ (79,401) $ 10,518 $ (1,647)
|
ADD: |
Interest Expense, net 2,645 | 3,481 14,610 19,163 18,426 17,722
Amortization of debt expense and debt discount 648 | 538 835 1,272 2,599 1,857
----------- | ----------- ----------- ----------- ----------- -----------
Income as adjusted $ 11,947 | $ (53,668) $ (59,492) $ (58,966) $ 31,543 $ 17,932
----------- | ----------- ----------- ----------- ----------- -----------
----------- | ----------- ----------- ----------- ----------- -----------
|
FIXED CHARGES: |
Interest Expense, net $ 2,645 | $ 3,481 $ 14,610 $ 19,163 $ 18,426 $ 17,722
Amortization of debt expense and debt discount 648 | 538 835 1,272 2,599 1,857
----------- | ----------- ----------- ----------- ----------- -----------
Total fixed Charges $ 3,293 | $ 4,019 $ 15,445 $ 20,435 $ 21,025 $ 19,579
----------- | ----------- ----------- ----------- ----------- -----------
----------- | ----------- ----------- ----------- ----------- -----------
|
----------- | ----------- ----------- ----------- ----------- -----------
Ratio of earnings to fixed charges 3.6 | n/a n/a n/a 1.5 0.9
----------- | ----------- ----------- ----------- ----------- -----------
----------- | ----------- ----------- ----------- ----------- -----------
When there is a loss, there is no ratio of earnings to fixed charges, as
is indicated by n/a ("not applicable").
</TABLE>
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of
Registration Statement No. 333-47991.
ARTHUR ANDERSEN LLP
New York, New York
May 29, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000910112
<NAME> COUNTY SEAT STORES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-02-1997
<PERIOD-END> JAN-31-1998
<CASH> 22,235
<SECURITIES> 0
<RECEIVABLES> 3,530
<ALLOWANCES> 0
<INVENTORY> 55,785
<CURRENT-ASSETS> 99,671
<PP&E> 34,419
<DEPRECIATION> 1,763
<TOTAL-ASSETS> 209,076
<CURRENT-LIABILITIES> 47,225
<BONDS> 77,632
0
0
<COMMON> 200
<OTHER-SE> 82,419
<TOTAL-LIABILITY-AND-EQUITY> 209,076
<SALES> 394,584
<TOTAL-REVENUES> 0
<CGS> 283,155
<TOTAL-COSTS> 109,745
<OTHER-EXPENSES> 38,405
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,312
<INCOME-PRETAX> (49,033)
<INCOME-TAX> 4,100
<INCOME-CONTINUING> (53,133)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (53,133)
<EPS-PRIMARY> .23
<EPS-DILUTED> .20
</TABLE>
