-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RUa9BKhjzO0BtDfczUwHL00ONf91zK4ct8zs4rChnxBGzMRQptDm/jp+cZT106/9 iXwcUnTzKWnBnLD8rI5zjQ== 0000950152-98-006281.txt : 19980803 0000950152-98-006281.hdr.sgml : 19980803 ACCESSION NUMBER: 0000950152-98-006281 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19980730 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ELDER BEERMAN STORES CORP CENTRAL INDEX KEY: 0000032020 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-DEPARTMENT STORES [5311] IRS NUMBER: 310271980 STATE OF INCORPORATION: OH FISCAL YEAR END: 0201 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-57447 FILM NUMBER: 98674391 BUSINESS ADDRESS: STREET 1: 3155 ELBEE RD CITY: DAYTON STATE: OH ZIP: 45439 BUSINESS PHONE: 9372962700 MAIL ADDRESS: STREET 1: 3155 EL BEE ROAD CITY: DAYTON STATE: OH ZIP: 45439 S-1/A 1 ELDER BEERMAN STORES CORP.--FORM S-1/AMENDMENT #3 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 30, 1998 REGISTRATION NO. 333-57447 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------ AMENDMENT NO. 3 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------ THE ELDER-BEERMAN STORES CORP. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) OHIO 5311 31-0271980 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION INCORPORATION CLASSIFICATION CODE NUMBER) NO.) OR ORGANIZATION)
3155 EL-BEE ROAD DAYTON, OHIO 45439 (937) 296-2700 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) SCOTT J. DAVIDO SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY THE ELDER-BEERMAN STORES CORP. 3155 EL-BEE ROAD DAYTON, OHIO 45439 (937) 296-2700 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: CHRISTOPHER M. KELLY JOHN J. JENKINS Jones, Day, Reavis & Pogue Calfee, Halter & Griswold LLP 901 Lakeside Avenue 800 Superior Avenue Cleveland, Ohio 44114 Cleveland, Ohio 44114 (216) 586-3939 (216) 622-8200
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as practicable after this Registration Statement becomes effective. ------------------ If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED JULY 30, 1998 2,800,000 SHARES THE ELDER-BEERMAN STORES CORP. ELDER-BEERMAN LOGO COMMON SHARES ------------------ All of the 2,800,000 shares of common stock, no par value (the "Common Shares"), offered hereby (the "Offering") are being offered by The Elder-Beerman Stores Corp. ("Elder-Beerman" or the "Company"). The Common Shares offered hereby will be traded on the Nasdaq National Market under the symbol "EBSC." On July 8, 1998, the last reported sale price of the Common Shares on the Nasdaq National Market was $25.875 per share. See "Price Range of Common Shares." ------------------ SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON SHARES. ------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO THE PUBLIC COMMISSIONS(1) THE COMPANY(2) - --------------------------------------------------------------------------------------------------------------------- Per Share.................................... $ $ $ - --------------------------------------------------------------------------------------------------------------------- Total(3)..................................... $ $ $ - --------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the Underwriters against certain liabilities, including certain liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses, estimated at $1,000,000, payable by the Company. (3) The Company has granted the Underwriters a 30-day option to purchase up to 420,000 additional Common Shares solely to cover over-allotments, if any. If such option is exercised in full, the Price to the Public, Underwriting Discounts and Commissions and Proceeds to the Company will be $ , $ , and $ , respectively. ------------------ The Common Shares are offered by the Underwriters subject to receipt and acceptance of the shares by them. The Underwriters reserve the right to reject any order, in whole or in part. It is expected that delivery of the Common Shares will be made against payment therefor at the offices of McDonald & Company Securities, Inc. or through the facilities of The Depository Trust Company, on or about , 1998. MCDONALD & COMPANY SECURITIES, INC. WARBURG DILLON READ LLC JOHNSON RICE & COMPANY L.L.C. The date of this Prospectus is , 1998 3 [Picture of the main entrance of an Elder-Beerman department store with pictures of customers wearing branded merchandise and in-store merchandise presentations superimposed in the forefront. Map of Elder-Beerman store locations.] CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON SHARES, INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS (IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON SHARES OF THE COMPANY ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SEE "UNDERWRITING." 4 PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Investors should consider carefully the information set forth in "Risk Factors" before making any decision to invest in the Common Shares. Unless otherwise indicated, information in this Prospectus assumes that the Underwriters' over-allotment option is not exercised. References herein to fiscal years of the Company, unless otherwise indicated, are to the Company's 52- or 53-week fiscal year (which ends on the Saturday nearest to January 31 in the following calendar year). For example, "Fiscal 1997" refers to the Company's fiscal year ended January 31, 1998. References in this Prospectus to the "Company" or "Elder-Beerman" refer to The Elder-Beerman Stores Corp., its subsidiaries and predecessor entities, unless the context otherwise requires. THE COMPANY The Company operates the tenth largest chain of independent department stores in the United States, based on Fiscal 1997 sales volume. Founded in Dayton, Ohio in 1883, Elder-Beerman currently operates 48 department stores in small to mid-sized markets in seven midwestern states. The Company's strategy is to provide its customers with a broad selection of the same high quality, brand-name merchandise available to consumers in larger markets. In keeping with this strategy, Elder-Beerman department stores feature a wide variety of moderate to better branded merchandise, including women's ready-to-wear, men's and children's apparel, accessories, shoes and cosmetics, home furnishings, and other consumer goods. Elder-Beerman's branded merchandise includes apparel and accessories from Liz Claiborne, Tommy Hilfiger, Ralph Lauren, Calvin Klein, and Nautica, cosmetics from Estee Lauder, Clinique, and Lancome, footwear from Nike and Nine West, and home furnishings from Fieldcrest, Croscill, Lenox, and Calphalon. Branded merchandise accounted for more than 90% of the Company's merchandise during Fiscal 1997. The Company also offers qualified customers the convenience of a private label credit card program. In addition to its department stores, Elder-Beerman operates 61 specialty shoe stores under the El-Bee and Shoebilee! names and two furniture stores. The specialty shoe stores accounted for $31.4 million, or 5.4%, of the Company's Fiscal 1997 sales volume. In October 1995, the adverse effects of a high-volume merchandising strategy implemented in the early 1990s prompted the Company and its subsidiaries to file voluntary petitions for relief under chapter 11 of the United States Bankruptcy Code, as amended (the "Bankruptcy Code"). The Company emerged from bankruptcy on December 30, 1997. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- General." Elder-Beerman believes that a number of actions taken while in chapter 11 to reorganize the Company and streamline its operations, together with its existing competitive strengths, provide a platform for future growth. During its reorganization, the Company made a number of important changes to its management team. The 15 current members of senior management have an average of 22 years of retailing experience. In addition, during this period, Elder-Beerman reduced the number of its vendors by approximately 40% and refined its merchandising practices to provide additional authority to buyers and store managers. The Company also rationalized its real estate portfolio by closing several unprofitable or underperforming department, furniture and shoe stores and liquidating its women's specialty store chain. These enhancements to Elder-Beerman's operations have enabled it to better capitalize on its competitive strengths, including its focus on branded merchandise, solid portfolio of store locations, flexible store formats, and tailored product assortments. The Company's actions contributed to a 3.7% increase in comparable department store sales during Fiscal 1997 and a 10.6% increase during the first quarter of Fiscal 1998. The Company's department stores range in size from 39,000 square feet to 217,000 square feet. Its current department store portfolio includes 37 mall stores, six stores located in strip shopping centers and five free-standing stores. The Company emphasizes an attractive in-store presentation and broad selection of brand name merchandise in convenient, well-maintained locations. The Company's regional focus permits merchandising decisions to be made with input from local store managers, which enables the Company to tailor product assortments to meet consumer demands in particular markets. A portion of the Company's merchandise in each store consists of tailored product assortments. To maintain an appropriate flow of fresh merchandise, the Company has implemented procedures designed to promote timely merchandise receipts and markdowns at each 3 5 of its department stores. Elder-Beerman also emphasizes a high degree of customer service, and operates training programs designed to make its store managers and sales associates more responsive to customer needs. The Company's emphasis on providing branded merchandise, tailored product assortments and customer service in underserved retail markets has contributed to its strong market position in its existing markets. COMPETITIVE STRENGTHS The Company believes that its solid portfolio of profitable store locations, its experienced management team, and its other competitive strengths provide a platform for profitable expansion. These competitive strengths include a focus on branded merchandise, flexible department store formats, tailored product assortments, strong vendor relationships, a proprietary credit card program, targeted marketing programs, and an emphasis on customer service. FOCUS ON BRANDED MERCHANDISE The Company offers a broad selection of moderate to better branded merchandise, including women's ready-to-wear, men's and children's apparel, accessories, shoes and cosmetics, home furnishings, and other consumer goods. The Company's merchandise mix consists of approximately 92% branded goods and 8% private label. Elder-Beerman's branded merchandise includes apparel and accessories from Liz Claiborne, Tommy Hilfiger, Ralph Lauren, Calvin Klein, and Nautica, cosmetics from Estee Lauder, Clinique, and Lancome, footwear from Nike and Nine West, and home furnishings from Fieldcrest, Croscill, Lenox, and Calphalon. Smaller midwestern cities, such as those in which Elder-Beerman operates retail stores, tend to be underserved with branded merchandise, leaving the Company as a principal retailer of branded merchandise in these smaller markets. Elder-Beerman's emphasis on branded products allows it to position its merchandise as complementary to that offered by mass merchants (such as Sears, Roebuck & Co. and J.C. Penney Company, Inc.) and discount stores (such as Kohl's Corporation and Kmart Corporation) in these smaller markets. FLEXIBLE DEPARTMENT STORE FORMATS The Company's department stores range in size from 39,000 square feet to 217,000 square feet, and its current store portfolio includes 37 mall stores, six stores located in strip shopping centers and five free-standing stores. Elder-Beerman believes that the flexibility of its store formats is an important competitive advantage in seeking potential new store locations. The Company's ability to operate profitably in three different store formats helps to reduce constraints on growth resulting from relatively low levels of new mall construction or mall anchor availability. TAILORED PRODUCT ASSORTMENTS The Company strives to maintain a consistent in-store presentation. The vast majority of the merchandise in each store consists of core assortments and the balance of the merchandise is tailored to characteristics of the particular local market. Merchandising decisions are made with input from local store managers, which enables the Company to tailor product assortments to meet consumer demands in particular markets. The Company does not make buying decisions using a committee or team format, which allows buyers and divisional merchandise managers to identify new designs and manufacturers and respond quickly to new fashion trends. STRONG VENDOR RELATIONSHIPS The Company's merchandise managers have significant industry experience and strong relationships with key vendors. During the past two years, the Company has reduced its vendor base by approximately 40% and has increased its volume of business with its remaining key vendors, especially the nationally recognized branded suppliers. The proliferation of media combined with the significant national marketing efforts of these vendors has created significant demand for branded merchandise in smaller markets. However, the financial and other limitations of many local retailers has left large national brands with limited access to those markets. Furthermore, these vendors desire to preserve their brand image and generally do not sell to national discounters. As a result, the Company is able to carry branded merchandise frequently not carried by local competitors. 4 6 PROPRIETARY CREDIT CARD PROGRAM Elder-Beerman aggressively promotes its proprietary credit card and, as a result, proprietary credit sales constitute a significant (approximately 44% of net sales in Fiscal 1997) portion of the Company's sales. The Company considers its credit card program to be a critical component of its business strategy because it: (a) enhances customer loyalty; (b) allows the Company to identify and regularly contact its best customers; and (c) creates a comprehensive data warehouse for targeted marketing. TARGETED MARKETING PROGRAMS The Company has realigned its advertising strategy from an emphasis on general mass media (i.e., television, radio, and print) to one that increasingly focuses on direct marketing. The Company leverages its data warehousing capabilities to extract customer buying and demographic information. The information generated through proprietary and third party credit data assists the Company in creating direct mail and telemarketing advertising and sales promotion programs that are designed to appeal to the specific needs of its customers. This targeted marketing approach has improved the effectiveness of advertising efforts, as evidenced by an increase in comparable store sales for Fiscal 1997 without a corresponding increase in advertising expenditures. EMPHASIS ON CUSTOMER SERVICE Elder-Beerman has a strong tradition of providing quality customer service. The Company is working to enhance customer service by: (a) making increased use of technology and improved controls to eliminate nonselling activities from stores; (b) using training and recruiting practices to further instill a culture of customer helpfulness and responsiveness; (c) developing tools and training programs to enhance associates' selling skills and awareness; and (d) implementing selling productivity measurement and compensation systems directed at encouraging selling activities and results. GROWTH STRATEGY The Company's objectives are (a) to build upon its position as a leading retailer of branded merchandise and increase its presence in its existing markets and (b) to selectively enter other small to mid-sized midwestern and contiguous markets that offer opportunities for profitable growth. Key elements of the Company's growth strategy include: NEW STORES AND ACQUISITIONS The Company believes that significant opportunities exist to increase sales and net income by developing new stores and by pursuing opportunistic acquisitions in existing and new markets located within or contiguous to its current trading area. By increasing the number of stores, the Company believes it will be able to improve overall profitability by leveraging its distribution, advertising, and corporate expenses. Develop New Stores. The Company seeks to open new stores in existing markets where it believes it can enhance its current market share and in new small to mid-sized markets where its emphasis on branded products will permit it to achieve a leading market share position. The Company currently has identified approximately 30 markets that meet its development criteria and intends to further assess these areas to determine where the most attractive real estate opportunities exist. Although it is anticipated that many of these stores will be located in regional malls, the Company's ability to operate profitably in other formats permits it to capitalize on attractive non-mall locations. This allows Elder-Beerman to avoid constraints placed on growth by the relatively low level of new mall construction or mall anchor tenant availability. Pursue Opportunistic Acquisitions. Elder-Beerman believes that its leading position in its existing markets, its improved financial condition, and its experienced management team position it to capitalize on opportunistic acquisitions. The Company believes that the ongoing consolidation among department store operators may create significant acquisition opportunities in small and mid-sized markets. As with its internal store development efforts, the Company intends to focus on acquisition candidates with attractive real estate locations in markets within or contiguous to its current trading area. In keeping with this strategy, Elder-Beerman recently acquired a 5 7 McAlpin's department store in Dayton, Ohio from Mercantile Stores Company, Inc. ("Mercantile") and a Lazarus store in Erie, Pennsylvania from Federated Department Stores, Inc. ("Federated"). Both of these stores are being converted to Elder-Beerman department stores and are expected to reopen in the summer of 1998. In addition, on July 27, 1998, the Company acquired Stone & Thomas, which operates department stores in West Virginia, Virginia, Ohio, and Kentucky. As a result of this acquisition, Stone & Thomas, the name of which has been changed to Elder-Beerman West Virginia, Inc., has become a wholly-owned subsidiary of the Company. See "-- Recent Developments" and "Use of Proceeds." INCREASING STORE SALES PRODUCTIVITY The Company believes that a number of opportunities exist to increase sales productivity in its existing stores. These include: (a) store expansions and remodelings; (b) modifications to employee training and compensation programs to more greatly emphasize and reward selling activities; (c) increased use of direct mail and other targeted marketing initiatives to the Company's charge customers; and (d) the installation of high capacity fixtures in stores where space constraints otherwise prevent store expansion. Elder-Beerman also has redesigned the layout of its prototype store to improve merchandise adjacencies and enhance the prominence and in-store presentation of departments offering higher-margin merchandise. The Company is an Ohio corporation with its principal executive offices located at 3155 El-Bee Road, Dayton, Ohio 45439, and its telephone number is (937) 296-2700. RECENT DEVELOPMENTS On July 27, 1998, the Company acquired Stone & Thomas, a West Virginia-based retailer that operates 21 department stores in West Virginia, Virginia, Ohio, and Kentucky (the "Acquisition"). The Company believes that the Acquisition will facilitate its entry into adjacent markets by providing it with a number of attractive store locations in small and mid-sized cities within these states. The cash purchase price for the Acquisition was approximately $21.0 million, plus the assumption of Stone & Thomas indebtedness. See "Use of Proceeds." During the fiscal year ended January 31, 1998, Stone & Thomas had revenues of $121.5 million and a net loss of $8.4 million. The Company expects to achieve cost savings by selling the stores described below and by closing two stores (which had combined retail sales in fiscal year 1997 of approximately $2.0 million), one distribution center, and Stone & Thomas' corporate offices in Charleston and Wheeling, West Virginia. The Company, however, anticipates a one-time charge in connection with the Acquisition. Although the Company has not definitively determined the amount of such charge, the Company anticipates that it will not be less than $8.0 million. See "Risk Factors -- Risks Associated with the Stone & Thomas Acquisition" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." The Company has entered into definitive agreements with Belk, Inc. for the disposition of three Stone & Thomas stores in Charlottesville, Virginia, and in Bluefield and Beckley, West Virginia, and Peebles Inc. for the disposition of five Stone & Thomas stores in Staunton, Virginia and in New Martinsville, Lewisburg, Summersville and Elkins, West Virginia. These eight stores, which are located primarily in Stone & Thomas' smaller markets, had aggregate retail sales in fiscal year 1997 of approximately $32.0 million. The Company anticipates that these sales, which are subject to standard terms and conditions, will be completed by the end of September 1998. The Company also anticipates that substantially all the Stone & Thomas stores other than those to be closed or sold to third parties will be converted into Elder-Beerman department stores by year end. INFORMATION ABOUT FORWARD-LOOKING STATEMENTS Certain sections in this Prospectus, including "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Business," contain certain forward-looking statements that are based on management's current beliefs, estimates, and assumptions concerning the operations, future results, and prospects of Elder-Beerman and the retail industry in general. All statements that address operating performance, events or developments that management anticipates will occur in the future, including statements related to future sales, profits, expenses, income and earnings per share, future 6 8 finance and capital market activity, or statements expressing general optimism about future results, are forward-looking statements. In addition, words such as "expects," "anticipates," "intends," "plans," "believes," "estimates," variations of such words, and similar expressions are intended to identify forward-looking statements. The statements described in the preceding paragraph constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"). Because these statements are based on a number of beliefs, estimates, and assumptions that could cause actual results to materially differ from those in the forward-looking statements, there is no assurance that forward-looking statements will prove to be accurate. See "Risk Factors" for a discussion of factors that could cause or contribute to such material differences. Any number of factors could affect future operations and results, including the following: increasing price and product competition; fluctuations in consumer demand and confidence; the availability and mix of inventory; fluctuations in costs and expenses; the effectiveness of advertising, marketing, and promotional programs; weather conditions that affect consumer traffic in stores; the continued availability and terms of financing; the outcome of pending and future litigation; and general economic conditions, such as the rate of employment, inflation, interest rates, and the condition of the capital markets. This list of factors is not exclusive. Forward-looking statements are subject to the safe harbors created in the Securities Act. Elder-Beerman undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. THE OFFERING Common Shares offered by the Company....................... 2,800,000 shares Common Shares to be outstanding after the Offering......... 15,478,021 shares (1) Nasdaq National Market symbol.............................. EBSC Use of Proceeds............................................ Repayment of debt incurred in connection with the Acquisition and general corporate purposes including new store development and potential acquisitions. See "Use of Proceeds."
- --------------- (1) Excludes 927,277 Common Shares issuable upon exercise of outstanding stock options at a weighted average exercise price of $12.50 per share. See "Management -- Equity and Performance Incentive Plan." Also excludes 624,522 Common Shares issuable upon the exercise of outstanding warrants. See "Description of Capital Stock -- Warrants" and "Management -- Equity and Performance Incentive Plan." 7 9 SUMMARY CONSOLIDATED FINANCIAL DATA
FISCAL YEAR ENDED PRO FORMA 13 WEEKS ENDED PRO FORMA ---------------------------------------------------- --------- ------------------- --------- JAN 29, JAN 28, FEB 3, FEB 1, JAN 31, JAN 31, MAY 3, MAY 2, MAY 2, 1994 1995 1996(1) 1997 1998 1998(2) 1997 1998 1998(2) -------- -------- -------- -------- -------- --------- -------- -------- --------- (IN THOUSANDS, EXCEPT PER SHARE AND DEPARTMENT STORE DATA) STATEMENT OF OPERATIONS DATA Net sales............ $620,041 $631,100 $590,018 $569,557 $581,372 $702,836 $119,821 $126,724 $148,146 Gross profit (3)..... 193,549 164,315 132,896 159,490 157,830 183,210 33,144 34,897 39,016 Interest expense..... 8,891 9,898 9,557 6,467 7,084 8,728 1,468 2,804 3,160 Income/(loss) before reorganization items and income tax expense (benefit).......... 23,194 (4,590) (33,631) 11,579 11,931 3,449 94 (710) (3,727) Reorganization items.............. 19,711 23,648 27,542 27,542 3,363 Income/(loss) from continuing operations (4) (5)................ 15,244 (2,064) (51,010) (12,429) (8,199) (16,681) (3,269) (436) (3,453) Net income/(loss) (6)................ 15,865 (13,355) (63,286) (12,429) (28,952) (37,434) (3,269) (436) (3,453) Basic and diluted loss per common share (7).......... (0.03) (0.23) Weighted average number of common shares outstanding........ 12,497 15,297 DEPARTMENT STORE DATA Stores open at end of period............. 54 53 53 52 50 71 52 50 71 Comparable store sales increase/(decrease) (8)................ 0.6% (3.8%) (8.4%) (1.2%) 3.7% 3.8% 10.6% Average sales per square foot (9).... N/A N/A N/A $ 116 $ 121
MAY 2, 1998 --------------------------- PRO FORMA ACTUAL AS ADJUSTED(10) --------- --------------- (DOLLARS IN THOUSANDS) BALANCE SHEET DATA Working capital............................................. $ 229,639 $ 300,172 Total assets................................................ 377,165 474,511 Long-term obligations, less current portion................. 153,059 170,356 Shareholders' equity........................................ 145,272 212,013
- --------------- (1) Fiscal 1995 included 53 weeks as compared to 52 weeks for each of the other fiscal years shown. (2) Pro forma statement of operations and department store data give effect to the Acquisition as if it had occurred at the beginning of the periods presented, but do not give effect to the pending disposition of eight S&T stores and the closure of two additional S&T stores. See "Pro Forma Condensed Consolidated Financial Data." (3) Represents net sales less cost of merchandise sold, occupancy, and buying expenses. (4) The Company adopted formal plans to dispose of its Margo's LaMode, Inc. women's specialty subsidiary during Fiscal 1994 and completed the disposal in January 1996. The financial information for Margo's is included in discontinued operations. (5) The financial information for The Bee-Gee Shoe Corp. is included as part of continuing operations for all periods except for the initial reserve related to the disposal of discontinued operations that was recorded in Fiscal 1994 and the subsequent reversal recorded in Fiscal 1996. (6) Net loss for Fiscal 1997 includes the impact of a $28.1 million extraordinary loss and a $7.4 million gain from discontinued operations related to the discharge of prepetition liabilities associated with the Company's chapter 11 cases. Net loss for Fiscal 1995, Fiscal 1994, and Fiscal 1993 includes discontinued operations expense of $12.3 million, $11.3 million, and $0.6 million, respectively. (7) No historical earnings per share data are presented as the Company does not consider such information meaningful. Upon consummation of the Offering, 15,478,021 million Common Shares will be outstanding. Pro forma earnings per Common Share gives effect to these Common Shares as if outstanding on February 1, 1998. (8) Comparable store sales data includes only those department stores that operated during the applicable full fiscal year and has been adjusted for elimination of complete product lines. (9) Department store average sales per square foot data is not available for years prior to Fiscal 1996. (10) Adjusted to give effect to the Acquisition as if it had occurred on May 2, 1998 and for the sale of 2,800,000 Common Shares at an assumed public offering price of $25.875 per share (the last reported sale price of the Common Shares on the Nasdaq National Market on July 8, 1998) and the application of the estimated net proceeds therefrom as described under "Use of Proceeds." 8 10 RISK FACTORS Prospective investors should consider carefully the following risk factors, together with the other information contained in this Prospectus, in evaluating an investment in the Common Shares offered hereby. The following factors and other information set forth in this Prospectus contain certain forward-looking statements involving risks and uncertainties. The Company's actual results may differ materially from the results anticipated in these forward-looking statements as a result of certain factors set forth in this section and elsewhere in this Prospectus. EXPANSION A component of the Company's business strategy includes constructing new stores and remodeling or expanding existing stores. The Company's success in achieving future growth through expanding existing stores or opening new stores will be dependent upon the Company's ability to identify, finance, obtain, and construct or refurbish suitable store sites and, where applicable, hire appropriate store personnel. In addition, the success of the Company's growth strategy is also dependent, in part, upon management's ability to negotiate acceptable lease terms and open new stores in a timely manner. At this time, Elder-Beerman has no definitive arrangements with real estate developers or contractors to build or to lease additional department stores. Opportunistic acquisitions of individual locations or other department store businesses also are a component of the Company's strategy. Elder-Beerman may face significant competition for acquisition candidates, which may limit the number of acquisition opportunities and lead to higher acquisition prices. There can be no assurance that the Company will be able to identify, acquire, successfully integrate, or profitably manage additional acquisitions without substantial costs, delays, or other financial or operational difficulties. Acquisitions involve a number of special risks, including adverse short-term effects on the Company's results of operations, potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities, diversion of management's attention from the remainder of its business, the failure to retain key personnel of the acquired business, increased expenses for accounting and computer systems (including reprogramming of such computer systems to effectively handle transactions in the year 2000 and beyond), and risks associated with unanticipated events or liabilities, some or all of which could have a material adverse effect on the business, operating results, and financial condition of the Company. In certain cases, the Company may be required to file applications and obtain clearances under applicable federal antitrust laws or receive the approval of a target company's stockholders before consummation of an acquisition. These requirements may restrict or delay the Company's acquisitions and may increase the cost of completing such transactions. The timing, size, and success of the Company's acquisition efforts and the associated capital commitments cannot be readily predicted. The Company intends to use cash, debt or Common Shares to finance future acquisitions. If the Company does not have sufficient cash resources, its growth could be limited unless it is able to obtain additional capital through debt or equity financings. The availability of debt or equity financing is subject to, among other things, the Company's financial condition and results of operations and general market and economic conditions. In addition, if the Company's Common Shares do not maintain a sufficient market value, or if potential acquisition candidates are otherwise unwilling to accept Common Shares as consideration, Elder-Beerman may be required to use more of its cash resources, if available, to finance its acquisition activities. The failure of the Company's Common Shares to maintain a sufficient market value also may adversely affect its ability to engage in future equity financings. There can be no assurance that the Company will be able to obtain the additional financing that it may need to implement its expansion strategy on terms that it finds acceptable. RISKS ASSOCIATED WITH THE STONE & THOMAS ACQUISITION On July 27, 1998, the Company consummated the Acquisition. The Company anticipates that it will use considerable resources in connection with the Acquisition, including, without limitation, fees for legal, accounting, and other professional services required in connection with the negotiation and documentation of the transaction. Depending on the costs incurred by the Company, such charges could have a material adverse effect on the business, operating results and financial condition of the Company. 9 11 Stone & Thomas has recognized significant losses during recent periods. Management of Stone & Thomas has disclosed in a note to its consolidated financial statements for the fiscal year ended January 31, 1998, the existence of a material uncertainty regarding Stone & Thomas' ability to continue as a going concern. See Note 9 of Notes to Stone & Thomas' Consolidated Financial Statements. In order to profitably operate the Stone & Thomas stores, the Company intends to take a number of actions designed to reduce operating costs including closing two stores (which had combined retail sales in fiscal year 1997 of approximately $2.0 million), one distribution center, and Stone & Thomas' corporate offices in Charleston and Wheeling, West Virginia. In addition, the Company has entered into definitive agreements to sell eight Stone & Thomas stores in Virginia and West Virginia. These eight stores, which are located primarily in Stone & Thomas' smaller markets, had aggregate retail sales in fiscal year 1997 of approximately $32.0 million. The Company anticipates that these sales, which are subject to standard terms and conditions, will be completed by the end of September 1998. There can be no assurance as to the Company's ability to achieve cost savings or realize disposition proceeds as a result of these actions or as to the timing or amount of any such savings or proceeds. In addition, there can be no assurance that the Company will be able to operate profitably the stores acquired from Stone & Thomas, or even that their operations will not result in significant losses during future periods. The Company anticipates that a one-time charge will be recognized as a result of the Acquisition. Although the Company has not yet definitively determined the amount of such charge, the Company anticipates that it will not be less than $8.0 million. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." COMPETITION The retail industry, in general, and the department store and shoe store businesses, in particular, are intensely competitive. Generally, the Elder-Beerman department stores and family shoe stores operated by The Bee-Gee Shoe Corp. ("Bee-Gee") are in competition not only with other department stores and family shoe stores, respectively, in the geographic areas in which they operate, but also with numerous other types of retail outlets, including specialty stores, general merchandise stores, off-price and discount stores, manufacturer outlets, and catalog retailers. Some of the retailers with which Elder-Beerman competes have substantially greater financial resources than the Company and may have other competitive advantages over the Company. The Elder-Beerman department stores and Bee-Gee shoe stores compete on the basis of quality, depth, and breadth of merchandise, prices for comparable quality merchandise, customer service, store location, and store environment. REGIONAL CONCENTRATION OF OPERATIONS The Company's department stores are concentrated in small and mid-sized markets in seven midwestern states. A majority of the Company's department stores are located in Ohio, Michigan, and Indiana. The retail business is dependent on levels of consumer spending, which may be adversely affected by an economic downturn or a decline in consumer confidence. As a result of the Company's focus on smaller markets and the concentration of its operations within the midwestern region, the Company may be more vulnerable to changes in economic conditions within this region than its competitors with more diverse geographic operations. An economic downturn in Ohio, Michigan or Indiana, or adverse economic conditions affecting localities within those states in which the Company conducts operations, could have a material adverse effect on the business, operating results, and financial condition of the Company. SEASONALITY The department store business is seasonal, with a significant portion of sales and operating income generated in November and December. Working capital requirements fluctuate during the year, increasing somewhat in mid-summer in anticipation of the fall merchandising season and increasing substantially prior to the holiday season, when the Company must carry significantly higher inventory levels. Consumer spending in the peak retail season may be affected by many factors outside the Company's control, including competition, consumer demand and confidence, weather that affects consumer traffic, and general economic conditions. A failure to generate substantial holiday season sales could have a material adverse effect on the business, operating results, and financial condition of the Company. 10 12 RESTRICTIVE COVENANTS Elder-Beerman's credit facilities impose certain operating and financial restrictions on the Company. Such restrictions limit, among other things, the Company's ability to incur additional indebtedness, grant additional liens, make dividend and other restricted payments, issue securities, sell assets, enter into certain mergers and consolidations and make capital expenditures. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Failure by the Company to comply with such covenants may result in an event of default, which, if not cured or waived, could have a material adverse effect on the business, operating results, and financial condition of the Company. DEPENDENCE ON KEY PERSONNEL The success of the Company depends to a large extent on its executive management team, including the Company's Chairman and Chief Executive Officer, Frederick J. Mershad, and the Company's President, Chief Operating Officer, and Chief Financial Officer, John A. Muskovich. The loss of the services of any key member of its senior management team could have a material adverse effect on the business, operating results, and financial condition of the Company. There can be no assurance that Elder-Beerman will be able to retain its executive officers and key personnel or attract additional qualified members to its management team in the future. RECENT INSOLVENCY AND REORGANIZATION; RECENT LOSSES The Company sought protection under chapter 11 of the Bankruptcy Code in October 1995. The Company incurred net losses of $13.4 million, $63.3 million, $12.4 million, and $29.0 million during the four fiscal years ended January 28, 1995, February 3, 1996, February 1, 1997, and January 31, 1998, respectively. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Former senior management of the Company has been replaced since the commencement of its reorganization in October 1995, and the Company's current senior management has concentrated on formulating and refining Elder-Beerman's business strategy. Since December 30, 1997, the Company has no meaningful financial performance history. There can be no assurance that Elder-Beerman will attain profitability or achieve continued growth in operating performance. AVAILABILITY OF PERSONNEL Elder-Beerman's department store and shoe store businesses are labor intensive. The Company employs a large number of hourly employees and incurs substantial expenses for recruiting and training new personnel. The current low unemployment rate in certain geographic areas in which Elder-Beerman operates has contracted the labor pool available to the Company in those areas. The Company has historically experienced a high level of turnover, and there can be no assurance that the Company will be able to successfully attract and retain labor at current rates. A change in labor market conditions that either further reduces the availability of hourly employees or that increases significantly the cost of such labor could have a material adverse effect on the business, operating results, and financial condition of the Company. CONSUMER CREDIT RISKS Sales under Elder-Beerman's private label credit card program represent a significant portion of the Company's business, accounting for approximately 44% of the Company's net sales for Fiscal 1997. The Company's private label credit card program is also a significant source of income. See Note 4 of Notes to the Company's Consolidated Financial Statements. There can be no assurance that sales will continue to be generated by credit card holders or that new credit card accounts will continue to be established at the rate historically experienced by the Company. Any decline in the generation of receivables or any adverse changes in laws regulating the granting or servicing of credit (including late fees and the finance charge applied to outstanding balances) could have a material adverse effect on the business, operating results and financial condition of the Company. The Company's wholly owned subsidiary, The El-Bee Chargit Corp. ("Chargit"), purchases substantially all of the receivables generated under Elder-Beerman's private label credit card program at a 3.0% discount and, under a credit facility with a commercial lender, pledges the receivables as collateral against borrowings of up to 11 13 $125.0 million. Under the pledged receivables credit facility, the Company is typically permitted to borrow 86.9% of the principal balance of eligible pledged receivables. The Company is required to replace receivables that become delinquent or to pay down the loan secured by the pledged receivables to maintain required loan to value ratios. Thus, the Company bears the risk of delinquencies and defaults of its credit card customers. General economic conditions, as well as other conditions beyond the Company's control, may have an impact on customers' ability to repay credit card debt. As of May 2, 1998, approximately 5.0% or $6.5 million principal amount of the Company's consumer credit card receivables were 90 days past due compared to 5.2% or $7.2 million principal amount as of May 3, 1997. Moreover, in Fiscal 1997 the Company experienced $8.3 million in charge-offs related to its credit card program, as compared to $6.1 million in Fiscal 1996. There can be no assurance that the rate of charge-offs on the Company's accounts receivable portfolio will not increase, or that finance charge revenue and late fee income will be adequate to offset charge-offs. If the rate of delinquencies and charge-offs increase, the Company could also incur substantial costs and delays in servicing and collecting its receivables. The Company is subject to consumer credit risks and risks associated with forecasting adequate reserves for uncollected or uncollectible receivables. Deterioration in the quality of the Company's accounts receivable portfolio could have a material adverse effect on the business, operating results and financial condition of the Company. EFFECT OF YEAR 2000 ON MANAGEMENT INFORMATION AND CONTROL SYSTEMS Many existing computer programs use only two digits to identify a year in the date field. These programs were designed and developed without considering the impact of the upcoming century change in the year 2000. Moreover, these programs often are highly dependent upon historical or dynamic financial and other data that, based on the programs' inability to distinguish between the year 2000 and other century-end years, could be misreported or misinterpreted and cause significant resulting errors. If not corrected, many computer applications could fail when processing year 2000 data. Elder-Beerman's operations are highly dependent on computerized recordkeeping, financial reporting, and other systems, including inventory management, point-of-sale, and internal accounting systems. In addition, many of the Company's vendors and other third parties with which the Company conducts business also utilize computer systems that may be adversely affected by year 2000-related programming errors. Although the Company is evaluating its computer systems and is endeavoring to identify and correct any year 2000-related problems, there can be no assurance that all such problems will, in fact, be identified and corrected by the Company or third parties. In addition, the Company's business may be adversely affected if the Company and/or other organizations with which the Company does business are unsuccessful in completing in a timely manner the conversion to applications that can process year 2000 dates. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Year 2000 Compliance." DIVIDEND POLICY; RESTRICTIONS ON PAYMENT OF DIVIDENDS The Company currently anticipates that, after the completion of the Offering, all of its earnings will be retained for development and expansion of the Company's business. The Company does not anticipate paying any cash dividends on the Common Shares in the foreseeable future. The Company's credit facilities contain covenants that restrict the payment of cash dividends. See "Dividend Policy" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." SHARES ELIGIBLE FOR FUTURE SALE Sales of substantial amounts of Common Shares in the public market following the Offering, or the perception that such sales could occur, could adversely affect prevailing market prices for the Common Shares. Upon consummation of the Offering, the Company will have 15,478,021 Common Shares outstanding. The Common Shares sold in the Offering are freely saleable in the public market, unless acquired by affiliates of Elder-Beerman. In addition, all of the 12,678,021 Common Shares outstanding as of June 12, 1998 (including 1,685,208 Common Shares scheduled to be distributed on July 31, 1998 from an escrow account to certain creditors in connection with the Company's reorganization under chapter 11 of the Bankruptcy Code), other than shares held by affiliates of the Company or persons deemed to be "underwriters" within the meaning of Section 1145(b) of the Bankruptcy Code, are freely tradeable without restriction under the Securities Act. Immediately 12 14 upon completion of the Offering, directors and executive officers of the Company will own 206,527 Common Shares and will beneficially own an additional 927,277 shares, which will be issuable upon exercise of options. Such persons are subject to contractual restrictions that prohibit them from offering, selling, transferring, pledging, contracting to do the same, or otherwise disposing of such shares for a period of 180 days after the date of this Prospectus without the consent of McDonald & Company Securities, Inc. After this 180-day period expires, 206,527 shares will be eligible for resale in the public market subject to certain restrictions under Rule 144 promulgated under the Securities Act. Prior to the commencement of the Offering, the Company filed Form S-8 registration statements under the Securities Act registering up to 3,375,000 shares issuable upon exercise of stock options granted or to be granted under its incentive and stock purchase plans. Subject to certain restrictions under Rule 144, these shares will be freely saleable in the public market immediately following exercise of such options. See "Description of Capital Stock" and "Management -- Equity and Performance Incentive Plan." ANTI-TAKEOVER PROVISIONS Certain provisions of the Company's Amended Articles of Incorporation (the "Articles of Incorporation") and the Amended Code of Regulations (the "Code of Regulations") and of the Ohio General Corporation Law (the "OGCL"), together or separately, could discourage potential acquisition proposals, delay or prevent a change in control of the Company, and limit the price that certain investors might be willing to pay in the future for the Common Shares, including provisions that (a) require certain supermajority votes and (b) establish certain advance notice procedures for nomination of candidates for election as directors and for shareholder proposals to be considered at shareholders' meetings. The Board of Directors of the Company will also have authority to issue one or more series of preferred stock without further shareholder approval and upon terms as the Board of Directors may determine. Issuance of preferred stock could adversely affect holders of the Common Shares in the event of liquidation of the Company or delay, defer, or prevent an attempt to obtain control of the Company by means of a tender offer, merger, proxy contest, or otherwise. Additionally, Section 1701.831 of the OGCL contains provisions that require shareholder approval of any proposed "control share acquisition" of any Ohio corporation; and Chapter 1704 of the OGCL contains provisions that restrict certain business combinations and other transactions between an Ohio corporation and interested shareholders. Furthermore, under a Rights Agreement (the "Rights Agreement") entered into as of December 30, 1997 (the "Effective Date"), the effective date of the Company's amended joint plan of reorganization (the "Plan"), each outstanding Common Share presently has one right attached that trades with the Common Shares. Generally, the rights become exercisable and trade separately after a third party acquires 20% or more of the then-outstanding Common Shares or commences a tender offer for a specified percentage of the then-outstanding Common Shares. Upon the occurrence of certain additional triggering events specified in the Rights Agreement, each right would entitle its holder (other than, in certain instances, the holder of 20% or more of the then-outstanding Common Shares) to purchase Common Shares at an exercise price of 50% of the then-current market value of the Common Shares. The rights expire on December 30, 1998, unless the Board of Directors takes action prior to that date to extend the rights, and are presently redeemable at $.01 per right. See "Description of Capital Stock -- Ohio Law and Certain Charter Provisions" and "-- Share Purchase Rights Agreement." DILUTION Purchasers of the Common Shares offered hereby will incur immediate and substantial dilution in the amount of $12.32 per share, assuming a public offering price of $25.875 (the last reported sale price of the Common Shares on the Nasdaq National Market ("Nasdaq") on July 8, 1998). See "Dilution." 13 15 USE OF PROCEEDS The net proceeds to Elder-Beerman from the sale of 2,800,000 Common Shares offered hereby are estimated to be $66.7 million ($76.9 million if the Underwriters' over-allotment option is exercised in full), after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company, assuming a public offering price of $25.875 (the last reported sale price for the Common Shares on Nasdaq on July 8, 1998). On July 27, 1998, the Company consummated the Acquisition. Approximately $21.0 million of the net proceeds from the Offering will be used to repay indebtedness incurred under the Company's Revolving Credit Facility (as defined below) in connection with the Acquisition. The balance of the net proceeds will be used to expand and remodel existing stores, open new stores, fund working capital and fund general corporate purposes, and also may be used to fund acquisitions. Pending their specific application, the Company intends to use the balance of the net proceeds to temporarily reduce indebtedness under its $150.0 million revolving credit facility (the "Revolving Credit Facility"), which had $33.2 million outstanding as of May 2, 1998, bears interest, at the Company's option, at either a base rate plus 37.5 basis points or LIBOR plus 137.5 basis points through January 1999, and terminates on December 30, 2000. The indebtedness incurred under the Revolving Credit Facility, other than in connection with the Acquisition, was used to fund the Company's obligations under the Plan and for general corporate purposes. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." DIVIDEND POLICY The Company anticipates that all future earnings will be retained to finance the Company's operations and for the growth and development of its business. Accordingly, Elder-Beerman does not currently anticipate paying cash dividends on its Common Shares. The payment of any future dividends will be subject to the discretion of the Board of Directors and will depend on the Company's results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law, and other factors that the Board of Directors deem relevant. The credit facilities contain covenants that restrict the payment of cash dividends. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." PRICE RANGE OF COMMON SHARES The Common Shares have been traded on Nasdaq under the symbol "EBSC" since February 17, 1998. The following table sets forth, for the periods indicated, the range of high and low closing prices for the Common Shares as reported on Nasdaq:
PRICE RANGE -------------- FISCAL 1998 HIGH LOW ----------- ----- --- First Quarter (from February 17, 1998)..................... 27 1/4 15 1/4 Second Quarter (through July 8, 1998)...................... 29 1/4 24
On July 8, 1998, the closing price of the Common Shares, as reported on Nasdaq, was $25.875. As of June 12, 1998, there were 2,150 record holders of the Common Shares. 14 16 CAPITALIZATION The following table sets forth the actual capitalization of the Company as of May 2, 1998, as well as the capitalization as adjusted to reflect (a) the Acquisition and (b) the sale by the Company of 2,800,000 Common Shares offered hereby and the application of the estimated net proceeds therefrom (assuming a public offering price of $25.875 per share, the last reported sale price of the Common Shares on Nasdaq on July 8, 1998, and after deduction of the estimated underwriting discounts and commissions and expenses). See "Use of Proceeds." This table should be read in conjunction with the Consolidated Financial Statements of the Company and Notes thereto included elsewhere in this Prospectus.
MAY 2, 1998 ----------------------- AS ACTUAL ADJUSTED -------- ----------- (IN THOUSANDS) Current portion of long-term obligations.................... $ 1,105 $ 1,120 ======== ======== Long-term obligations, less current portion................. 153,059 170,356 Shareholders' equity: Common Shares, no par value, 12,671,777 shares issued and outstanding on May 2, 1998; 15,471,777 shares issued and outstanding as adjusted (1)........................ 201,031 267,772 Unearned compensation -- restricted stock, net.............. (2,708) (2,708) Deficit..................................................... (53,051) (53,051) -------- -------- Total shareholders' equity........................ 145,272 212,013 -------- -------- Total capitalization.............................. $298,331 $382,369 ======== ========
- --------------- (1) Excludes 927,277 Common Shares issuable upon exercise of stock options outstanding as of July 8, 1998 at a weighted average exercise price of $12.50 per share. See "Management -- Equity and Performance Incentive Plan." Also excludes 624,522 Common Shares issuable upon the exercise of outstanding warrants. See "Description of Capital Stock -- Warrants" and "Management -- Equity and Performance Incentive Plan." 15 17 DILUTION The net tangible book value of the Company at May 2, 1998 was $143.1 million, or $11.29 per share. Net tangible book value is determined by dividing the net tangible book value (tangible assets less liabilities) of the Company by the number of Common Shares outstanding on that date. Without taking into account any other changes in net tangible book value of the Company after May 2, 1998, other than to give effect to the sale of the 2,800,000 Common Shares offered hereby (at an assumed public offering price of $25.875 per share, the last reported sale price of the Common Shares on Nasdaq on July 8, 1998) and the application of the estimated net proceeds therefrom as described under "Use of Proceeds," the pro forma net tangible book value of the Company at May 2, 1998 would have been approximately $209.8 million or $13.56 per share. This represents an immediate increase in the net tangible book value of $2.27 per share to existing shareholders and an immediate dilution of $12.32 per share to new investors. The following table illustrates this dilution: Assumed public offering price per share..................... $25.875 Net tangible book value per share at May 2, 1998.......... $11.29 Pro forma net tangible book value per share............... 13.56 ------ Increase per share attributable to existing shareholders.... 2.27 ------ Pro forma net tangible book value per share after the Offering.................................................. 13.56 ------- Net tangible book value dilution per share to new investors................................................. $ 12.32 =======
As of July 8, 1998, the Company had outstanding stock options exercisable for 927,277 Common Shares at a weighted average exercise price of $12.50 per share and outstanding warrants exercisable for 249,809 Common Shares and 374,713 Common Shares at an exercise price of $12.80 per share and $14.80 per share, respectively. If these options or warrants are exercised, further dilution to new investors will occur. Elder-Beerman may also issue additional shares to effect future potential business acquisitions or upon exercise of future stock option grants or equity awards, which could also result in additional dilution to then existing shareholders. See "Management -- Equity and Performance Incentive Plan" and "Description of Capital Stock -- Warrants." 16 18 PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA The accompanying unaudited pro forma condensed consolidated statements of operations for Fiscal 1997 and the 13 weeks ended May 2, 1998 give effect to the Acquisition and, as described in the Notes to Pro Forma Condensed Consolidated Financial Data, certain effects of the Offering as if they had occurred at the beginning of each of the periods presented. Pro forma condensed consolidated balance sheet data give effect to the Acquisition and, as described in the Notes to Pro Forma Condensed Consolidated Financial Data, certain effects of the Offering as if they had occurred as of May 2, 1998. The unaudited pro forma condensed consolidated financial data do not give effect to the pending disposition of eight S&T stores and closure of two additional S&T stores, which together had aggregate retail sales in fiscal year 1997 of approximately $34.0 million. See "Prospectus Summary -- Recent Developments." The unaudited pro forma condensed consolidated financial data are presented for illustrative purposes only and do not purport to present the results of operations or financial condition of the Company had the Acquisition occurred on the dates indicated, nor are they necessarily indicative of the Company's future results of operations or financial condition. The unaudited pro forma condensed consolidated financial data and accompanying notes should be read in conjunction with the Company's Consolidated Financial Statements and notes thereto and the Consolidated Financial Statements of Stone & Thomas and the notes thereto included elsewhere in this Prospectus. The pro forma adjustments relating to the Acquisition represent the Company's preliminary determinations of purchase accounting adjustments based on available information and certain assumptions that the Company considers reasonable under the circumstances. PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AS OF MAY 2, 1998
ELDER- STONE & BEERMAN THOMAS ADJUSTMENTS PRO FORMA ------- ------- ----------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) ASSETS Current assets: Cash and equivalents......................... $ 6,413 $45,741(1) $ 52,154 Customer accounts receivable................. 126,762 $ 878 127,640 Merchandise inventories...................... 154,772 32,914 (1,400)(2) 186,286 Deferred tax asset........................... 2,579 193 2,772 Other current assets......................... 8,945 2,682 11,627 -------- ------- ------- -------- Total current assets................. 299,471 36,667 44,341 380,479 Property, fixtures and equipment, less accumulated depreciation and amortization.... 62,589 6,269 6,411(3) 75,269 Other assets................................... 15,105 3,658 18,763 -------- ------- ------- -------- Total assets......................... $377,165 $46,594 $50,752 $474,511 ======== ======= ======= ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term obligations..... $ 1,105 $ 15 $ 1,120 Accounts payable............................. 42,658 6,958 49,616 Other accrued liabilities.................... 26,069 3,502 29,571 -------- ------- -------- Total current liabilities............ 69,832 10,475 80,307 -------- ------- -------- Long-term obligations -- less current portion...................................... 153,059 17,297 170,356 Other long-term/deferred liabilities........... 9,002 2,833 11,835 Total shareholders' equity..................... 145,272 15,989 $50,752(4) 212,013 -------- ------- ------- -------- Total liabilities and shareholders' equity............................. $377,165 $46,594 $50,752 $474,511 ======== ======= ======= ========
17 19 PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS 13 WEEKS ENDED MAY 2, 1998
ELDER-BEERMAN STONE & THOMAS ADJUSTMENTS PRO FORMA ------------- -------------- ----------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues: Net sales............................ $ 126,724 $21,422 $ 148,146 Financing............................ 6,498 6,498 ----------- ------- ----------- Total revenues....................... 133,222 21,422 154,644 ----------- ------- ----------- Costs and expenses: Cost of merchandise sold, occupancy and buying expenses............... 91,827 17,233 70(5) 109,130 Selling, general and administrative expenses.......................... 37,724 6,718 44,442 Provision for doubtful accounts...... 1,577 1,577 Interest expense..................... 2,804 356 3,160 Other expense........................ 62 62 ----------- ------- ----------- ----------- Total costs and expenses............. 133,932 24,369 70 158,371 ----------- ------- ----------- ----------- Loss before income tax benefit....... (710) (2,947) (70) (3,727) Income tax benefit..................... (274) (274) ----------- ------- ----------- ----------- Net loss............................. $ (436) $(2,947) $ (70) $ (3,453) =========== ======= =========== =========== Basic and diluted net loss per common share................................ (0.03) (0.23) =========== =========== Weighted average number of common shares outstanding................... 12,496,996 2,800,000(6) 15,296,996
18 20 PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FISCAL YEAR ENDED JANUARY 31, 1998
ELDER-BEERMAN STONE & THOMAS ADJUSTMENTS PRO FORMA ------------- -------------- ------------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues: Net sales........................... $ 581,372 $121,464 $ 702,836 Financing........................... 26,574 26,574 ---------- -------- ---------- Total revenues...................... 607,946 121,464 729,410 ---------- -------- ---------- Cost and expenses: Cost of merchandise sold, occupancy and (200)(2) buying expenses.................. 423,542 96,004 280 (5) 519,626 Selling, general and administrative expenses......................... 151,293 32,053 183,346 Key employees retention bonus plan expense.......................... 4,000 4,000 Hiring and recruiting expenses for new executives................... 2,121 2,121 Provision for doubtful accounts..... 8,636 285 8,921 Interest expense.................... 7,084 1,644 8,728 Other income........................ (661) (120) (781) ---------- -------- ------------- ---------- Total costs and expenses............ 596,015 129,866 80 725,961 ---------- -------- ------------- ---------- Income (loss) before reorganization items and income tax benefit..... 11,931 (8,402) (80) 3,449 Reorganization items.................. (27,542) (27,542) ---------- -------- ------------- ---------- Loss before income tax benefit, discontinued operations and extraordinary item............... (15,611) (8,402) (80) (24,093) Income tax benefit.................... (7,412) (7,412) ---------- -------- ------------- ---------- Loss from continuing operations..... (8,199) (8,402) (80) (16,681) Discontinued operations............... 7,378 7,378 ---------- -------- ------------- ---------- Loss before extraordinary item...... (821) (8,402) (80) (9,303) Extraordinary item.................... (28,131) (28,131) ---------- -------- ------------- ---------- Net loss............................ $ (28,952) $ (8,402) $ (80) $ (37,434) ========== ======== ============= ========== Basic and diluted loss per common share: Loss from continuing operations..... $ (6.58) $ (4.12) Discontinued operations............. 5.92 1.82 Extraordinary item.................. (22.58) (6.95) ---------- ---------- Net loss............................ $ (23.24) $ (9.25) ========== ========== Weighted average number of common shares outstanding.................. 1,245,760 2,800,000 (6) 4,045,760
19 21 NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (1) Represents the estimated net proceeds from the Offering at an estimated offering price of $25.875 per share, less a purchase price of $21,000 for Stone & Thomas. (2) An estimated purchase accounting adjustment to conform Stone & Thomas' inventory valuation method to that used by Elder-Beerman, with regard to the capitalization of procurement costs. (3) An estimated purchase accounting adjustment to record fair value of Stone & Thomas' fixed assets. (4) Represents the amount of net equity generated by the Offering of $66,741, less the elimination of Stone & Thomas' equity of $15,989 as a result of the Acquisition. (5) To reflect adjustments to depreciation and amortization expense based on a preliminary purchase accounting allocation related to property, fixtures, and equipment. (6) Weighted average number of Common Shares outstanding has been adjusted to give effect to the issuance of the 2,800,000 Common Shares in the Offering as if it had occurred at the beginning of each of the periods presented. 20 22 SELECTED CONSOLIDATED FINANCIAL INFORMATION The following table presents selected consolidated financial data of the Company as of and for the periods and the dates indicated. The selected statement of operations and balance sheet information, at or for each of the full fiscal years presented below, was derived from the audited Consolidated Financial Statements. The Consolidated Financial Statements at January 31, 1998 and February 1, 1997 and for each fiscal year in the three-year period ended January 31, 1998 and the auditors' report of Deloitte & Touche LLP, independent auditors, thereon are included elsewhere in this Prospectus. The selected results of operations data for the 13 weeks ended May 2, 1998 and May 3, 1997 and the balance sheet data at May 2, 1998 are derived from the unaudited financial statements of the Company and, in the opinion of the Company's management, reflect all adjustments necessary for a fair presentation of its financial condition and results of operations. All such adjustments are of a normal recurring nature. The results of operations for an interim period are not necessarily indicative of results that may be expected for a full year or any other interim period. The selected consolidated financial information below should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto included elsewhere in this Prospectus and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
FISCAL YEAR ENDED --------------------------------------------------------------------------- JAN 29, 1994 JAN 28, 1995 FEB 3, 1996(1) FEB 1, 1997 JAN 31, 1998 ------------ ------------ --------------- ------------ ------------ (IN THOUSANDS, EXCEPT PER SHARE AND DEPARTMENT STORE DATA) STATEMENT OF OPERATIONS DATA Net sales......................... $620,041 $631,100 $590,018 $569,557 $581,372 Gross profit (2).................. 193,549 164,315 132,896 159,490 157,830 Interest expense.................. 8,891 9,898 9,557 6,467 7,084 Income/(loss) before reorganization items and income tax expense (benefit)........... 23,194 (4,590) (33,631) 11,579 11,931 Reorganization items.............. 19,711 23,648 27,542 Income/(loss) from continuing operations (3) (4).............. 15,244 (2,064) (51,010) (12,429) (8,199) Net income/(loss)(5).............. 15,865 (13,355) (63,286) (12,429) (28,952) Basic and diluted earnings (loss) per common share................ $ 120.48 $(115.10) $(510.22) $(100.20) $ (23.24) Weighted average number of common shares outstanding.............. 124 124 124 124 1,246 DEPARTMENT STORE DATA Stores open at end of period...... 54 53 53 52 50 Comparable store sales increase/(decrease) (6)......... 0.6% (3.8%) (8.4%) (1.2%) 3.7% Average sales per square foot (7)............................. N/A N/A N/A $ 116 $ 121 BALANCE SHEET DATA Working capital................... $131,918 $124,733 $183,382 $182,840 $214,059 Total assets...................... 285,996 267,822 367,069 368,609 371,365 Long-term obligations, less current portion................. 108,010 109,487 3,100 5,669 142,024 Liabilities subject to compromise...................... 229,409 231,675 Shareholders' equity.............. 92,621 81,853 18,567 6,138 145,511 13 WEEKS ENDED --------------------------- MAY 3, 1997 MAY 2, 1998 ------------ ------------ (IN THOUSANDS, EXCEPT PER SHARE AND DEPARTMENT STORE DATA) STATEMENT OF OPERATIONS DATA Net sales......................... $119,821 $126,724 Gross profit (2).................. 33,144 34,897 Interest expense.................. 1,468 2,804 Income/(loss) before reorganization items and income tax expense (benefit)........... 94 (710) Reorganization items.............. 3,363 Income/(loss) from continuing operations (3) (4).............. (3,269) (436) Net income/(loss)(5).............. (3,269) (436) Basic and diluted earnings (loss) per common share................ $ (26.36) $ (0.03) Weighted average number of common shares outstanding.............. 124 12,497 DEPARTMENT STORE DATA Stores open at end of period...... 52 50 Comparable store sales increase/(decrease) (6)......... 3.8% 10.6% Average sales per square foot (7)............................. BALANCE SHEET DATA Working capital................... $229,639 Total assets...................... 377,165 Long-term obligations, less current portion................. 153,059 Liabilities subject to compromise...................... Shareholders' equity.............. 145,272
- --------------- (1) Fiscal 1995 included 53 weeks as compared to 52 weeks for each of the other fiscal years shown. (2) Represents net sales less cost of merchandise sold, occupancy, and buying expenses. (3) The Company adopted formal plans to dispose of its Margo's LaMode, Inc. women's specialty subsidiary during Fiscal 1994 and completed the disposal in January 1996. The financial information for Margo's is included in discontinued operations. (4) The financial information for The Bee-Gee Shoe Corp. is included as part of continuing operations for all periods except for the initial reserve for discontinued operations that was recorded in Fiscal 1994 and the subsequent reversal recorded in Fiscal 1996. (5) Net loss for Fiscal 1997 includes the impact of a $28.1 million extraordinary loss and a $7.4 million gain from discontinued operations related to the discharge of prepetition liabilities associated with the Company's chapter 11 cases. Net loss for Fiscal 1995, Fiscal 1994, and Fiscal 1993 includes discontinued operations expense of $12.3 million, $11.3 million, and $0.6 million, respectively. (6) Comparable store sales data include only those department stores that operated during the applicable full fiscal year and has been adjusted for elimination of complete product lines. (7) Department store average sales per square foot data are not available for years prior to Fiscal 1996. 21 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Prospectus contains certain forward-looking statements that are based on the beliefs of the Company's management, as well as assumptions made by, and information currently available to, the Company's management. Elder-Beerman's future performance, results or achievements could differ materially from those expressed in, or implied by, any such forward-looking statements. See "Risk Factors" for a discussion of factors that could cause or contribute to such material differences. The discussion and analysis that follows is based upon and should be read in conjunction with the Company's audited Consolidated Financial Statements and the Notes thereto included elsewhere in this Prospectus. GENERAL The Company operates the tenth largest chain of independent department stores in the United States, based on Fiscal 1997 sales volume. Founded in Dayton, Ohio in 1883, Elder-Beerman currently operates 48 department stores in small to mid-sized markets in seven midwestern states. The Company's strategy is to provide its customers with a broad selection of the same high quality, brand-name merchandise available to consumers in larger markets. In keeping with this strategy, Elder-Beerman department stores feature a wide variety of moderate to better branded merchandise, including women's ready-to-wear, men's and children's apparel, accessories, shoes and cosmetics, home furnishings, and other consumer goods. Elder-Beerman's branded merchandise includes apparel and accessories from Liz Claiborne, Tommy Hilfiger, Ralph Lauren, Calvin Klein, and Nautica, cosmetics from Estee Lauder, Clinique, and Lancome, footwear from Nike and Nine West, and home furnishings from Fieldcrest, Croscill, Lenox, and Calphalon. Branded merchandise accounted for more than 90% of the Company's merchandise during Fiscal 1997. The Company also offers qualified customers the convenience of a private label credit card program. In addition to its department stores, Elder-Beerman operates 61 specialty shoe stores under the El-Bee and Shoebilee! names and two furniture stores. The specialty shoe stores accounted for $31.4 million, or 5.4%, of the Company's Fiscal 1997 sales volume. During 1992 and through 1994, the Company undertook a new, high volume merchandising strategy. In 1995, it became apparent that this strategy had a negative impact on the Company's financial position, and the Company entered into negotiations with its lenders for a plan to provide additional liquidity. These negotiations ultimately were unsuccessful. In addition, as the need for working capital to fund increased inventory purchases for the 1995 holiday season drew closer, Elder-Beerman's suppliers began to show concerns about further extensions of trade credit to the Company in the wake of other bankruptcies in the retail industry. The Company was faced with an absence of working capital financing and the prospect of being unable to secure inventory for the 1995 holiday selling season. On October 17, 1995 (the "Petition Date"), Elder-Beerman and its subsidiaries, Chargit, Bee-Gee, Margo's LaMode, Inc. ("Margo's"), McCook Wholesale Corp., E-B Community Redevelopment Corp. and EBA, Inc. (collectively, the "Old Elder-Beerman Companies") filed voluntary petitions for relief (the "Reorganization Cases") under the Bankruptcy Code with the United States Bankruptcy Court for the Southern District of Ohio, Western Division (the "Bankruptcy Court"). The Old Elder-Beerman Companies filed their proposed joint plan of reorganization with the Bankruptcy Court on August 6, 1997, which was subsequently amended and ultimately confirmed by an order of the Bankruptcy Court on December 16, 1997. The Plan became effective on December 30, 1997. A total of $229.9 million in general unsecured claims was discharged under the Plan in exchange for cash payments of $79.7 million and the issuance of approximately 12.3 million Common Shares and warrants to purchase an additional 624,522 Common Shares. See Note 1 of Notes to the Company's Consolidated Financial Statements. All prepetition ownership interests in the Company were extinguished. As of the Effective Date, the reorganization value of the Company's assets exceeded its total liabilities. Accordingly, pursuant to AICPA Statement of Position 90-7, Financial Reporting by Entities in Reorganization under the Bankruptcy Code, "fresh start" accounting was not adopted. Elder-Beerman believes that a number of actions taken during the Reorganization Cases to reorganize the Company and streamline its operations, together with its existing competitive strengths, provide a platform for 22 24 future growth. During the Reorganization Cases, the Company made a number of important changes in its management team; the 15 current members of senior management have an average of 22 years of retailing experience. The Company reduced the number of its vendors by approximately 40% and refined its merchandising practices to provide additional authority to buyers and store managers to make merchandising decisions. The Company also rationalized its real estate portfolio by closing several unprofitable or underperforming department, furniture and shoe stores and liquidating its Margo's women's specialty store chain. The Company's actions contributed to a 3.7% increase in comparable department store sales during Fiscal 1997 and a 10.6% increase during the first quarter of Fiscal 1998. Certain departments in Elder-Beerman's department stores are leased to independent third parties for a percentage of net sales. These leased departments, which include the fine jewelry, beauty salon, watch repair, and maternity departments, provide high quality service and merchandise where specialization and expertise are critical and the Company's direct participation in the business is not economically justifiable. Leased department sales are included in Elder-Beerman's total sales. One new department store is scheduled to open during each of the second and third quarters of 1998. Pre-opening expenses associated with these stores will be charged to operations during these periods. Expenses associated with these openings and other store openings and closings during future periods may result in fluctuations in the Company's quarterly results of operations. RESULTS OF OPERATIONS The following table sets forth the Company's results of operations expressed as a percentage of total revenue:
FISCAL YEAR ENDED 13 WEEKS ENDED --------------------------------------- --------------- FEBRUARY 3, FEBRUARY 1, JANUARY 31, MAY 3, MAY 2, 1996 1997 1998 1997 1998 ----------- ----------- ----------- ------ ------ Revenues: Net sales.................................. 96.9% 95.4% 95.6% 94.7% 95.1% Financing.................................. 3.1 4.6 4.4 5.3 4.9 ----- ----- ----- ----- ----- Total revenue...................... 100.0 100.0 100.0 100.0 100.0 ----- ----- ----- ----- ----- Cost and expenses: Cost of merchandise sold, occupancy and buying expenses......................... 75.1 68.7 69.7 68.5 68.9 Selling, general and administrative expenses................................ 27.9 26.3 24.9 29.1 27.8 Key employees retention bonus plan expense................................. 0.0 0.8 0.7 0.4 0.4 Hiring and recruiting expenses for new executives.............................. 0.0 0.2 0.3 0.1 0.1 Provision for doubtful accounts............ 1.0 1.1 1.4 0.8 1.2 Interest expense........................... 1.6 1.1 1.2 1.2 2.1 Other income............................... 0.0 (0.2) (0.1) (0.2) 0.0 ----- ----- ----- ----- ----- Total costs and expenses........... 105.6 98.0 98.1 99.9 100.5 ----- ----- ----- ----- ----- Income (loss) before reorganization items and income tax expense (benefit)........ (5.6) 2.0 1.9 0.1 (0.5) Reorganization items......................... (3.2) (4.0) (4.5) (2.7) 0.0 ----- ----- ----- ----- ----- Loss before income tax expense (benefit), discontinued operations and extraordinary item............................. (8.8) (2.0) (2.6) (2.6) (0.5) Income tax expense (benefit)................. (0.4) 0.1 (1.2) 0.0 (0.2) ----- ----- ----- ----- ----- Loss from continuing operations.... (8.4) (2.1) (1.4) (2.6) (0.3) Discontinued operations...................... (2.0) 0.0 1.2 0.0 0.0 Loss before extraordinary item..... (10.4) (2.1) (0.2) (2.6) (0.3) Extraordinary item........................... 0.0 0.0 (4.6) 0.0 0.0 ----- ----- ----- ----- ----- Net loss........................... (10.4)% (2.1)% (4.8)% (2.6)% (0.3)% ===== ===== ===== ===== =====
23 25 THIRTEEN WEEKS ENDED MAY 2, 1998 COMPARED TO THIRTEEN WEEKS ENDED MAY 3, 1997 Net Sales. Net sales for the 13-week period ended May 2, 1998 ("First Quarter 1998") increased by 5.8% to $126.7 million from $119.8 million for the 13-week period ended May 3, 1997 ("First Quarter 1997"). The increase was due to a 10.6% comparable store sales increase for the Elder-Beerman department stores and a 2.5% comparable store sales increase for the Bee-Gee shoe stores. Better and moderate women's sportswear, men's clothing and men's sportswear, furniture, and domestics led the sales increase for the department stores. The Company's business is subject to seasonal fluctuations. Approximately one-third of the Company's annual sales occur in the fourth quarter (i.e., November -- January), as well as a majority of the Company's profits. Financing Revenue. Financing revenue from the Company's private label credit card operated by Chargit for First Quarter 1998 decreased by 3.5% to $6.5 million from $6.7 million for First Quarter 1997. Outstanding net customer accounts receivable decreased 5.1% from May 3, 1997 to May 2, 1998. The decline in finance charges due to the reduction in outstanding customer accounts receivable was partially offset by an increase in late fees charged. Cost of Merchandise Sold, Occupancy, and Buying Expenses. Cost of merchandise sold, occupancy, and buying expenses increased to $91.8 million, or 72.5% of net sales, for First Quarter 1998 from $86.7 million, or 72.3% of net sales, for First Quarter 1997. This increase was primarily due to an increase in the buying staff payroll as a result of being more fully staffed and an increase in depreciation due to capital expenditures in 1997. Selling, General, and Administrative Expenses. Although selling, general, and administrative (including key employee performance bonus plan expense), and hiring and recruiting expenses for new executives increased by $0.2 million to $37.7 million for First Quarter 1998 from $37.5 million for First Quarter 1997, this represented a decrease of 1.5% as a percentage of net sales to 29.8% for First Quarter 1998 from 31.3% for First Quarter 1997. This was due to the leverage of several semi-fixed costs, most notably service and operations, utilities, and advertising costs. Provision for Doubtful Accounts. Provision for doubtful accounts increased to $1.6 million, or 1.2% of net sales, for First Quarter 1998 from $1.1 million or 0.9% for First Quarter 1997. The increase was primarily due to the level of delinquent accounts and receivable charge-offs in previous months. Interest Expense, Net. Interest expense increased to $2.8 million, or 2.2% of net sales, for First Quarter 1998 from $1.5 million, or 1.2% of net sales, for First Quarter 1997. The increase was due to the required financing to support the payment of the bankruptcy obligations under the Plan. Other Income. There was no other income for First Quarter 1998 compared to other income of $0.2 million, or 0.2% of net sales, for First Quarter 1997. The income for First Quarter 1997 was realized from a swap mark-to-market adjustment on the unhedged portion of swap agreements in place at that time. With the emergence from bankruptcy protection, these swaps were bought out and no longer in force. Also, on December 30, 1997 the Company entered into a new swap agreement with a notional amount of $115.0 million (expiring September 28, 2001). This agreement has been matched to the Company's securitization facility to reduce the impact of interest rate fluctuations. Reorganization Costs. Reorganization costs were zero for First Quarter 1998 compared to $3.4 million, or 2.8% of net sales, for First Quarter 1997. The costs for First Quarter 1997 were due to the Company's emergence from bankruptcy protection in December 1997. Income Tax Expense. An income tax benefit of $0.3 million was recorded in First Quarter 1998 at the estimated statutory rate for federal and state income taxes of 38.6%. An income tax benefit was not recorded in First Quarter 1997 because the Company remained under bankruptcy protection. FISCAL 1997 COMPARED TO FISCAL 1996 Net Sales. Net sales for Fiscal 1997 increased by 2.1% to $581.4 million from $569.6 million for Fiscal 1996. The increase was due to a 3.7% comparative store sales increase for the Elder-Beerman department stores, offset partially by a 2.5% comparative stores sales decline for the Bee-Gee shoe stores. The Company closed the outlet section of the downtown Dayton, Ohio department store, the Fairborn, Ohio furniture store, and the outlet 24 26 section of the Hamilton, Ohio department store, which contributed a combined total of approximately $5.5 million in Fiscal 1996 sales that were absent in Fiscal 1997. In addition, the Company closed its Northtowne Mall department store located in Toledo, Ohio and its department store in Carbondale, Illinois in November 1997 and liquidated its unprofitable electronics product line in December 1997. Financing Revenue. Financing revenue from the Company's private label credit card program for Fiscal 1997 decreased by 3.2% to $26.6 million from $27.5 million for Fiscal 1996. The decline was due to a 2.0% decrease in sales attributed to the Company's private label credit card and a resulting decline in the outstanding customer accounts receivable. The decline in finance charges due to outstanding customer accounts receivable has been partially offset by an increase in late fees charged. Cost of Merchandise Sold, Occupancy, and Buying Expenses. Cost of merchandise sold, occupancy, and buying expenses increased to $423.5 million, or 72.9% of net sales, for Fiscal 1997 from $410.1 million, or 72.0% of net sales, for Fiscal 1996. This increase was due to $8.6 million in excess markdowns in cost of merchandise due to store closings in Fiscal 1997. This increase in costs was partially offset by an increase in the initial rate of mark-up coupled with a decrease in the markdown rate. In Fiscal 1997, the LIFO inventory valuation adjustment reduced cost of merchandise sold by $1.4 million compared to a decrease in cost of merchandise sold of $1.9 million in Fiscal 1996. Selling, General, and Administrative Expenses. Selling, general, administrative (including key employee performance bonus plan expense), and hiring and recruiting expenses for new executives decreased by 3.6% to $157.4 million, or 27.1% of net sales, for Fiscal 1997 from $163.3 million, or 28.7% of net sales, for Fiscal 1996. This improvement was primarily due to a reduction in payroll and suspension of ongoing payments on certain computer leases resulting from settlements with the lessors in which such lessors received claims in the Reorganization Cases, offset partially by an increase in sales promotion expense. The payroll expense reduction was primarily attributable to a reduction in store payroll as the Company implemented several technology driven programs to eliminate store nonselling workload, such as automating the price change, transfer and return to vendor processes as well as reengineering the store cash office and gift wrap functions. In addition, $4.0 million was incurred under the key employee retention bonus program for Fiscal 1997 compared to $5.0 million for Fiscal 1996. The decline was due to an increase in the profit threshold to which such bonus is tied. The expense savings above were partially offset by an increase of $0.7 million in hiring and recruiting expenses for new executives. Provision for Doubtful Accounts. Provision for doubtful accounts increased by 29.3% to $8.6 million, or 1.5% of net sales, for Fiscal 1997 compared to $6.7 million, or 1.2% of net sales, for Fiscal 1996. Consistent with industry trends, net charge offs increased due to the rise in personal bankruptcy filings and delinquent customer balances. Interest Expense, Net. Interest expense increased by 9.5% to $7.1 million, or 1.2% of net sales, for Fiscal 1997 from $6.5 million, or 1.1% of net sales, for Fiscal 1996. Interest expense increased due to the additional borrowings to support working capital requirements and capital expenditures. Other Income. Other income decreased by 40.2% to $0.7 million, or 0.1% of net sales, for Fiscal 1997 from $1.1 million, or 0.2% of net sales, for Fiscal 1996. Elder-Beerman had certain interest rate swap agreements and was required to make adjustments to market value. For Fiscal 1997, the swap adjustment to market resulted in an expense of $0.6 million compared to income of $1.1 million in the prior period. Fiscal 1997's swap expense was offset by $1.3 million in interest income generated by a federal income tax refund received in 1997. Reorganization Costs. Reorganization expense increased by 16.5% to $27.5 million, or 4.7% of net sales, for Fiscal 1997 from $23.6 million, or 4.2% of net sales, for Fiscal 1996. The Company expensed $6.9 million more in professional fees in Fiscal 1997 compared to Fiscal 1996. Also, in Fiscal 1997 there was a $2.3 million expense recorded for an adjustment to estimated allowed claims and a one time $2.1 million expense recorded for reorganization bonuses. In Fiscal 1996, the Company recognized a one time expense of $7.4 million for equipment lease settlements that did not occur in Fiscal 1997. There was also a reduction in financing cost expense of $2.4 million. 25 27 Income Tax Expense. In Fiscal 1997 a state income tax expense provision was made for approximately $0.5 million. The Fiscal 1997 operating loss resulted in additional federal net operating loss carryforwards ("NOLs"). The Company reviewed the status of its deferred tax valuation allowance and determined that a deferred tax asset of $7.9 million should be recognized. This resulted in a net income tax benefit being recorded in Fiscal 1997. Discontinued Operations. The discontinued operations gain of $7.4 million recorded in 1997 was for the extinguishment of debt for Margo's. In December 1995, the Bankruptcy Court approved the disposal of Margo's. The gain recorded represents the difference between the amount of cash Margo's creditors received as part of the plan of reorganization and the liabilities subject to settlement recorded by Margo's. Extraordinary Item. In Fiscal 1997 an extraordinary loss of $28.1 million was recorded in connection with the extinguishment of the Company's prepetition liabilities. The loss was based on the excess of the fair value of the stock and cash distributed to the general unsecured creditors over the carrying amount of the liabilities extinguished. FISCAL 1996 COMPARED TO FISCAL 1995 Net Sales. Net sales for Fiscal 1996 decreased 3.5% to $569.6 million from $590.0 million for Fiscal 1995. Fiscal 1995 contained 53 weeks and approximately $4.6 million in net sales for the extra week. The department store division comparative store sales for Fiscal 1996 and the first 52 weeks of Fiscal 1995 decreased approximately 0.4%. In Fiscal 1995, two department stores were closed and two new department stores were opened. In addition, Bee-Gee closed 11 El-Bee Shoe outlet stores in Fiscal 1996. Financing Revenue. Financing revenue for Fiscal 1996 increased by 45.1% to $27.5 million from $18.9 million in Fiscal 1995. In Fiscal 1995, prior to the Petition Date, the Company maintained a financing facility through the sale ("securitization") of customer accounts receivable. With the filing of the Reorganization Cases the securitization facility was canceled. In Fiscal 1995, gross financing revenue was reduced by $5.9 million of securitization expense. Cost of Merchandise Sold, Occupancy, and Buying Expenses. Cost of merchandise sold, occupancy, and buying expenses decreased from $457.1 million, or 77.5% of net sales, in Fiscal 1995 to $410.1 million, or 72.0% of net sales, in Fiscal 1996. This improvement was attributable to a significant increase in the initial rate of mark-up coupled with a significant decrease in the markdown rate for Fiscal 1996 compared to Fiscal 1995. In Fiscal 1995, increased markdowns were taken to clear excess inventories. In Fiscal 1996, the LIFO inventory valuation adjustment reduced cost of merchandise sold by $1.9 million compared to an increase in cost of merchandise sold of $0.8 million in Fiscal 1995. Selling, General, and Administrative Expenses. Selling, general, and administrative expenses (including key employee performance bonus plan expense) and hiring and recruiting expenses for new executives, decreased by 3.9% to $163.3 million, or 28.7% of net sales, in Fiscal 1996, compared to $170.0 million, or 28.8% of net sales, in Fiscal 1995. In Fiscal 1996 through expense reduction programs, Elder-Beerman was able to reduce expenses in a significant number of expense categories, particularly in the areas of data processing and sales promotion, which was partially offset by implementation in Fiscal 1996 of a key employee retention bonus program and hiring and recruiting expenses. Provision for Doubtful Accounts. Provision for doubtful accounts increased by 13.6% to $6.7 million, or 1.2% of net sales, in Fiscal 1996, compared to $5.9 million, or 1.0% of net sales, in Fiscal 1995. This increase was primarily the result of an increase in customer personal bankruptcy filings. Interest Expense, Net. Interest expense decreased by 32.3% to $6.5 million, or 1.1% of net sales, in Fiscal 1996, compared to $9.6 million, or 1.6% of net sales, in Fiscal 1995. After the Petition Date, the primary method of financing was through a Debtor-In-Possession ("DIP") financing agreement. The required borrowings under the DIP financing agreement after the Petition Date were significantly less than the total indebtedness outstanding prior to the Petition Date, resulting in substantially less interest expense for Fiscal 1996. 26 28 Other Income. Other income for Fiscal 1996 related to income recorded for a market value adjustment in interest rate swaps. Reorganization Costs. Reorganization expense increased by 20.0% to $23.6 million in Fiscal 1996 compared to $19.7 million in Fiscal 1995. Professional fees in Fiscal 1996 were $5.0 million higher than Fiscal 1995 because the bankruptcy filing occurred in October 1995. Other major differences included an expense of $7.5 million for equipment lease settlements in Fiscal 1996 for which there were no similar charges in Fiscal 1995, restructuring expenses that were $4.4 million less in Fiscal 1996, and an expense in Fiscal 1995 of $5.0 million for the market value adjustment of interest rate swaps. Income Tax Expense. Income tax expense for Fiscal 1996 was $0.4 million, compared to a benefit of $2.3 million in Fiscal 1995. The tax provision for Fiscal 1996 was for state and local taxes only, no federal tax benefit was recorded due to a valuation allowance. Fiscal 1995's tax benefit included the carryback of net operating losses for a refund of prior tax paid net of state and local taxes paid, and was also subject to a valuation allowance. Discontinued Operations. Loss from discontinued operations for Fiscal 1996 was zero compared to a loss of $12.3 million for Fiscal 1995. Fiscal 1995's expense relates to an additional reserve for disposal of Margo's and reversal of the reserve for discontinued operations set up for Bee-Gee in the 1994 fiscal year, as the Company had decided to retain Bee-Gee as a continuing operation in Fiscal 1996. The Margo's disposal was completed in January 1996 (i.e., Fiscal 1995). SEASONALITY AND QUARTERLY FLUCTUATIONS The Company's business, like that of most retailers, is highly seasonal, with a high proportion of sales and operating income realized during the latter half of each fiscal year, which includes the holiday season. Working capital requirements fluctuate during the year, increasing somewhat in mid-summer in anticipation of the fall merchandising season and increasing substantially prior to the holiday season when the Company must carry significantly higher inventory levels. Selling, general, and administrative expenses are typically higher as a percentage of net sales during the first half of each fiscal year. Consumer spending in the peak retail season may be affected by many factors outside the Company's control, including competition, consumer demand and confidence, weather that affects consumer traffic, and general economic conditions. A failure to generate substantial holiday season sales could have a material adverse effect on the business, operating results and financial condition of the Company. Because of the seasonality of the Company's business, results for any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year. In addition, quarterly results of operations depend upon the timing and amount of revenues and costs associated with the opening, closing, and remodeling of existing stores. LIQUIDITY AND CAPITAL RESOURCES Prior to the filing of the Reorganization Cases on the Petition Date, the Company's primary sources of funds were cash flows from operations and borrowings under various debt agreements, and during the Reorganization Cases were cash flows from operations and the DIP financing agreement. Since the Effective Date, the Company's principal sources of funds have been cash flows from operations and borrowings under its three-year Revolving Credit Facility and its accounts receivable securitization facility (the "Receivables Securitization Facility" and, together with the Revolving Credit Facility, the "Credit Facilities"). The Company's primary ongoing cash requirements are to fund debt service, make capital expenditures, and finance working capital. The Revolving Credit Facility, with Citicorp USA, Inc. as the Agent and Citibank N.A. as the Issuer (collectively, "Citicorp"), was amended and restated on July 27, 1998 to provide for revolving credit loans of up to $150.0 million for seasonal working capital purposes (including a $40.0 million letter of credit subfacility). The borrowing base used in determining the aggregate availability for loans and other extensions of credit under the Revolving Credit Facility is equal to (a) up to 95% of cash and (b) eligible finished-goods inventory as follows: January-October, up to 60%; and November-December, up to 65%, less such reserves as the 27 29 arranger under the Revolving Credit Facility deems appropriate. As of May 2, 1998, the Company's outstanding balance under the Revolving Credit Facility was $33.2 million. In addition, the Revolving Credit Facility provided the Company an overadvance facility in excess of the borrowing base of $40.0 million, which the Company used to finance the Acquisition. The overadvance facility is required to be repaid with the proceeds of the Offering. The Receivables Securitization Facility with Citicorp North America, Inc., as agent, is a three-year variable rate loan agreement, in which Chargit's customer accounts receivable are pledged as collateral. The Receivables Securitization Facility is a revolving arrangement whereby Elder-Beerman can borrow up to $125.0 million. The borrowings under the Receivables Securitization Facility are subject to a borrowing base formula based primarily on outstanding customer accounts receivable. Borrowings bear interest at approximately LIBOR plus 50 basis points. As of May 2, 1998, the Company's outstanding balance under the Receivables Securitization Facility was $112.1 million. On December 30, 1997, as a requirement of the Receivables Securitization Facility, the Company entered into an interest rate swap agreement with a notional amount of $115.0 million, expiring on September 28, 2001, to reduce the impact of interest rate changes on future interest expense. This agreement has been matched to the Receivables Securitization Facility to reduce the impact of interest rate changes on cash flows. Under the terms of the Receivables Securitization Facility, the Company is typically permitted to borrow 86.9% of the principal amount of eligible pledged receivables. The Company is required to replace receivables that become delinquent or to pay down the loan secured by the pledged receivables to remain in compliance with required loan to value ratios. Thus, the Company bears the risk of delinquencies and defaults of its credit card customers, and general economic conditions, as well as other conditions beyond the Company's control, have an impact on customers' ability to repay credit card debt. As of May 2, 1998, approximately 5.0% or $6.5 million principal amount of the Company's consumer credit card receivables were 90 days past due compared to 5.2% or $7.2 million principal amount as of May 3, 1997. In Fiscal 1997, the Company experienced $8.3 million in charge-offs related to its credit card program as compared to $6.1 million in Fiscal 1996. See Note 4 of Notes to the Company's Consolidated Financial Statements. The Credit Facilities contain a number of covenants, including, among others, covenants restricting the Company with respect to the incurrence of additional indebtedness, capital expenditures, the ability to declare, pay or make dividends, distributions or other restricted payments, the creation of liens, the making of certain investments and loans, the consummation of certain transactions such as sales of substantial assets, mergers or consolidations and other transactions. The Company is also required to comply with certain financial tests and maintain certain financial ratios. Management believes that the Company will be able to comply with the covenants contained in the Credit Facilities and does not believe that compliance with these covenants will interfere with its business or the implementation of its growth strategy. The Credit Facilities require the consent of the Company's lenders for the Acquisition and the Offering, both of which consents have been obtained. The Company's capital expenditures for Fiscal 1997 were $21.0 million, of which $4.7 million related to data processing and the remaining $16.3 million related to store maintenance, remodeling, and expansions. The Company expects to make capital expenditures in Fiscal 1998 of $18.1 million. In addition, the Company expects to make approximately $12.4 million in additional capital expenditures related to remodeling and maintenance of certain Stone & Thomas stores over a three-year period. The Company had working capital of $183.4 million, $182.8 million, and $214.1 million at the end of Fiscal 1995, Fiscal 1996, and Fiscal 1997, respectively, and $229.6 million at May 2, 1998. The increase in working capital in Fiscal 1997 was principally attributable to an increase in inventories, partially offset by increased payable levels consistent with higher inventory and a decrease in liabilities of discontinued operations. The Company's business follows a seasonal pattern and working capital fluctuates with seasonal variations. Historically, the Company's working capital is at its lowest levels from February through July and then increases rapidly through November when it reaches its highest level. Net cash provided by operating activities amounted to $57.1 million in Fiscal 1995. Net cash used in operating activities amounted to $10.3 million and $53.4 million in Fiscal 1996 and Fiscal 1997, respectively. Net operating outflows in Fiscal 1997 primarily resulted from an increase in working capital over prior year levels and payments to general unsecured creditors. Net cash used in operating activities was $8.6 million in First Quarter 28 30 1998, compared to $6.8 million in First Quarter 1997, primarily as a result of increased inventory levels offset, in part, by decreased accounts receivable. Net cash used in investing activities amounted to $123.4 million, $3.0 million, and $21.0 million in Fiscal 1995, Fiscal 1996, and Fiscal 1997, respectively. The net cash outflow in Fiscal 1997 reflects capital expenditures, which included $4.7 million related to data processing and the remaining $16.3 million related to store maintenance, remodeling, and expansions. Net cash outflow in Fiscal 1995 primarily resulted from the acquisition of securitized receivables in the amount of $115.0 million and capital expenditures resulting from adding new stores in Green Bay, Wisconsin and Muskegon, Michigan. Net cash used in investing activities was $2.5 million in First Quarter 1998 as compared to $2.2 million in First Quarter 1997, primarily as a result of increased capital expenditures. Net cash provided by financing activities amounted to $74.4 million, $5.7, million and $73.8 million in Fiscal 1995, Fiscal 1996, and Fiscal 1997, respectively. The net cash inflow in Fiscal 1997 was primarily attributable to proceeds from borrowings under the asset securitization agreement partially offset by payments made to pay off the DIP facility. Net cash inflow in Fiscal 1996 consisted of borrowings against the DIP facility partially offset by payments on long-term obligations and debt acquisition costs. Net cash inflow in Fiscal 1995 consisted primarily of borrowings under the DIP facility in addition to borrowings from revolving lines of credit partially offset by debt acquisition costs. Financing activities provided net cash of $11.0 million in First Quarter 1998 and First Quarter 1997. During First Quarter 1998, borrowings under the Company's Revolving Credit Facility of $22.3 million were partially offset by $10.9 million of repayments under the Receivables Securities Facility and $0.3 million of repayments of other long-term obligations. On July 27, 1998, the Company consummated the Acquisition. The purchase price for the Acquisition was approximately $21.0 million, plus the assumption of Stone & Thomas indebtedness. The Company financed the Acquisition through borrowings under its Revolving Credit Facility. The Company also anticipates that a one-time charge will be recognized in connection with the Acquisition. Although the Company has not definitively determined the amount of such charge, the Company anticipates that it will not be less than $8.0 million. During recent periods, Stone & Thomas has recognized significant losses. In order to profitably operate the Stone & Thomas stores subsequent to the Acquisition, the Company intends to take a number of actions designed to reduce operating costs. These include the closure of two stores (which had combined retail sales in fiscal year 1997 of approximately $2.0 million), one distribution center, and Stone & Thomas' corporate offices in Charleston and Wheeling, West Virginia. In addition, the Company has entered into definitive agreements with Belk, Inc. for the disposition of three Stone & Thomas stores in Charlottesville, Virginia and in Bluefield and Beckley, West Virginia and Peebles Inc. for the disposition of five Stone & Thomas stores in Staunton, Virginia and in New Martinsville, Lewisburg, Summersville and Elkins, West Virginia. These eight stores, which are located primarily in Stone & Thomas' smaller markets, had aggregate retail sales in fiscal year 1997 of approximately $32.0 million. The Company anticipates that these sales, which are subject to standard terms and conditions, will be completed by the end of September 1998. The Company believes that the net proceeds from the Offering and anticipated cash generated from operations and anticipated future permitted borrowings under existing or proposed credit facilities will be sufficient to meet the Company's working capital, capital expenditures, and debt service requirements for the foreseeable future. The Company may, in the future, require additional credit facilities, mortgage or lease financings or issuances of other corporate debt or equity securities in connection with acquisitions or otherwise. Any debt incurred or issued by the Company may be secured or unsecured, fixed or variable rate interest and may be subject to such terms as management deems prudent. There can be no assurance that sufficient funds will be available from operations or under existing, proposed, or future revolving credit or other borrowing arrangements to meet the Company's cash needs, including, without limitation, its debt service obligations. As noted above, the Company's Revolving Credit Facility includes customary conditions to funding, eligibility requirements for collateral, and certain financial and other affirmative and negative covenants. In addition, the Company's future operating performance and ability to meet its financial obligations will be subject to future economic conditions and to financial, business, and other factors, many of which will be beyond the Company's control. 29 31 YEAR 2000 COMPLIANCE Many existing computer programs use only two digits to identify a year in the date field. These programs were designed and developed without considering the impact of the upcoming century change in the year 2000. Moreover, these programs often are highly dependent upon historical or dynamic financial and other data that, based on the programs' inability to distinguish between the year 2000 and other century-end years, could be misreported or misinterpreted and cause significant resulting errors. In fact, if not corrected, many computer applications could fail when processing year 2000 data. Elder-Beerman's operations are highly dependent on computerized recordkeeping, financial reporting, and other systems, including inventory management, point-of-sale, and internal accounting systems. The Company has assessed its systems and equipment with respect to Year 2000 and has developed a project plan. Many of the Year 2000 issues have been addressed. The remaining Year 2000 issues will be addressed either with scheduled systems upgrades or through the Company's internal systems development staff. The incremental costs will be charged to expense as incurred and are not expected to have a material impact on the financial position or the results of operations of the Company. The Company does not know the Year 2000 status of its vendors or of other third parties with which it does business. The Company could be adversely impacted if Year 2000 modifications are not properly completed by the Company or its vendors, banks or any other entity with which the Company conducts business. INFLATION Elder-Beerman does not believe inflation had a material effect on the financial statements for the periods presented. However, there can be no assurance that the Company's business will not be affected by inflationary adjustments in the future. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS Financial Accounting Standards Board Statement No. 130, "Reporting Comprehensive Income," issued in June 1997 and effective for fiscal years beginning after December 15, 1997, establishes standards for reporting and display of the total net income and the components of all other nonowner changes in equity, or comprehensive income (loss) in the statement of operations, in a separate statement of comprehensive income (loss) or within the statement of changes of shareholders' equity. The Company has had no significant items of other comprehensive income. Financial Accounting Standards Board Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information," issued in June 1997 and effective for fiscal years beginning after December 15, 1997, will change the way companies report selected segment information in annual financial statements and also requires those companies to report selected segment information in interim financial statements. The Company has evaluated the impact of the application of the new rules on the Company's consolidated financial statements and does not expect the new rules to change its current financial reporting. 30 32 BUSINESS GENERAL The Company operates the tenth largest chain of independent department stores in the United States, based on Fiscal 1997 sales volume. Founded in Dayton, Ohio in 1883, Elder-Beerman currently operates 48 department stores in small to mid-sized markets in seven midwestern states. The Company's strategy is to provide its customers with a broad selection of the same high quality, brand-name merchandise available to consumers in larger markets. In keeping with this strategy, Elder-Beerman department stores feature a wide variety of moderate to better branded merchandise, including women's ready-to-wear, men's and children's apparel, accessories, shoes and cosmetics, home furnishings, and other consumer goods. Elder-Beerman's branded merchandise includes apparel and accessories from Liz Claiborne, Tommy Hilfiger, Ralph Lauren, Calvin Klein, and Nautica, cosmetics from Estee Lauder, Clinique, and Lancome, footwear from Nike and Nine West, and home furnishings from Fieldcrest, Croscill, Lenox, and Calphalon. Branded merchandise accounted for more than 90% of the Company's merchandise during Fiscal 1997. The Company also offers qualified customers the convenience of a private label credit card program. In addition to its department stores, Elder-Beerman operates 61 specialty shoe stores under the El-Bee and Shoebilee! names, and two furniture stores. The specialty shoe stores accounted for $31.4 million, or 5.4%, of the Company's Fiscal 1997 sales volume. In October 1995, the adverse effects of a high-volume merchandising strategy implemented in the early 1990s prompted the Company and its subsidiaries to file voluntary petitions for relief under chapter 11 of the Bankruptcy Code. The Company emerged from bankruptcy on December 30, 1997. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- General." Elder-Beerman believes that a number of actions taken while in chapter 11 to reorganize the Company and streamline its operations, together with its existing competitive strengths, provide a platform for future growth. During its reorganization, the Company made a number of important changes to its management team. The 15 current members of senior management have an average of 22 years of retailing experience. In addition, during this period, Elder-Beerman reduced the number of its vendors by approximately 40% and refined its merchandising practices to provide additional authority to buyers and store managers. The Company also rationalized its real estate portfolio by closing several unprofitable or underperforming department, furniture and shoe stores and liquidating its women's specialty store chain. These enhancements to Elder-Beerman's operations have enabled it to better capitalize on its competitive strengths, including its focus on branded merchandise, solid portfolio of store locations, flexible store formats, and tailored product assortments. The Company's actions contributed to a 3.7% increase in comparable department store sales during Fiscal 1997 and a 10.6% increase during the first quarter of Fiscal 1998. The Company's department stores range in size from 39,000 square feet to 217,000 square feet. Its current store portfolio includes 37 mall stores, six stores located in strip shopping centers and five free-standing stores. The Company emphasizes an attractive in-store presentation and broad selection of brand name merchandise in convenient, well-maintained locations. The Company's regional focus permits merchandising decisions to be made with input from local store managers, which enables the Company to tailor product assortments to meet consumer demands in particular markets. A portion of the Company's merchandise in each store consists of tailored product assortments. To maintain an appropriate flow of fresh merchandise, the Company has implemented procedures designed to promote timely merchandise receipts and markdowns at each of its department stores. Elder-Beerman also emphasizes a high degree of customer service, and operates training programs designed to make its store managers and sales associates more responsive to customer needs. The Company's emphasis on providing branded merchandise, tailored product assortments and customer service in underserved retail markets has contributed to its strong market position in its existing markets. COMPETITIVE STRENGTHS The Company believes that its solid portfolio of profitable store locations, its experienced management team, and its other competitive strengths provide a platform for profitable expansion. These competitive strengths include a focus on branded merchandise, flexible department store formats, tailored product assortments, strong vendor relationships, a proprietary credit card program, targeted marketing programs, and an emphasis on customer service. 31 33 FOCUS ON BRANDED MERCHANDISE The Company offers a broad selection of moderate to better branded merchandise, including women's ready-to-wear, men's and children's apparel, accessories, shoes and cosmetics, home furnishings, and other consumer goods. The Company's merchandise mix consists of approximately 92% branded goods and 8% private label. Elder-Beerman's branded merchandise includes apparel and accessories from Liz Claiborne, Tommy Hilfiger, Ralph Lauren, Calvin Klein, and Nautica, cosmetics from Estee Lauder, Clinique, and Lancome, footwear from Nike and Nine West, and home furnishings from Fieldcrest, Croscill, Lenox, and Calphalon. Smaller midwestern cities, such as those in which Elder-Beerman operates retail stores, tend to be underserved with branded merchandise, leaving the Company as a principal retailer of branded merchandise in these smaller markets. Elder-Beerman's emphasis on branded products allows it to position its merchandise as complementary to that offered by mass merchants (such as Sears, Roebuck & Co. and J.C. Penney Company, Inc.) and discount stores (such as Kohl's Corporation and Kmart Corporation) in these smaller markets. FLEXIBLE DEPARTMENT STORE FORMATS The Company's department stores range in size from 39,000 square feet to 217,000 square feet, and its current store portfolio includes 37 mall stores, six stores located in strip shopping centers and five free-standing stores. The Company's prototype store, which generally has the most favorable unit economics, averages 75,000 square feet in size. Elder-Beerman believes that the flexibility of its store formats is an important competitive advantage in seeking potential new store locations. In targeting locations for new store development, the Company seeks both new locations in existing markets where it believes it can enhance its current market share, as well as new small to mid-sized markets where its emphasis on branded products will permit it to achieve a leading market share position. The Company's ability to operate profitably in three different store formats helps to reduce constraints on growth resulting from relatively low levels of new mall construction or mall anchor availability. TAILORED PRODUCT ASSORTMENTS The Company strives to maintain a consistent in-store presentation. The vast majority of the merchandise in each store consists of core assortments and the balance of the merchandise is tailored to characteristics of the particular local market. Merchandising decisions are made with input from local store managers, which enables the Company to tailor product assortments to meet consumer demands in particular markets. The Company does not make buying decisions using a committee or team format, which allows buyers and divisional merchandise managers to identify new designs and manufacturers and respond quickly to new fashion trends. STRONG VENDOR RELATIONSHIPS The Company's merchandise managers have significant industry experience and strong relationships with key vendors. During the past two years, the Company has reduced its vendor base by approximately 40% and has increased its volume of business with its remaining key vendors, especially the nationally recognized branded suppliers. The proliferation of media combined with the significant national marketing efforts of these vendors has created significant demand for branded merchandise in smaller markets. However, the financial and other limitations of many local retailers has left large national brands with limited access to those markets. Furthermore, these vendors desire to preserve their brand image and generally do not sell to national discounters. As a result, the Company is able to carry branded merchandise frequently not carried by local competitors. PROPRIETARY CREDIT CARD PROGRAM Elder-Beerman aggressively promotes its proprietary credit card and, as a result, proprietary credit sales constitute a significant (approximately 44% of net sales in Fiscal 1997) portion of the Company's sales. The Company considers its credit card program to be a critical component of its business strategy because it: (a) enhances customer loyalty; (b) allows the Company to identify and regularly contact its best customers; and (c) creates a comprehensive data warehouse for targeted marketing. 32 34 TARGETED MARKETING PROGRAMS The Company has realigned its advertising strategy from an emphasis on general mass media (i.e., television, radio, and print) to one which increasingly focuses on direct marketing. The information generated through proprietary and third party credit data assists the Company in creating direct mail and telemarketing advertising and sales promotion programs that are designed to appeal to the specific needs of its customers. This targeted marketing approach has improved the effectiveness of advertising efforts, as evidenced by an increase in comparable store sales for Fiscal 1997 without a corresponding increase in advertising expenditures. EMPHASIS ON CUSTOMER SERVICE Elder-Beerman has a strong tradition of providing quality customer service. The Company is working to enhance customer service by: (a) making increased use of technology and improved controls to eliminate nonselling activities from stores; (b) using training and recruiting practices to further instill a culture of customer helpfulness and responsiveness; (c) developing tools and training programs to enhance associates' selling skills and awareness; and (d) implementing selling productivity measurement and compensation systems directed at encouraging selling activities and results. BEE-GEE SHOE STORES Bee-Gee operates two distinct discount footwear formats that are differentiated by varying degrees of fashion, value, and convenience. The 48 El-Bee Shoe stores average approximately 3,000 square feet and offer primarily close-out and special purchase budget footwear styles for women, men, and children in a self-service, open-box rack format. The 13 Shoebilee! family footwear stores average approximately 5,000 square feet and offer national brands in an updated shopping environment where moderate assortments are merchandised by lifestyle and classification rather than by size and gender. Merchandise is value-priced and presented in a self-select caseline format. The Company is in the process of converting several El-Bee Shoe stores to the newer Shoebilee! format. Many Bee-Gee stores are positioned near existing Elder-Beerman stores to leverage credit marketing and cross-shopping opportunities. MERCHANDISING AND MARKETING The Company emphasizes "signature" areas critical to its image in its niche market as a primary destination for fashion apparel and gifts. These "signature" areas include men's and women's collections, and cosmetics. In addition, through continued efforts to develop a partnership with its most significant vendors, the Company (a) has automated replenishment of basic stock to increase sales and reduce basic inventories and (b) is using technology and focused merchandising and distribution to reduce material handling costs and increase speed in moving stock from the vendor to the selling floor. The following table sets forth the Company's department store percentages of net sales by major merchandise category for each of the periods presented.
13 WEEKS ENDED MERCHANDISE FISCAL FISCAL FISCAL --------------------------- CATEGORY 1995 1996 1997 MAY 3, 1997 MAY 2, 1998 ----------- ------ ------ ------ ------------ ------------ Women's Ready-to-Wear........................ 32.1% 33.2% 34.0% 36.5% 36.2% Accessories, Shoes and Cosmetics............. 21.4 21.6 21.7 22.5 22.0 Men's and Children's......................... 24.9 25.1 24.3 21.7 22.3 Home Store................................... 21.6 20.1 20.0 19.3 19.5 ----- ----- ----- ----- ----- Total Retail....................... 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== =====
The Company's marketing and advertising functions are centralized at its corporate headquarters and, for the department stores, are focused on communicating a timely and broad offering of moderate to better branded merchandise, a strong quality/value relationship, and outstanding customer service. See "-- Competitive Strengths -- Targeted Marketing Programs." Marketing activities for the Bee-Gee subsidiary are limited primarily to newspaper, radio, coupons, and in-store displays emphasizing price, seasonal assortments, and special promotions. 33 35 PURCHASING During Fiscal 1997, the Company purchased merchandise from approximately 1,000 domestic and foreign manufacturers and suppliers. During that period, the top 25 vendors by dollar volume accounted for approximately 32% of net purchases. In Fiscal 1997, the Company also purchased approximately 8% of its merchandise, primarily private label merchandise, through Frederick Atkins, Inc. ("Frederick Atkins"), a national association of major retailers that provides its members with group purchasing opportunities. The Company employs three general merchandise managers, 13 divisional merchandise managers, and 62 buyers. Management believes it has good relationships with its suppliers. The Company believes that alternative sources of supply are available for each category of merchandise it purchases. REMODELING PROGRAM Elder-Beerman's ongoing remodeling program is designed to enhance store appearances and increase comparable store sales. Remodelings are designed to match departmental size and location with volume opportunities, to recapture non-selling space where appropriate, and to reconfigure aisle patterns, adjacencies and lighting to enhance selling potential. Remodels often are complemented with improvements in departmental signage, visual displays, high-capacity fixtures, and other techniques to maximize merchandise exposure to customer traffic and strengthen visual impact. Elder-Beerman has redesigned the layout of its prototype store to improve merchandise adjacencies and enhance the prominence and in-store presentation of departments offering higher-margin merchandise. PRIVATE LABEL CREDIT CARD PROGRAM Elder-Beerman operates a private label credit card program through its wholly-owned subsidiary, Chargit. During Fiscal 1997, the Company issued approximately 132,300 Elder-Beerman credit cards for newly opened accounts and had approximately 450,000 Elder-Beerman active credit card accounts during Fiscal 1997. See Note 4 of Notes to the Company's Consolidated Financial Statements. The Company has made a significant investment in its credit card program since it believes that Elder-Beerman credit card holders generally constitute the Company's most loyal and active customers. Elder-Beerman credit card holders shop more frequently with the Company and generally purchase more merchandise than customers who pay with cash or third-party credit cards. During Fiscal 1997, approximately 44% of Elder-Beerman's total sales were private label credit card sales whereas cash sales and third-party credit cards accounted for 33% and 23% of sales, respectively. Frequent use of the Elder-Beerman credit card by customers is an important element in the Company's business strategy. The Company also seeks to increase penetration of its private label credit card program through a combination of efforts intended to increase the use of cards by existing Elder-Beerman credit card customers, either through incremental sales or shifting sales from other credit cards and other retailers, and attracting new cardholders. All phases of the credit card operation are handled by Chargit except the processing of customer mail payments, which is performed pursuant to a retail lockbox agreement with a bank. Decisions whether to issue a credit card to an applicant are made on the basis of a credit scoring system. WAREHOUSING/DISTRIBUTION The Company owns a 20% limited partnership interest in Fairborn Commerce Center II, a partnership that owns Elder-Beerman's 300,000 square foot distribution center in Fairborn, Ohio. The Company also has access to a currently unutilized 100,000 square foot distribution center in Moraine, Ohio. The Company believes that the Moraine facility and excess capacity at the Fairborn facility provide sufficient excess capacity to support its growth strategy. Merchandise is generally shipped from vendors, through three consolidation points, to this distribution center. Deliveries are made from the distribution center to each store two to seven times per week depending on the store size and the time of year. Merchandise is usually shipped ready for immediate placement on the selling floor. 34 36 INFORMATION SYSTEMS The Company's merchandising activities are controlled by a series of on-line systems, including a point-of-sale and sales reporting system, a purchase order management system, a receiving system, and a merchandise planning system. These integrated systems track merchandise from the order stage through the selling stage and provide valuable "actual vs. plan" sales information for management. Elder-Beerman is presently further enhancing its management information systems, through capital investment and training programs, to: (a) improve the data integrity of financial and merchandise systems; (b) reduce administrative costs through automation and elimination of paperwork and redundant controls; (c) utilize Electronic Data Interchange and other industry standards to increase "floor ready" merchandise receipts; (d) eliminate paperwork through automatic invoice processing; and (e) improve merchandise analysis and decision making. COMPETITION The retail industry, in general, and the department store and shoe store businesses, in particular, are intensely competitive. Generally, the Elder-Beerman department stores and Bee-Gee shoe stores are in competition not only with other department stores and family shoe stores, respectively, in the geographic areas in which they operate, but also with numerous other types of retail outlets, including specialty stores, general merchandise stores, off-price and discount stores, manufacturer outlets, and catalog retailers. Some of the retailers with which Elder-Beerman competes have substantially greater financial resources than the Company and may have other competitive advantages over the Company. The Elder-Beerman department stores and Bee-Gee Shoe Stores compete on the basis of quality, depth and breadth of merchandise, prices for comparable quality merchandise, customer service, store location and environment. PROPERTIES Elder-Beerman currently operates 48 department stores and two furniture stores, principally in smaller midwestern markets in Ohio, Indiana, Illinois, Michigan, Wisconsin, Kentucky, and West Virginia, and Bee-Gee operates 61 stores (48 El-Bee Shoe outlets and 13 Shoebilee! stores), principally in smaller midwestern markets in Ohio, Indiana, Illinois, Michigan, Pennsylvania, Virginia and West Virginia. Substantially all of the Company's stores are leased properties. The Company owns, subject to a mortgage, the 302,570 square foot office/warehouse facility located in Dayton, Ohio, which serves as its principal executive offices. The Company also has a 20% limited partnership interest in a partnership that owns a 300,000 square foot distribution center located in Fairborn, Ohio. The following table sets forth by state the number of Elder-Beerman department store locations and Bee-Gee shoe store locations, operating as of May 2, 1998, the end of Elder-Beerman's and Bee-Gee's most recently completed fiscal year:
DEPARTMENT SHOE STATE STORES STORES - --------------------- ---------- ------ Ohio................. 29(a) 40 Indiana.............. 9 9 Michigan............. 6 2 Illinois............. 2 5 Wisconsin............ 2 -- Kentucky............. 1 -- West Virginia........ 1 1 Pennsylvania......... --(b) 3 Virginia............. -- 1 -- -- 50(a) 61(c)
- --------------- (a) Includes two furniture stores. (b) One department store is planned to open in Pennsylvania this summer. (c) Includes 48 El-Bee shoe stores and 13 Shoebilee! shoe stores. 35 37 Substantially all of the Company's stores are leased properties. The typical department store lease has an initial term of between 15 and 20 years, with two to six renewal periods of five years each, exercisable at the Company's option. Substantially all of the Company's leases provide for a minimum annual rent that is fixed or adjusts to set levels during the lease term, including renewals. Most of the leases provide for additional rent based on a percentage of sales to be paid when designated sales levels are achieved. Eleven department store leases are scheduled to expire over the next five years. All of these leases contain renewal options. The Company has determined not to exercise a renewal option associated with one department store lease scheduled to expire in April 1999. The Company is currently evaluating various alternatives with respect to this store, including the renegotiation of its lease on more favorable terms or closing the store. ASSOCIATES On May 2, 1998, the Company had approximately 7,500 regular and part-time associates, approximately 7,100 of which are employed by Elder-Beerman's department stores. Because of the seasonal nature of the retail business, the number of employees rises to a peak in the holiday season. None of the Company's associates are represented by a labor union. The Company's management considers its relationships with its associates to be satisfactory. LEGAL PROCEEDINGS The Company is involved in several legal proceedings arising from its normal business activities and reserves have been established where appropriate. Management believes that none of these legal proceedings will have a material adverse effect on the business, operating results or financial condition of the Company. In addition, as a result of the Reorganization Cases, Elder-Beerman remains subject to the jurisdiction of the Bankruptcy Court for matters relating to the consummation of the Plan. 36 38 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth information regarding those persons currently serving as the executive officers and directors of Elder-Beerman. Certain biographical information regarding each of the Company's current directors and executive officers is described below the table.
NAME AGE POSITION ---- --- -------- Frederick J. Mershad...................... 55 Chairman of the Board and Chief Executive Officer John A. Muskovich......................... 51 President, Chief Operating Officer, Chief Financial Officer, and Director James M. Zamberlan........................ 51 Executive Vice President, Stores Steven D. Lipton.......................... 47 Senior Vice President, Controller Perry J. Schiller......................... 40 Senior Vice President and Treasurer Scott J. Davido........................... 37 Senior Vice President, General Counsel, and Secretary Stewart M. Kasen.......................... 59 Director Steven C. Mason........................... 62 Director Thomas J. Noonan, Jr...................... 58 Director Bernard Olsoff............................ 69 Director Laura H. Pomerantz........................ 51 Director Jack A. Staph............................. 52 Director John J. Wiesner........................... 60 Director
Frederick J. Mershad has served as Chairman of the Board of Elder-Beerman since December 1997, as Chief Executive Officer of Elder-Beerman since January 1997, and as President of Elder-Beerman from January 1997 to December 1997. Prior to this time, Mr. Mershad served as President and Chief Executive Officer of the Proffitt's division of Proffitt's, Inc. ("Proffitt's"), a regional department store retailer, from February 1995 to December 1996; Executive Vice President, Merchandising Stores for Proffitt's from May 1994 to January 1995; Senior Vice President, General Merchandise Manager, Home Store for Rich's Department Stores, Inc. from August 1993 to May 1994; and Executive Vice President, Merchandising and Marketing of the McRae's Department Stores division of Proffitt's from June 1990 to August 1993. John A. Muskovich has served as President, Chief Operating Officer, Chief Financial Officer, and a Director of Elder-Beerman since December 1997 and served as Executive Vice President of Administration of Elder-Beerman from February 1996 to December 1997. Prior to this time, Mr. Muskovich served as Director of Business Process for Kmart Corp., a discount retailer, from September 1995 to February 1996; President of the Federated Claims Services Group with Federated from February 1992 to August 1995; Vice President of Benefits of Federated from 1994 to 1995; and Vice President, Corporate Controller of Federated from 1988 to 1992. James M. Zamberlan has served as Executive Vice President, Stores of Elder-Beerman since July 1997. Prior to this time, Mr. Zamberlan served as Executive Vice President of Stores for Bradlee's, Inc., a regional retailer, from September 1995 to January 1997 and also served as Senior Vice President of Stores for the Lazarus Division of Federated from November 1989 to August 1995. Steven D. Lipton has served as Senior Vice President, Controller of Elder-Beerman since March 1996. Prior to this time, Mr. Lipton served as Operating Vice President of Payroll for Federated Financial & Credit Services, a wholly-owned subsidiary of Federated, from September 1994 to January 1996 and served as Vice President and Controller of the Lazarus Division of Federated from February 1990 to August 1994. Perry J. Schiller has served as Senior Vice President and Treasurer of Elder-Beerman since November 1995. Prior to this time, Mr. Schiller served as the Director of Internal Audit for Elder-Beerman from October 1993 to November 1995 and served as a Senior Manager of Financial Audit for Deloitte & Touche LLP, an accounting firm, from May 1988 to October 1993. 37 39 Scott J. Davido has served as Senior Vice President, General Counsel, and Secretary of Elder-Beerman since January 1998. Prior to this time, Mr. Davido was a partner with Jones, Day, Reavis & Pogue, a law firm, since December 1996, and was employed as an associate with the firm since September 1987. Stewart M. Kasen has served as a Director of Elder-Beerman since December 1997. Currently, Mr. Kasen serves as Chairman of the Board of Directors, President and Chief Executive Officer of Factory Card Outlet Corp., a retail party goods company, and has served in this capacity since May 1998. Mr. Kasen has served as Chairman of the Board of Directors for Factory Card Outlet Corp. since April 1997. Prior to this time, Mr. Kasen served as Chairman of the Board, President, and Chief Executive Officer of Best Products Co., Inc. ("Best Products"), a Richmond, Virginia, retail catalogue showroom company, from June 1994 through April 1996, President and Chief Executive Officer from June 1991 to June 1994, and President and Chief Operating Officer from 1989 to June 1991. Best Products filed for protection under chapter 11 of the Bankruptcy Code in January 1991. Best Products' plan of reorganization was confirmed in June 1994, and it filed a petition for bankruptcy under chapter 11 of the Bankruptcy Code again on September 24, 1996. Mr. Kasen also currently serves as a Director of Markel Corp., O'Sullivan Industries Holdings, Inc., Bibb Co., and K2 Inc. Steven C. Mason has served as a Director of Elder-Beerman since December 1997. Mr. Mason retired from Mead Corp., a forest products company, in November 1997. Prior to retirement, Mr. Mason served as Chairman of the Board and Chief Executive Officer of Mead Corp., from April 1992 to November 1997. Mr. Mason is also currently a Director of PPG Industries, Inc. and Cincinnati Bell. Thomas J. Noonan, Jr. has served as a Director of Elder-Beerman since December 1997. Mr. Noonan serves as Managing Director of The Coppergate Group, a financial investment and management company, and has served in this capacity since April 1993. Mr. Noonan also serves as Executive Vice President of Herman's Sporting Goods, Inc., a sporting goods retailer that filed for protection under chapter 11 of the Bankruptcy Code and is currently being liquidated, and has served in this capacity since August 1994. Prior to this time, Mr. Noonan served as Managing Director and Chief Executive Officer of TFGII, a financial investment and management company, from January 1993 to October 1994, and as Executive Vice President of Intrenet Inc., a trucking holding company, from September 1990 to March 1993. Mr. Noonan is also currently a Director of Intrenet Inc. and Richman Gordman 1/2 Price Stores Inc. Bernard Olsoff has served as a Director of Elder-Beerman since December 1997. Mr. Olsoff retired from Frederick Atkins in 1997. Prior to this time, Mr. Olsoff served as President, Chief Executive Officer, and Chief Operating Officer of Frederick Atkins, a national retailers association, from 1995 to April 1997, and President and Chief Operating Officer from 1983 to 1995. Mr. Olsoff is also currently a Director of The Leslie Fay Companies, Inc. ("Leslie Fay"). Laura H. Pomerantz has served as a Director of Elder-Beerman since January 1998. Mrs. Pomerantz currently serves as President of LHP Consulting & Management, a real estate consulting firm, and has served in this capacity since 1995. Through LHP Consulting & Management, Mrs. Pomerantz is also associated with Newmark Real Estate Co., Inc., a commercial real estate company, as Senior Managing Director and has served in this capacity since August 1996. Prior thereto, Mrs. Pomerantz served as Senior Managing Director of S.L. Green Real Estate Company, a commercial real estate company, from August 1995 to July 1996, and was affiliated with Koeppel Tenor Real Estate Services, Inc., a commercial real estate company, from March 1995 through July 1995. Prior to this time, Mrs. Pomerantz served as Executive Vice President and a Director of Leslie Fay, an apparel design and manufacturing company, from January 1993 to November 1994, and as Senior Vice President and Vice President of Leslie Fay from 1986 through 1992. Jack A. Staph has served as a Director of Elder-Beerman since December 1997. Currently, Mr. Staph is a consultant and a private investor. Mr. Staph has also served in an unrestricted advisory capacity to CVS Corp., a retail pharmacy company, since June 1997. Prior to this time, Mr. Staph served as Senior Vice President, Secretary, and General Counsel of Revco D.S., Inc., a retail pharmacy company, from October 1972 to August 1997. John J. Wiesner has served as a Director of Elder-Beerman since December 1997. Mr. Wiesner retired from C.R. Anthony, a regional apparel retailer, in June 1997. Prior to retirement, Mr. Wiesner served as Chairman of 38 40 the Board of Directors, President, and Chief Executive Officer of C.R. Anthony, a regional apparel retailer, from April 1987 to June 1997. Mr. Wiesner is also currently a Director of Stage Stores, Inc. and Lamonts Apparel, Inc. The Board of Directors is presently composed of nine directors. The directors are divided into three classes. Mr. Noonan, Mr. Olsoff, and Ms. Pomerantz comprise Class I, which class will stand for election at the annual meeting of shareholders to be held in 1999. Mr. Kasen, Mr. Muskovich, and Mr. Wiesner comprise Class II, which class will stand for election at the annual meeting of shareholders to be held in 2000. Mr. Mason, Mr. Mershad, and Mr. Staph comprise Class III, which class will stand for election at the annual meeting of shareholders to be held in 2001. Executive officers of Elder-Beerman are appointed and serve at the discretion of the Board of Directors. CERTAIN TRANSACTIONS Bernard Olsoff, a director of Elder-Beerman since December 1997, served from 1983 to 1995 as President and Chief Operating Officer, and from 1995 to 1997 as President and Chief Executive Officer of Frederick Atkins. In Fiscal 1997, Fiscal 1996, and Fiscal 1995, the Company purchased approximately 8% (for approximately $28.0 million), 9.0% (for approximately $30.0 million), and 14.0% (for approximately $50.0 million), respectively, of its merchandise through Frederick Atkins. During the Reorganization Cases, Frederick Atkins was also a creditor of the Company holding approximately $3.2 million in claims, which claims were paid upon the Company's emergence from bankruptcy. COMPENSATION OF EXECUTIVE OFFICERS The compensation discussion that follows has been prepared based on the actual plan and non-plan compensation awarded to, earned by, or paid to the Company's named executive officers during the periods presented. The Company's compensation arrangements with its directors and employment contracts and several arrangements with its named executive officers are also described below. 39 41 SUMMARY COMPENSATION TABLE The following table sets forth the compensation paid or payable by Elder-Beerman during Fiscal 1995, Fiscal 1996, and Fiscal 1997, to those individuals serving as the registrant's chief executive officer at any time during Fiscal 1997 and certain other highly compensated executive officers of the Company (the "Named Executive Officers").
ANNUAL COMPENSATION LONG-TERM COMPENSATION -------------------------------------- --------------------------------- AWARDS PAYOUTS ----------------------- ------- SECURITIES OTHER RESTRICTED UNDERLYING ANNUAL STOCK OPTIONS/ LTIP ALL OTHER NAME AND PRINCIPAL COMPENSATION AWARD(S) SARS PAYOUTS COMPENSATION POSITION YEAR SALARY ($) BONUS ($) ($) ($) (#) ($) ($) - ------------------------------ ---- ---------- --------- ------------ ---------- ---------- ------- ------------ Frederick J. Mershad 1997 503,344 500,000(1) 51,251(2) 47,087 194,000 -- -- Chairman of the Board and 1996 19,231 633,632(3) -- -- -- -- -- Chief Executive Officer 1995 -- -- -- -- -- -- -- John A. Muskovich 1997 267,335 598,750(4) -- 34,802(5) 126,000 -- -- President, Chief Operating 1996 183,974 67,908 -- -- -- -- -- Officer and Chief Financial Officer 1995 -- -- -- -- -- -- -- James M. Zamberlan 1997 139,944 41,313 -- 1,404(6) 61,000 -- -- Executive Vice President, 1996 -- -- -- -- -- -- -- Stores 1995 -- -- -- -- -- -- -- Steven D. Lipton 1997 132,897 19,763 -- 1,701(7) 21,000 -- -- Senior Vice President, 1996 103,143 45,820 -- -- -- -- -- Controller 1995 -- -- -- -- -- -- -- Perry J. Schiller 1997 118,489 27,600 -- 594(8) 15,000 -- -- Senior Vice President 1996 113,846 34,500 -- -- -- -- -- and Treasurer 1995 93,365 5,750 -- -- -- -- -- Max Gutmann (9) 1997 687,071(10) 800,000(11) -- -- -- -- -- Chairman of the Board 1996 368,846 160,000 -- -- -- -- -- 1995 107,308 -- -- -- -- -- -- Herbert O. Glaser (12) 1997 517,159(13) 670,000(14) -- -- -- -- -- Vice Chairman 1996 309,030 134,000 -- -- -- -- -- 1995 135,000 -- -- -- -- -- --
- --------------- (1) Amount includes a $250,000 reorganization bonus granted to Mr. Mershad by the Board of Directors on March 11, 1998, paid in the same manner as the reorganization bonus previously paid to Messrs. Muskovich, Gutmann, and Glaser. (2) Moving expense reimbursement. (3) In accordance with his employment contract, Mr. Mershad received a signing bonus of $633,632 as reimbursement for forfeiting his performance bonus, restricted stock grants, and stock options that he would have received from his prior employer. (4) Amount includes a $550,000 reorganization bonus awarded to Mr. Muskovich pursuant to the Plan, paid 32.9% in cash and 67.1% in stock (at $14.52 per share). (5) Includes 3,357 deferred shares and 839 restricted shares awarded to Mr. Muskovich as the deferred portion of his 1997 bonus pursuant to the Equity and Performance Incentive Plan. (6) Includes 1,123 deferred shares and 281 restricted shares awarded to Mr. Zamberlan as the deferred portion of his 1997 bonus pursuant to the Equity and Performance Incentive Plan. (7) Includes 1,361 deferred shares and 340 restricted shares awarded to Mr. Lipton as the deferred portion of his 1997 bonus pursuant to the Equity and Performance Incentive Plan. (8) Includes 475 deferred shares and 119 restricted shares awarded to Mr. Schiller as the deferred portion of his 1997 bonus pursuant to the Equity and Performance Incentive Plan. (9) Effective December 30, 1997, Mr. Gutmann was replaced by Mr. Mershad as Chairman of the Board of Directors. (10) Includes severance payment of $400,000. (11) Amount represents a reorganization bonus awarded to Mr. Gutmann pursuant to the Plan, paid 32.9% in cash and 67.1% in stock (at $14.52 per share). (12) Effective August 1997, Mr. Glaser is no longer employed by the Company. (13) Includes severance payment of $335,000. (14) Amount represents a reorganization bonus awarded to Mr. Glaser pursuant to the Plan, paid 32.9% in cash and 67.1% in stock (at $14.52 per share). 40 42 FISCAL 1997 OPTION GRANTS The following table sets forth information concerning individual grants of stock options to each of the Named Executive Officers during Fiscal 1997.
INDIVIDUAL GRANTS (1) --------------------------------------- PERCENT OF POTENTIAL REALIZABLE VALUE NUMBER OF TOTAL AT ASSUMED ANNUAL RATE SECURITIES OPTIONS EXERCISE OF STOCK PRICE UNDERLYING GRANTED TO OR APPRECIATION FOR OPTION TERM OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ------------------------------- NAME GRANTED (#) FISCAL YEAR ($/SH)(2) DATE 0%($) 5%($) 10%($) ---- ----------- ------------ ---------- ---------- ------- --------- --------- Frederick J. Mershad........ 194,000 24.6% $10.89 12/30/07 704,220 2,475,440 5,193,380 John A. Muskovich........... 126,000 16.0 $10.89 12/30/07 457,380 1,607,760 3,373,020 James M. Zamberlan.......... 61,000 7.7 $10.89 12/30/07 221,430 778,360 1,632,970 Steven D. Lipton............ 21,000 2.7 $10.89 12/30/07 76,230 267,960 562,170 Perry J. Schiller........... 15,000 1.9 $10.89 12/30/07 54,450 191,400 401,550 Max Gutmann................. 0 0.0 -- -- 0 0 0 Herbert O. Glaser........... 0 0.0 -- -- 0 0 0
- --------------- (1) One-fifth of the options vest on each of December 30, 1998, 1999, 2000, 2001, and 2002. (2) There was no established market price for the Company's stock on the date of grant. The Company's stock did not begin trading on Nasdaq until February 17, 1998, following distribution of Common Shares to creditors under the Plan. FISCAL 1997 AGGREGATED OPTION EXERCISES AND FISCAL YEAR END OPTION VALUES The following table sets forth information concerning the exercise of stock options by each of the Named Executive Officers during Fiscal 1997 and fiscal year end value of unexercised options.
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT FISCAL OPTIONS AT FISCAL YEAR- SHARES VALUE YEAR-END(#)(1)(2) END ($)(2) ACQUIRED ON REALIZED --------------------------- --------------------------- NAME EXERCISE(#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- -------- ----------- ------------- ----------- ------------- Frederick J. Mershad................ 0 0 0 194,000 0 0 John A. Muskovich................... 0 0 0 126,000 0 0 James M. Zamberlan.................. 0 0 0 61,000 0 0 Steven D. Lipton.................... 0 0 0 21,000 0 0 Perry J. Schiller................... 0 0 0 15,000 0 0 Max Gutmann......................... 0 0 0 0 0 0 Herbert O. Glaser................... 0 0 0 0 0 0
- --------------- (1) One-fifth of the options vest on each of December 30, 1998, 1999, 2000, 2001, and 2002. (2) There was no established market price for the Company's stock on the date of grant. The Company's stock did not begin trading on Nasdaq until February 17, 1998, following distribution of Common Shares to creditors under the Plan. EMPLOYMENT AND SEVERANCE AGREEMENTS WITH CERTAIN EXECUTIVES The Company has entered into employment agreements with Frederick J. Mershad, Chairman and Chief Executive Officer, and John A. Muskovich, President, Chief Operating Officer, and Chief Financial Officer and several of its other executive officers as described below (the "Employment Agreements"). The Employment Agreements with Messrs. Mershad and Muskovich were effective as of the Effective Date and will end on the third anniversary of the Effective Date. These Employment Agreements will be automatically renewed every year on the anniversary date of the employment agreement for an additional one year period, unless Mr. Mershad or Mr. Muskovich provides the Company or the Company provides Mr. Mershad or Mr. Muskovich with 180 days prior notice terminating this yearly renewal. These Employment Agreements set forth: (a) the executive's compensation and benefits, subject to review at the discretion of the Board of Directors, (b) the Company's right to terminate the executive for cause or otherwise; (c) the amounts to be paid by the Company in the event of the executive's termination, death, or disability while rendering services; (d) the executive's duty of strict confidence 41 43 and to refrain from conflicts of interest; (e) the executive's obligations not to compete for the term of the agreement plus one year unless the executive terminated his employment for good reason or the employer terminates the executive other than for cause; and (f) the executive's right to receive severance payments. In general, these Employment Agreements provide that if either Mr. Mershad or Mr. Muskovich is terminated for any reason other than for cause or following a change in control, he will receive payments equal to the remaining base salary that would have been distributed to him by the Company under the remaining term of his employment agreement and the incentive compensation earned by him for the most recent fiscal year. If such executive: (a) is terminated within two years of a change of control without cause, (b) voluntarily terminates within two years of a change of control, or (c) is terminated in connection with but prior to a change of control and termination occurs following the commencement of any discussions with any third party that ultimately results in a change in control, he will receive a severance payment equal to the greater of 2.99 times the Internal Revenue Code "base amount" as described in Section 280G of the Internal Revenue Code or two times his most recent base salary and bonus and the executive will continue to be eligible for health benefits, perquisites, and fringe benefits generally made available to senior executives for three years following his termination, or until the executive obtains new employment providing substantially similar benefits. A tax gross-up on excise taxes also will be paid if the severance pay exceeds the limits imposed by the Internal Revenue Code. The Company has also entered into Employment Agreements that include severance pay provisions with each of Messrs. Zamberlan, Davido, Lipton, and Schiller. These executives serve Elder-Beerman under their respective agreements for terms ending on the second anniversary, with respect to Mr. Schiller, or the third anniversary, with respect to Messrs. Davido, Lipton, and Zamberlan, of the Effective Date with automatic yearly extensions thereafter, unless the Company or the executive has given written notice of termination not less than 120 days prior to the yearly renewal date. These Employment Agreements set forth: (a) the executive's compensation and benefits, subject to review at the discretion of the Board of Directors; (b) the Company's right to terminate the executive for cause or otherwise; (c) the amounts to be paid by the Company in the event of the executive's termination, death, or disability while rendering services; (d) the executive's duty of strict confidence and to refrain from conflicts of interest; (e) the executive's obligations not to compete for the term of the agreement plus one year unless the executive terminated his employment for good reason or the employer terminates the executive other than for cause; and (f) the executive's right to receive severance payments if he (i) is terminated within two years of a change of control without cause, (ii) voluntarily terminates for defined good reasons within two years of a change of control, (iii) terminates his employment for any reason, or without reason, during the thirty-day period immediately following the first anniversary of a change in control, or (iv) is terminated in connection with but prior to a change in control and termination occurs following the commencement of any discussions with any third party that ultimately results in a change in control. Specifically, under the employment agreements, the amount of any severance payment by the Company will be the greater of 2.99 times the Internal Revenue Code "base amount" as described in Section 280G of the Internal Revenue Code or two times his most recent base salary and bonus. Severance payments made under the employment agreements will reduce any amounts that would be payable under any other severance plan or program, including the master severance plan for certain key employees. A tax gross-up on excise taxes also will be paid if the severance pay exceeds the limit imposed by the Internal Revenue Code. In addition, the executive will continue to be eligible for health benefits, perquisites, and fringe benefits generally made available to senior executives for two years following his or her termination, or until he or she obtains new employment providing substantially similar benefits. EQUITY AND PERFORMANCE INCENTIVE PLAN The Company's Equity and Performance Incentive Plan (the "Equity and Performance Incentive Plan") includes both annual and long-term (i.e., three or more years) incentives for key employees in the form of bonuses and Common Shares. The Equity and Performance Incentive Plan allows key employees entitled to receive an annual incentive bonus to defer voluntarily up to 50% of their annual incentive bonus and instead receive Deferred Shares (as hereinafter defined). These Deferred Shares are 100% vested at all times and may be exercised on the earliest of: (a) the third anniversary of the date awarded, (b) the date the employee's employment is terminated for reasons other than death, (c) the employee's death, or (d) an unforeseeable financial emergency of the employee. To provide key employees with the incentive to defer, the Equity and Performance Incentive 42 44 Plan also grants Restricted Shares (as described below) equal in value to 25% of the amount deferred. These Restricted Shares will become 100% vested on the third anniversary of the date of grant if such employee remains in the continuous employ of the Company. The Equity and Performance Incentive Plan also permits equity-related grants as long-term incentives that are intended to motivate and reward certain employees for the achievement of long-term corporate goals and to balance annual goals with strategic plans. These long-term incentives also offer capital accumulation potential for employees and align employees' interests with shareholder interests. Only certain senior executives, as determined by the Board of Directors, are eligible to receive grants under the long-term incentive portion of the Equity and Performance Incentive Plan. The shares awarded as long-term incentives may not exceed the equivalent of 2,250,000 shares plus any shares relating to awards that expire or are forfeited or canceled (the "Long-Term Incentive Reserve"). The Equity and Performance Plan has an evergreen provision that provides that, in any acquisition, merger, or secondary offering, the Long-Term Incentive Reserve shall remain constant. The Equity and Performance Incentive Plan permits grants in a variety of forms. First, the Board of Directors may authorize the granting of stock options ("Option Rights") to designated employees and non-employee directors. Option Rights provide the right to purchase Common Shares at a predetermined price per share (which, in the case of non-qualified stock options, may not be less than 75% of the fair market value on the date of grant and, in the case of incentive stock options as described in Section 422 of the Internal Revenue Code, may not be less than fair market value on the date of grant). The grant may also provide for the automatic grant of additional Option Rights, known as Reload Option Rights, to an employee or non-employee director upon the exercise of Option Rights using Common Shares or other defined consideration as payment. Options granted to non-employee directors become exercisable one-third on each of the first three anniversaries of the date of grant for so long as the individual remains a non-employee director. Options granted to employees become exercisable 20% on each of the first five anniversaries of the date of grant for so long as the employee remains in the continuous employ of the Company. No Option Rights may be exercised more than ten years from the date of grant. All Option Rights provide for the earlier exercisability of the Option Rights in the event of retirement, death, or disability of the employee or non-employee director or a change of control of the Company. Any grant of Option Rights may specify performance goals that must be achieved as a condition to exercise such rights. Second, the Board of Directors may authorize the granting of appreciation rights ("Appreciation Rights") to designated employees. Appreciation Rights represent the right to receive from the Company an amount, determined by the Board of Directors and expressed as a percentage not exceeding 100%, of the difference between the base price established for such rights and the market value of the Common Shares on the date the rights are exercised. Appreciation Rights can be tandem (i.e., granted with Option Rights to provide an alternative to exercise of the Option Rights) or free-standing. Appreciation Rights may only be exercised at a time when the related Option Right, if applicable, is exercisable and the spread is positive, and requires that any related Option Right be surrendered for cancellation. A grant of Appreciation Rights may specify that the amount payable on exercise of an Appreciation Right may not exceed a maximum specified by the Board of Directors on the date of grant, may specify the period of employment that is necessary before such Appreciation Rights become exercisable, may provide for the exercise of the Appreciation Rights only in the event of retirement, death, or disability of the employee or a change in control of the Company and is evidenced by an agreement executed on behalf of the Company and accepted by the employee describing such Appreciation Rights and other terms and provisions. Such grant may also include that payment may be made by one or more methods of payment and may specify performance goals that must be achieved as a condition to exercise such rights. Third, the Board of Directors may authorize the granting of restricted shares ("Restricted Shares") to designated employees and non-employee directors. Restricted Shares constitute an immediate transfer of ownership to the recipient in consideration of the performance of services. The recipient has dividend and voting rights on such shares. Restricted Shares are subject to a "substantial risk of forfeiture" within the meaning of Section 83 of the Internal Revenue Code. To enforce these forfeiture provisions, the transferability of Restricted Shares is prohibited or restricted in the manner prescribed by the Board of Directors on the date of grant for the period during which such forfeiture provisions are to continue. Any grant of Restricted Shares (a) may specify performance goals which, if achieved, will result in termination or early termination of the restrictions applicable to such shares, (b) may require that any or all dividends or other distributions paid thereon during the period of 43 45 such restrictions be automatically deferred and reinvested in additional Restricted Shares, which may be subject to the same restrictions as the underlying award, and (c) is evidenced by an agreement executed on behalf of the Company and accepted by the employee. Fourth, the Board of Directors may authorize the granting of deferred shares ("Deferred Shares") to designated employees. Deferred Shares constitute an agreement to issue shares to the recipient in the future in consideration of the performance of services, but subject to the fulfillment of such conditions as the Board of Directors may specify. The Board of Directors must fix a deferral period of at least one year at the time of grant, and may provide for the earlier termination of the deferral period in the event of retirement, hardship, death, or disability of the employee or a change in control of the Company. During the deferral period, the employee has no right to transfer any rights under his or her award and has no ownership or voting rights in the Deferred Shares, but the Board of Directors may, at or after the grant date, authorize the payment of dividend equivalents on such shares on either a current, deferred, or contingent basis, either in cash or in additional Common Shares. Each grant of Deferred Shares is evidenced by an agreement executed on behalf of the Company and accepted by the employee. Finally, the Board of Directors may authorize the granting of performance shares ("Performance Shares") and performance units ("Performance Units") to designated employees upon achievement of specified performance objectives. A Performance Share is the equivalent of one Common Share and a Performance Unit is denominated in dollars. The employee is given one or more performance goals to meet within a specified period, not less than one year (the "Performance Period"). The specified Performance Period may be subject to earlier termination in the event of retirement, death, or disability of the employee or a change in control of the Company. A minimum level of acceptable achievement also is established. If, by the end of the Performance Period, the employee has achieved the specified performance goals, the employee will be deemed to have fully earned the Performance Shares or Performance Units. If the designated employee has not achieved the performance goals, but has attained or exceeded the predetermined minimum level of acceptable achievement, the employee will be deemed to have partly earned the Performance Shares or Performance Units in accordance with a predetermined formula. To the extent earned, the Performance Shares or Performance Units will be paid to the employee at the time and in the manner determined by the Board of Directors as set forth in each grant. The Board of Directors may, at or after the date of grant of Performance Shares, provide for the payment of dividend equivalents to the holder thereof on either a current or deferred or contingent basis, either in cash or in additional Common Shares. Each grant of Performance Shares or Performance Units is evidenced by an agreement executed on behalf of the Company and accepted by the employee. The Equity and Performance Incentive Plan is administered by the Board of Directors, which may from time to time delegate all or any part of its authority under the Equity and Performance Incentive Plan to an agent or a committee or subcommittee of the Board of Directors. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee of the Board of Directors consists of Messrs. Olsoff, Staph, and Wiesner. Prior to the Effective Date, the Company never had a Compensation Committee or other committee of the Board of Directors performing similar functions. Previously, decisions concerning compensation of executive officers of the Company were made by the Company's Chief Executive Officer. DIRECTOR COMPENSATION Each director of Elder-Beerman who is not an employee of Elder-Beerman or any of its subsidiaries receive an annual base retainer fee of $15,000. Each director may choose to take such retainer as cash, in the form of a discounted stock option, or as a combination of the two. Nonemployee directors also will be paid $1,500 for each meeting of the Board of Directors attended and $500 for any committee meeting of the Board of Directors attended. Each such director also received an initial grant of (a) 1,300 shares of restricted stock and (b) 7,000 options to purchase Common Shares. Members of the Board of Directors who are also employees of any of Elder-Beerman or any of its subsidiaries receive no additional compensation for service on the Board of Directors. 44 46 BOARD COMMITTEES Elder-Beerman's Board of Directors has established an Audit and Finance Committee, a Compensation Committee, a Nominating and Corporate Governance Committee, and an Executive Committee. The Audit and Finance Committee recommends the firm to be appointed as independent accountants to audit financial statements and to perform services related to the audit; reviews the scope and results of the audit with the independent accountants; reviews with management and the independent accountants Elder-Beerman's year-end operating results; considers the adequacy of the internal accounting procedures; addresses such other matters with respect to accounting, auditing, and financial reporting practices and procedures of the Company as may be brought to its attention; and reviews the Company's financing plans. The Audit and Finance Committee consists of Mr. Noonan, Mr. Kasen, and Mr. Olsoff. The Compensation Committee, which consists of Mr. Olsoff, Mr. Staph, and Mr. Wiesner, reviews and approves the compensation arrangements for all executive officers and administers and takes such other action as may be required in connection with certain compensation, retirement and incentive plans of Elder-Beerman. The Nominating and Corporate Governance Committee, which consists of Mr. Mason, Ms. Pomerantz, and Mr. Mershad, is responsible for exercising all powers of the Board of Directors to select, evaluate, and nominate candidates for election to the Board; evaluate the Board's overall performance and its individual members; and ensure effective operations of the Board of Directors and overall corporate governance of Elder-Beerman. The Executive Committee, which consists of Mr. Mershad, Mr. Muskovich, Mr. Mason, and Mr. Staph, has all the powers of the Board of Directors in the management and control of the business of Elder-Beerman during intervals between meetings of the Board of Directors. 45 47 PRINCIPAL SHAREHOLDERS The Common Shares are the Company's only outstanding class of voting securities. The following table sets forth information regarding the beneficial ownership of Common Shares as of June 15, 1998 by: (a) each person who owns beneficially more than 5% of Common Shares to the extent known to management; (b) each named executive officer and director of the Company; and (c) all directors and executive officers, as a group. Unless otherwise indicated, the named persons exercise sole voting and investment power over the shares that are shown as beneficially owned by them.
AMOUNT AND NATURE PERCENT BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP (1) OF CLASS - --------------------------------------- --------------------------- -------- Perry Corp. (2) 772,943 6.10% 599 Lexington Avenue New York, New York 10022 Beerman-Peal Holdings, Inc. (3) 748,558 5.63% 11 West Monument Building 8th Floor Dayton, Ohio 45402 Bank of Montreal (4) 707,211 5.58% 115 South LaSalle Street Chicago, Illinois 60603 The Elder-Beerman Stores Corp. 644,680 5.09% Profit Sharing and Stock Ownership Plan 3155 El-Bee Road Dayton, Ohio 45401-1448 Stewart M. Kasen 4,300 * Steven D. Lipton 340 * Steven C. Mason 1,300 * Frederick J. Mershad 105,969 * John A. Muskovich 77,181 * Thomas J. Noonan, Jr. 1,300 * Bernard Olsoff 1,300 * Laura H. Pomerantz 1,300 * Perry J. Schiller 213 * Jack A. Staph 1,700 * John J. Wiesner 1,300 * James M. Zamberlan 10,281 * Max Gutmann 91,308(5) * Herbert O. Glaser 45,343(6) * All directors and executive officers as 206,527 1.63% a group (13 persons)
* less than 1% - --------------- (1) Information with respect to beneficial ownership is based on information furnished to the Company by each stockholder included in this table. Each stockholder included in this table has sole voting and investment power with respect to the shares shown to be beneficially owned by him. (2) According to Schedule 13G dated March 3, 1998 filed by Perry Corp. and Richard C. Perry, President and sole stockholder of Perry Corp. (3) Includes a Series A Warrant and a Series B Warrant with respect to 249,809 and 374,713 Common Shares, respectively, both of which were granted December 30, 1997. Does not include approximately 34,161 shares owned by the beneficial owners of Beerman-Peal Holdings, Inc. through other entities. (4) According to Schedule 13G dated February 20, 1998 filed by Bank of Montreal. (5) Includes 54,338 shares distributed to Mr. Gutmann pursuant to the Plan in satisfaction of his claims in Class C-5, General Unsecured Claims. Effective December 30, 1997, Mr. Gutmann was replaced by Mr. Mershad as Chairman of the Board of Directors. (6) Includes 14,381 shares distributed to Mr. Glaser pursuant to the Plan in satisfaction of his claims in Class C-5, General Unsecured Claims. Effective August 1997, Mr. Glaser was no longer employed by the Company. 46 48 DESCRIPTION OF CAPITAL STOCK GENERAL The authorized capital stock of the Company consists of 25,000,000 Common Shares and 5,000,000 shares of preferred stock, no par value (the "Preferred Stock"). The following summary description of the capital stock of the Company is qualified in its entirety by reference to the Articles of Incorporation and Code of Regulations, a copy of each of which is an exhibit to the Registration Statement of which this Prospectus forms a part. COMMON SHARES As of June 12, 1998, there were 12,678,021 Common Shares outstanding (including 1,685,208 Common Shares scheduled to be distributed on July 31, 1998 from an escrow account to certain creditors in connection with the Company's reorganization under chapter 11 of the Bankruptcy Code). There will be 15,478,021 Common Shares outstanding after giving effect to the sale of Common Shares offered hereby assuming no exercise of outstanding options or warrants. In addition, as of July 8, 1998, there were 927,277 Common Shares issuable upon exercise of outstanding stock options and 624,522 Common Shares issuable upon exercise of outstanding warrants. All outstanding shares are, and the Common Shares offered hereby will be, duly authorized, validly issued, fully paid, and nonassessable immediately following the closing of the Offering. The Common Shares are traded on Nasdaq under the symbol "EBSC." Subject to such rights of the holders of any class or series of Preferred Stock as may be fixed by the Board of Directors or by law when and if any class or series is created and issued, the holders of Common Shares are entitled to one vote for each share held of record on all matters submitted to a vote of shareholders. Subject to preferential rights that may be applicable to any Preferred Stock, holders of Common Shares are entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available therefor. However, the Company does not presently anticipate that dividends will be paid on Common Shares in the foreseeable future. See "Risk Factors -- Dividend Policy," "Dividend Policy," and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." In the event of a liquidation, dissolution, or winding up of the Company, holders of Common Shares will be entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preference of any Preferred Stock. Holders of Common Shares have no preemptive, subscription, redemption, or conversions rights. Subject to the terms and conditions set forth in the Rights Agreement, each Common Share issued is accompanied by a Right (as defined below). See "-- Share Purchase Rights Agreement" below. OHIO LAW AND CERTAIN CHARTER PROVISIONS In addition to the provisions relating to the Board of Directors described above, the Articles of Incorporation and Code of Regulations provide, in general, that: (a) shareholder action can be taken at an annual or special meeting of shareholders; (b) except as directed below, special meetings of shareholders may be called for any proper purpose or purposes, including the election of directors, by (i) the Chairman of the Board, (ii) the President, (iii) a majority of the Board of Directors, (iv) any person or persons holding at least 50% of all shares outstanding and entitled to vote at such meeting, or (v) holders of shares that are entitled to call a special meeting of the shareholders by virtue of any Preferred Stock Designation for the purposes provided in the terms of such Preferred Stock Designation; (c) written notice of every meeting of the shareholders stating the time, place, and purposes for which the meeting is called must be given by or at the direction of the President, a Vice President, the Secretary, or an Assistant Secretary to each shareholder of record; (d) the Board of Directors may postpone, for up to thirty days, any previously scheduled annual or special meeting of shareholders; and (e) the members of the Board of Directors shall be classified with respect to the time for which they severally hold office into three classes, as nearly equal in size as possible. The Code of Regulations also requires that shareholders desiring to bring any business before any annual meeting of shareholders deliver written notice thereof to the Secretary of the Company not less than 60, nor more than 90 calendar days, prior to the meeting of shareholders; provided, however, that if the date of the annual meeting is not publicly announced by Elder-Beerman more than 105 calendar days prior to the meeting, notice by the shareholder to be timely must be delivered to the Secretary of the Company not later than the close of business on the tenth day following the day on which such announcement 47 49 of the date of the annual meeting was so communicated. The Code of Regulations further require that the notice by the shareholder set forth a description in reasonable detail of the business to be brought before the annual meeting and the reasons for conducting such business at the annual meeting and certain information concerning the shareholder proposing such business and the beneficial owner, if any, on whose behalf the proposal is made, including their names and addresses, the class and number of shares of stock that are owned beneficially and of record by each of them, and any material interest of either of them in the business proposed to be brought before the annual meeting. Upon the written request of the holders of not less than 50% of Elder-Beerman's voting stock to the Chairman, the President, or the Secretary, such officer is required to call a annual meeting of shareholders for the purposes specified in such written request and fix a record date for the determination of shareholders entitled to notice of and vote at such annual meeting (which record date may not be later than 60 days after the date of receipt of notice of such meeting). Under applicable provisions of Ohio law, shareholder approval is required to adopt amendments to a company's articles of incorporation, except that a company's board of directors may adopt certain amendments relating to unissued or treasury shares, changes in the number of authorized shares necessitated by a conversion, option program, redemption, or provisions that were, at one time, necessary for a merger or consolidation. Under Ohio law, an Ohio corporation's code of regulations may be amended only by action of its shareholders. The Articles of Incorporation and Code of Regulations provide that the provisions relating to the time and place of shareholder meetings, who may call a special meeting of shareholders, the order of business at shareholder meetings, the number, nomination, classification election, and term of directors on the Board of Directors, allowing directors to fill vacancies on the Board of Directors, the removal of directors by shareholders, the elimination of cumulative voting in the election of directors, allowing the corporation to reacquire capital stock of the corporation, and forbidding preemptive rights with respect to unissued shares and treasury stock may not be amended, altered, superseded, or repealed in any respect without the affirmative vote of the holders of at least 72% of the voting stock of Elder-Beerman, voting together as a single class; provided, however, that these provisions shall not alter the voting entitlement of shares that, by virtue of any Preferred Stock Designation, are expressly entitled to vote on any amendment to the Articles of Incorporation or Code of Regulations. In addition to the matters discussed above, the OGCL contains certain provisions that may have the effect of delaying, deterring, or preventing a change in control of Elder-Beerman. All information set forth below regarding the OGCL is necessarily general in nature and reference should be made to the OGCL for more specific, detailed information. Section 1701.831 of the OGCL (the "Control Share Act") regarding shareholder review of control share acquisitions applies to the Company. Under the Control Share Act, any "control share acquisition" of an Ohio corporation having fifty or more shareholders (an "Ohio Public Company") shall be made only with the prior authorization of the shareholders of the Ohio Public Company in accordance with the provisions of the Control Share Act. A "control share acquisition" is defined as the acquisition, directly or indirectly, by any person of shares of an Ohio Public Company that, when added to all other shares of the corporation in respect of which such person may exercise or direct the exercise of voting power, would entitle such person, immediately after such acquisition, directly or indirectly, alone or with others, to exercise or direct the exercise of the voting power of the corporation in the election of directors within any of the following ranges of voting power: (a) one fifth or more, but less than one third; (b) one third or more, but less than a majority; or (c) a majority or more. The Control Share Act requires that the acquiring person deliver an "acquiring person's statement" to the Ohio Public Company. The Ohio Public Company must then hold a special meeting of its shareholders to vote upon the proposed acquisition within 50 days after receipt of such acquiring person's statement, unless the acquiring person agrees to a later date. The Control Share Act further specifies that the shareholders of the Ohio Public Company must approve the proposed control share acquisition by certain percentages at a special meeting of shareholders at which a quorum is present. In order to comply with the Control Share Act, the acquiring person may only acquire the stock of the Ohio Public Company upon the affirmative vote of: (a) a majority of the voting power of the Ohio Public Company that is represented in person or by proxy at the special meeting and (b) a majority of the voting power of the Ohio Public Company that is represented in person or by proxy at the special meeting, excluding those shares of the corporation deemed to be "interested shares." "Interested shares" are defined to mean shares in respect of which the voting power is controlled by any of the following persons: (i) an 48 50 acquiring person; (ii) any officer of the Ohio Public Company; and (iii) any employee who is also a director of the Ohio Public Company. "Interested shares" also includes shares of the Ohio Public Company that are acquired, directly or indirectly, by any person after the date of the first public disclosure of the proposed acquisition and prior to the date of the special meeting, if either (A) the aggregate consideration paid by such person, and any person acting in concert with him, for such shares of the Ohio Public Company exceeds $250,000 or (B) the number of shares acquired by such person, and any person acting in concert with him, exceeds one-half of one percent of the outstanding shares of the Ohio Public Company. Elder-Beerman is also subject to Chapter 1704 of the OGCL, which generally prohibits a wide range of business combinations and other transactions (including mergers, consolidations, asset sales, loans, disproportionate distributions of property, and disproportionate issuances or transfers of shares or rights to acquire shares) between an Ohio Public Company and a person that owns, alone or with other related parties, shares representing at least 10% of the voting power of the Ohio Public Company (an "Interested Shareholder"). Such prohibitions continue for a period of three years after such person becomes an Interested Shareholder, unless, prior to the date that the Interested Shareholder became such, the board of directors approved either the transaction or the acquisition of the Ohio Public Company's shares that resulted in the person becoming an Interested Shareholder. Following the three-year moratorium period, the Ohio Public Company may engage in covered transactions with an Interested Shareholder only if, among other things, (a) the transaction receives the approval of the holders of two-thirds of all the voting shares or the approval of the holders of a majority of the voting shares held by persons other than an Interested Shareholder or (b) the remaining shareholders receive an amount for their shares equal to the higher of the highest amount paid in the past by the Interested Shareholder for the Ohio Public Company's shares or the amount that would be due the shareholders if the Ohio Public Company were to dissolve. Under Ohio's Control Bid Statute, no person may make a control bid for the Common Shares of Elder-Beerman pursuant to a tender offer or a request or invitation for tenders until such person has filed with the Ohio Division of Securities (the "Division") and Elder-Beerman a control bid information statement. A "control bid" is defined by Section 1707.01 of the OGCL as the purchase or offer to purchase any equity security of an issuer located in Ohio, which has more than 10% of its record equity security holders who are residents of Ohio, from a resident of Ohio where, after such purchase, the offeror would own, directly or indirectly, more than 10% of any class of the issued and outstanding equity securities of such issuer. Within three calendar days of the filing of the control bid information statement, the Division may summarily suspend the continuation of the control bid if the Division determines that the information given in the information statement does not provide full disclosure to offerees of all material information relating to the control bid. A hearing will be scheduled within ten days of any such suspension. In addition, no offeror may make a control bid that is not made to all holders residing in Ohio, or that is not made to such holders on the same terms as the control bid made to holders residing outside of the state of Ohio. Further, no offeror may acquire from any resident of Ohio any equity security within two years following the last acquisition of any security of the same class pursuant to a control bid by such offeror unless the resident is afforded, at the time of the later acquisition, a reasonable opportunity to dispose of the security to the offeror upon substantially the same terms of those provided in the earlier control bid. For the purpose of preventing manipulative practices by a person who makes a proposal, or publicly discloses the intention or possibility of making a proposal, to acquire control of Elder-Beerman, Section 1707.043 of the OGCL states that any profit realized, directly or indirectly, from the disposition of any equity securities of Elder-Beerman by a person who, within 18 months before the disposition, directly or indirectly, alone or in concert with others, made a proposal, or publicly disclosed the intention or possibility of making a proposal, to acquire control of Elder-Beerman, inures to Elder-Beerman and is recoverable by Elder-Beerman by an action brought within two years after the date of the disposition of such securities. Finally, the OGCL provides for the right of Elder-Beerman's Board of Directors to consider the interests of various constituencies, including employees, customers, suppliers, and creditors of Elder-Beerman, as well as the communities in which Elder-Beerman is located, in addition to the interest of Elder-Beerman and its shareholders, in discharging its duties in determining what is in the best interests of the Company. The foregoing provisions of the Articles of Incorporation; the provisions of the Code of Regulations relating to advance notice of shareholder nominations; and the provisions of the Share Purchase Rights Agreement 49 51 described under "-- Share Purchase Rights Agreement," together with applicable state law, may discourage or make more difficult the acquisition of control of Elder-Beerman by means of a tender offer, open market purchase, proxy fight, or otherwise. These provisions are intended to discourage, or may have the effect of discouraging, certain types of coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of Elder-Beerman first to negotiate with Elder-Beerman. The management of the Company believes that the foregoing measures, many of which are substantially similar to the takeover-related measures in effect for many other publicly-held companies, provide benefits, by enhancing Elder-Beerman's potential ability to negotiate with the proponent of an unsolicited proposal to acquire or restructure Elder-Beerman, which outweigh the disadvantages of discouraging such proposals because, among other things, negotiation of such proposals could result in an improvement of their terms. In addition, management of the Company believes that such takeover-related measures aid in protecting shareholders from takeover bids that the directors of such companies have determined to be inadequate. While there necessarily can be no assurance in this regard, the management of the Company also believes that the foregoing measures are not likely to have a material impact on market prices for Common Shares in circumstances other than those described above in light of, among other factors, the existence of generally comparable measures in effect for other publicly-held companies and management's belief that market prices will be influenced most significantly by Elder-Beerman's actual results of operations, general market and economic conditions, and other traditional determinants of stock market prices rather than takeover-related measures and other corporate governance provisions. Nevertheless, such collective anti-takeover effects could prevent shareholders from realizing a premium for the sale of their shares in an acquisition of the Company. PREFERRED STOCK As of the Effective Date, Elder-Beerman was authorized to issue 5,000,000 shares of Preferred Stock. The Board of Directors has the authority to issue Preferred Stock from time to time in one or more classes or series and to fix the price, rights, preferences, privileges, and restrictions thereof, including dividend rights, dividend rates, conversion rights, terms or redemption, redemption prices, liquidation preferences, and the number of shares constituting a class or series or the designation of such class or series, without any further vote or action by Elder-Beerman's shareholders. The Preferred Stock may be issued in distinctly designated classes, may be convertible into Common Shares and may rank prior to the Common Shares as to dividend rights, liquidation preferences, or both. Also the express terms of shares of a different series of any particular class of Preferred Stock shall be identical except for such variations as may be permitted by law. Without limiting the foregoing, the Company is authorized to issue three initial classes of Preferred Stock that will be designated Class A Preferred Stock, Class B Preferred Stock, and Class C Preferred Stock. Each holder of Class A Preferred Stock is entitled to 100 votes per share and, except as otherwise required by law, shall vote together with the Common Shares as a single class on all matters properly submitted to a vote at a meeting of the shareholders. Each holder of Class B Preferred Stock is entitled to one vote per share and, except as otherwise required by law, shall vote together with the Common Shares as a single class on all matters properly submitted to a vote at a meeting of shareholders. Holders of Class C Preferred Stock have no voting rights. WARRANTS In connection with the Plan, the Company issued two warrants, a Series A Warrant and a Series B Warrant (collectively, the "Warrants"), to former shareholders of the Company. Upon exercise, the Warrants allow the holders to acquire: (a) in the case of the Series A Warrant, 249,809 Common Shares at an exercise price of $12.80 per share; and (b) in the case of the Series B Warrant, 374,713 Common Shares at an exercise price of $14.80 per share. The Warrants will expire on the fifth anniversary of the Effective Date. SHARE PURCHASE RIGHTS AGREEMENT As of the Effective Date, Elder-Beerman entered into the Rights Agreement with Norwest Bank Minnesota, N.A. (the "Rights Agent"), which agreement was approved by the Bankruptcy Court upon confirmation of the Plan. Under the Rights Agreement, the Board of Directors has declared a dividend on the Common Shares of one right (a "Right") to purchase one one-hundredth of a share of Class A Preferred Stock of Elder-Beerman at a 50 52 price per one one-hundredth of such Class A Preferred Stock, subject to adjustment, of $60.00 (the "Purchase Price"). The Rights are evidenced by certificates representing the Common Shares until the earlier (the "Distribution Date") of: (a) the close of business on the first date (the "Share Acquisition Date") of public announcement that a person (other than a person that has maintained beneficial ownership of at least 20% of the outstanding Common Shares since the Effective Date, Elder-Beerman, a subsidiary or employee benefit or stock ownership plan of Elder-Beerman or any of its affiliates or associates), together with its affiliates and associates, has acquired beneficial ownership of 20% or more of the then-outstanding Common Shares (any such person or group being hereinafter called an "Acquiring Person") or (b) the close of business on the tenth business day (or such later date as may be specified by the Board of Directors) following the commencement of a tender offer or exchange offer by any person (other than Elder-Beerman, a subsidiary or employee benefit or stock ownership plan of Elder-Beerman, or any of its affiliates or associates), the consummation of which would result in beneficial ownership by such person of 20% or more of the outstanding Common Shares. Rights are exercisable to purchase Class A Preferred Stock only after the Distribution Date occurs and prior to the occurrence of a Flip-in Event, as described below. A Distribution Date resulting from the commencement of a tender offer or exchange offer described in clause (b) above could precede the occurrence of a Flip-in Event and thus result in the Rights being exercisable to purchase Class A Preferred Stock. A Distribution Date resulting from any occurrence described in clause (a) above would necessarily follow the occurrence of a Flip-in Event and thus result in the Rights being exercisable to purchase Common Shares or other securities as described below. Under the Rights Agreement, in the event (a "Flip-in Event") that (a) any person or group, together with its affiliates and associates, becomes an Acquiring Person, (b) any Acquiring Person or any affiliate or associate thereof merges into or combines with Elder-Beerman and Elder-Beerman is the surviving corporation, (c) any Acquiring Person or any affiliate or associate thereof effects certain other transactions with Elder-Beerman, or (d) during such time as there is an Acquiring Person, Elder-Beerman effects certain transactions, in each case as described in the Rights Agreement, then, in each such case, proper provision will be made so that from and after the later of the Distribution Date and the date of the occurrence of such Flip-in Event each holder of a Right, other than Rights that are or were owned beneficially by an Acquiring Person (which, from and after the date of a Flip-in Event, will be void), will have the right to receive, upon exercise thereof at the then-current exercise price of the Right, that number of Common Shares (or, under certain circumstances, an economically equivalent security or securities of the Elder-Beerman) that at the time of such Flip-in Event have a market value of two times the exercise price of the Right. In the event (a "Flip-over Event") that, at any time after a person has become an Acquiring Person, (a) Elder-Beerman merges with or into any person and Elder-Beerman is not the surviving corporation, (b) any person merges with or into Elder-Beerman and Elder-Beerman is the surviving corporation, but all or part of the Common Shares are changed or exchanged for stock or other securities of any other person or cash or any other property, or (c) 50% or more of Elder-Beerman's assets or earning power, including securities creating obligations of Elder-Beerman, are sold, in each case as described in the Rights Agreement, then, and in each such case, proper provision will be made so that each holder of a Right, other than Rights which have become void, will thereafter have the right to receive, upon the exercise thereof at the then-current exercise price of the Right, that number of shares of common stock (or, under certain circumstances, an economically equivalent security or securities) of such other person that at the time of such Flip-over Event have a market value of two times the exercise price of the Right. From and after the later of the Share Acquisition Date and the Distribution Date, Rights (other than any Rights that have become void) will be exercisable to purchase Common Shares as described above, upon payment of the aggregate exercise price in cash. In addition, at any time after the later of the Share Acquisition Date and the Distribution Date and prior to the acquisition by any person or group of affiliated or associated persons of 50% or more of the outstanding Common Shares, the Company may exchange the Rights (other than any rights that have become void), in whole or in part, at an exchange ratio of one Common Share per Right (subject to adjustment). For all purposes of the Rights Agreement, any person that, as of the Effective Date, has beneficial ownership of 20% or more of the then-outstanding Common Shares, or that becomes the beneficial owner of 20% or more of 51 53 the then-outstanding Common Shares solely as a result of a reduction in the number of Common Shares outstanding, will not be deemed to have become an Acquiring Person unless and until such time as (a) such person, or any affiliate or associate of such person, thereafter becomes the beneficial owner of additional Common Shares representing 1% or more of the then-outstanding Common Shares or (b) any other person that is the beneficial owner of Common Shares representing 1% or more of the then-outstanding Common Shares thereafter becomes an affiliate or associate of such person. Elder-Beerman will be able, at its option, to redeem the Rights in whole, but not in part, at a price of $.01 per Right, subject to adjustment (the "Redemption Price"), at any time prior to the close of business on the date of the first occurrence of a Flip-in Event or Flip-over Event. Immediately upon any redemption of the Rights, the right to exercise the Rights will terminate and the only right of the holders of Rights will be to receive the Redemption Price. The Company is able to amend the Rights Agreement without the approval of any holders of Right certificates, including amendments that increase or decrease the Purchase Price, that add other events requiring adjustment to the Purchase Price payable and the number of the Class A Preferred Stock or other securities issuable upon the exercise of the Rights or that modify procedures relating to the redemption of the Rights, except that no amendment may be made that decreases the stated Redemption Price to an amount less than $.01 per Right. The Rights Agreement will expire on (a) the first anniversary of the Effective Date or (b) such later date as the Board of Directors, by resolution adopted prior to the first anniversary of the Effective Date, may establish, but not later than the tenth anniversary of the Effective Date. In accordance with the foregoing, the Board of Directors (a) will have the right to reconsider any of the terms of the Rights Agreement at any time and (b) may take such action with respect to the Rights Agreement as the Board of Directors deems appropriate. The Rights are being registered under the Securities Act, together with the Common Shares, pursuant to this Registration Statement. In the event that the Rights become exercisable, the Company will register the Class A Preferred Stock for which the Rights may be exercised, in accordance with applicable law. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Shares is Norwest Bank Minnesota, N.A. 52 54 UNDERWRITING In the Underwriting Agreement, the Underwriters, represented by McDonald & Company Securities, Inc., Warburg Dillon Read LLC, and Johnson Rice & Company L.L.C. (the "Representatives"), have agreed, severally, subject to the terms and conditions therein set forth, to purchase from the Company, and the Company has agreed to sell to them, the number of Common Shares, totaling 2,800,000 shares, set forth opposite their respective names below. The Underwriters are committed to take and pay for all shares if any shares are purchased.
NUMBER OF UNDERWRITERS SHARES ------------ --------- McDonald & Company Securities, Inc...................... Warburg Dillon Read LLC................................. Johnson Rice & Company L.L.C. .......................... --------- Total......................................... 2,800,000 =========
The Company has been advised by the Representatives that the Underwriters propose to offer the Common Shares to the public at the public offering price set forth on the cover page of this Prospectus. The Underwriters may allow to certain selected dealers who are members of the National Association of Securities Dealers, Inc. (the "NASD") a discount not exceeding $ per share, and the Underwriters may allow, and such selected dealers may re-allow, a discount not exceeding $ per share to other dealers who are members of the NASD. After the Offering, the public offering price and the discount to dealers may be changed by the Representatives. The Company has granted an option to the Underwriters, exercisable during the 30-day period after the date of this Prospectus, to purchase up to a maximum of 420,000 Common Shares at the public offering price, less the underwriting discount, as set forth on the cover page of this Prospectus. The Underwriters may exercise that option only to cover over-allotments in the sale of the Common Shares that the Underwriters have agreed to purchase. To the extent that the Underwriters exercise such option, each of the Underwriters will have a firm commitment, subject to certain conditions, to purchase the same percentage of the option shares as the number of shares to be purchased and offered by that Underwriter in the table above bears to the total. The Company has agreed to indemnify the Underwriters against certain liabilities that may be incurred in connection with the Offering, including liabilities under the Securities Act. The Company and the directors and executive officers of the Company have agreed that they will not offer, sell, transfer or otherwise dispose of any Common Shares, or any securities convertible into or exchangeable for Common Shares, for a period of 180 days from the date of this Prospectus, without the prior written consent of McDonald & Company Securities, Inc. The Representatives have advised the Company that the Underwriters do not intend to confirm sales of Common Shares offered by this Prospectus to any accounts over which they exercise discretionary authority. In connection with the Offering and in compliance with applicable law, the Underwriters may overallot or effect transactions that stabilize, maintain, or otherwise affect the market price of the Common Shares at levels above those that might otherwise prevail in the open market, including by entering stabilizing bids, effecting syndicate covering transactions or imposing penalty bids. A stabilizing bid means the placing of any bid, or the effecting of any purchase, for the purpose of pegging, fixing or maintaining the price of a security. A syndicate covering transaction means the placing of any bid on behalf of the underwriting syndicate or the effecting of any purchase to reduce a short position created in connection with the Offering. A penalty bid means an arrangement 53 55 that permits McDonald & Company Securities, Inc., as managing underwriter, to reclaim a selling concession from a syndicate member in connection with the Offering when securities originally sold by the syndicate member are purchased in stabilizing or syndicate covering transactions. These transactions may be effected on Nasdaq or otherwise. The Underwriters are not required to engage in any of these activities. Any such activities, if commenced, may be discounted at any time. In connection with the Offering, certain Underwriters and selling group members (if any) who are qualified market makers on Nasdaq may engage in passive market making transactions in the Common Shares on Nasdaq in accordance with Rule 103 of Regulation M promulgated under the Securities Exchange Act of 1934, as amended. Passive market makers must comply with applicable volume and price limitations and must be identified as such. In general, a passive market maker must display its bid at a price not in excess of the highest independent bid for such security. If all independent bids are lowered below the passive market maker's bid, however, such bid may exceed the highest independent bid until certain purchase limits are exceeded. VALIDITY OF SHARES The validity of the issuance of the Common Shares offered hereby will be passed upon for Elder-Beerman by Jones, Day, Reavis & Pogue, Cleveland, Ohio. Certain legal matters related to the Offering will be passed upon for the Underwriters by Calfee, Halter & Griswold LLP, Cleveland, Ohio. EXPERTS The financial statements as of January 31, 1998 and February 1, 1997 and for each of the three fiscal years in the period ended January 31, 1998 of the Company included in this Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report (which expresses an unqualified opinion and includes an explanatory paragraph concerning the Company's plan of reorganization) appearing in this Prospectus, and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The financial statements as of January 31, 1998 and February 1, 1997, and for each of the three fiscal years in the period ended January 31, 1998 of Stone & Thomas included in this Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report (which expresses an unqualified opinion and includes an explanatory paragraph that expresses substantial doubt as to Stone & Thomas' ability to continue as a going concern and an explanatory paragraph relating to a letter of intent for the sale of Stone & Thomas' outstanding stock) appearing in this Prospectus, and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. AVAILABLE INFORMATION Elder-Beerman is subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information filed by the Company can be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Judiciary Plaza, Washington, D.C. 20549, and at the Commission's Regional Offices at Citicorp Center, 500 West Madison, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such material can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Room 1024, Judiciary Plaza, Washington, D.C. 20549, at prescribed rates. The Commission maintains a Web site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. Elder-Beerman has filed with the Commission a Registration Statement on Form S-1 under the Securities Act with respect to the Common Shares offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto, certain portions have been omitted in accordance with the rules and regulations of the Commission. For further information with respect to Elder- 54 56 Beerman and the Common Shares, reference is hereby made to such Registration Statement and the exhibits and schedules thereto. Statements contained in this Prospectus as to the contents of any contract or other document are not necessarily complete, although the material terms thereof are described in this Prospectus, and, in each instance, reference is made to the copy of such contract or document filed as an exhibit to the Registration Statement. Each such statement is qualified by such reference to such exhibits. The Registration Statement, including exhibits and schedules thereto, may be inspected without charge at the Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of all or any part thereof may be obtained from such office upon payment of the fees prescribed by the Commission. 55 57 THE ELDER-BEERMAN STORES CORP. INDEX TO HISTORICAL FINANCIAL INFORMATION
PAGE ---- THE ELDER-BEERMAN STORES CORP. Independent Auditors' Report................................ F-2 Consolidated Balance Sheets as of January 31, 1998 and February 1, 1997.......................................... F-3 Consolidated Statements of Operations for the fiscal years ended January 31, 1998, February 1, 1997, and February 3, 1996...................................................... F-5 Consolidated Statements of Shareholders' Equity for the fiscal years ended January 31, 1998, February 1, 1997, and February 3, 1996.......................................... F-6 Consolidated Statements of Cash Flows for the fiscal years ended January 31, 1998, February 1, 1997, and February 3, 1996...................................................... F-7 Notes to Consolidated Financial Statements.................. F-8 Condensed Consolidated Balance Sheets (unaudited) as of May 2, 1998 and as of January 31, 1998........................ F-21 Condensed Consolidated Statements of Operations (unaudited) for the 13 weeks ended May 2, 1998 and May 3, 1997........ F-22 Condensed Consolidated Statements of Cash Flows (unaudited) for the 13 weeks ended May 2, 1998 and May 3, 1997........ F-23 Notes to Condensed Consolidated Financial Statements (unaudited)............................................... F-24 STONE & THOMAS Independent Auditors' Report................................ F-25 Consolidated Balance Sheets as of May 2, 1998 (unaudited), January 31, 1998, and February 1, 1997.................... F-26 Consolidated Statements of Operations for the 13 weeks ended May 2, 1998 (unaudited) and May 3, 1997 (unaudited) and for the fiscal years ended January 31, 1998, February 1, 1997, and February 3, 1996................................ F-28 Consolidated Statements of Stockholders' Equity for the 13 weeks ended May 2, 1998 (unaudited) and for the fiscal years ended January 31, 1998, February 1, 1997, and February 3, 1996.......................................... F-29 Consolidated Statements of Cash Flows for the 13 weeks ended May 2, 1998 (unaudited) and May 3, 1997 (unaudited) and for the fiscal years ended January 31, 1998, February 1, 1997, and February 3, 1996................................ F-30 Notes to Consolidated Financial Statements.................. F-31
F-1 58 INDEPENDENT AUDITORS' REPORT To the Board of Directors of The Elder-Beerman Stores Corp.: We have audited the accompanying consolidated balance sheets of The Elder-Beerman Stores Corp. and subsidiaries (the "Company") as of January 31, 1998 and February 1, 1997 and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three fiscal years in the period ended January 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of January 31, 1998 and February 1, 1997 and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 31, 1998, in conformity with generally accepted accounting principles. As discussed in Note 1 to the financial statements, on December 16, 1997, the Bankruptcy Court entered an order confirming the plan of reorganization, which became effective after the close of business on December 30, 1997. DELOITTE & TOUCHE LLP April 10, 1998 Dayton, Ohio F-2 59 THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
JANUARY 31, FEBRUARY 1, 1998 1997 ----------- ----------- ASSETS Current assets: Cash and equivalents...................................... $ 6,497 $ 7,091 Customer accounts receivable (less allowance for doubtful accounts: fiscal 1997 -- $4,177; fiscal 1996 -- $3,800)........................................ 136,705 147,814 Merchandise inventories................................... 137,507 126,850 Refundable income taxes................................... 10,336 Assets of discontinued operations......................... 3 Deferred tax asset........................................ 2,595 Other current assets...................................... 10,051 10,822 -------- -------- Total current assets.............................. 293,355 302,916 -------- -------- Property: Land and improvements..................................... 1,030 1,177 Buildings and leasehold improvements...................... 62,074 54,361 Furniture, fixtures and equipment......................... 87,132 76,047 -------- -------- Total cost........................................ 150,236 131,585 Less accumulated depreciation and amortization............ (86,980) (77,782) -------- -------- Property, net..................................... 63,256 53,803 -------- -------- Other assets................................................ 14,754 11,890 -------- -------- Total assets...................................... $371,365 $368,609 ======== ========
See notes to consolidated financial statements. F-3 60 THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
JANUARY 31, FEBRUARY 1, 1998 1997 ----------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term obligations.................. $ 1,105 $ 57,931 Accounts payable.......................................... 49,005 22,345 Accrued liabilities: Compensation and related items......................... 8,562 8,696 Income and other taxes................................. 6,581 6,421 Rent................................................... 2,079 2,009 Other.................................................. 11,964 12,458 Liabilities of discontinued operations.................... 10,216 -------- -------- Total current liabilities......................... 79,296 120,076 -------- -------- Long-term obligations -- less current portion............... 142,024 5,669 Deferred items.............................................. 4,534 5,051 Liabilities subject to compromise........................... 231,675 Commitments and contingencies Shareholders' equity: Series B convertible preferred stock, $.01 par value, 1,250,000 shares authorized, 662,474 issued and outstanding at February 1, 1997........................ 7 Common stock, no par, 12,583,789 shares in fiscal 1997 and 124,036 shares in fiscal 1996 issued and outstanding... 199,351 6,511 Additional paid-in capital................................ 23,283 Unearned compensation -- restricted stock, net............ (1,225) Deficit................................................... (52,615) (23,663) -------- -------- Total shareholders' equity........................ 145,511 6,138 -------- -------- Total liabilities and shareholders' equity...... $371,365 $368,609 ======== ========
See notes to consolidated financial statements. F-4 61 THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
YEAR ENDED ----------------------------------------- JANUARY 31, FEBRUARY 1, FEBRUARY 3, 1998 1997 1996 ----------- ----------- ----------- Revenues: Net sales............................................. $ 581,372 $569,557 $590,018 Financing............................................. 26,574 27,451 18,913 ---------- -------- -------- Total revenues................................ 607,946 597,008 608,931 ---------- -------- -------- Costs and expenses: Cost of merchandise sold, occupancy and buying expenses........................................... 423,542 410,067 457,122 Selling, general and administrative expenses.......... 151,293 156,892 169,919 Key employees retention bonus plan expense............ 4,000 4,994 Hiring and recruiting expenses for new executives..... 2,121 1,435 86 Provision for doubtful accounts....................... 8,636 6,680 5,878 Interest expense...................................... 7,084 6,467 9,557 Other income.......................................... (661) (1,106) ---------- -------- -------- Total costs and expenses...................... 596,015 585,429 642,562 ---------- -------- -------- Income (loss) before reorganization items and income tax expense (benefit).................. 11,931 11,579 (33,631) Reorganization items.................................... (27,542) (23,648) (19,711) ---------- -------- -------- Loss before income tax expense (benefit), discontinued operations and extraordinary item.......................................... (15,611) (12,069) (53,342) Income tax expense (benefit)............................ (7,412) 360 (2,332) ---------- -------- -------- Loss from continuing operations.................. (8,199) (12,429) (51,010) Discontinued operations................................. 7,378 (12,276) ---------- -------- -------- Loss before extraordinary item................... (821) (12,429) (63,286) Extraordinary item...................................... (28,131) ---------- -------- -------- Net loss......................................... $ (28,952) $(12,429) $(63,286) ========== ======== ======== Basic and diluted earnings (loss) per common share: Loss from continuing operations....................... $ (6.58) $(100.20) $(411.25) Discontinued operations............................... 5.92 (98.97) Extraordinary item.................................... (22.58) ---------- -------- -------- Net loss.............................................. $ (23.24) $(100.20) $(510.22) ========== ======== ======== Weighted average number of common shares outstanding........................................ 1,245,760 124,036 124,036 ========== ======== ========
See notes to consolidated financial statements. F-5 62 THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DOLLARS IN THOUSANDS)
UNEARNED PREFERRED ADDITIONAL COMPENSATION -- RETAINED TOTAL STOCK COMMON PAID-IN RESTRICTED EARNINGS SHAREHOLDERS' SERIES B STOCK CAPITAL STOCK (DEFICIT) EQUITY --------- -------- ---------- --------------- --------- ------------- Shareholders' equity at January 28, 1995 (124,036 common shares outstanding).......... $ 7 $ 6,511 $23,283 $ $ 52,052 $ 81,853 Net loss....................... (63,286) (63,286) --- -------- ------- ------- -------- -------- Shareholders' equity at February 3, 1996 (124,036 common shares outstanding)... 7 6,511 23,283 (11,234) 18,567 Net loss....................... (12,429) (12,429) --- -------- ------- ------- -------- -------- Shareholders' equity at February 1, 1997 (124,036 common shares outstanding)... 7 6,511 23,283 (23,663) 6,138 Net loss....................... (28,952) (28,952) Common stock issuance at bankruptcy emergence (12,372,960 common shares)... (7) 191,580 (23,283) 168,290 Restricted shares issued (86,793 common shares)....... 1,260 (1,225) 35 --- -------- ------- ------- -------- -------- Shareholders' equity at January 31, 1998 (12,583,789 common shares outstanding).......... $ $199,351 $ $(1,225) $(52,615) $145,511 === ======== ======= ======= ======== ========
See notes to consolidated financial statements. F-6 63 THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
YEAR ENDED ----------------------------------------- JANUARY 31, FEBRUARY 1, FEBRUARY 3, 1998 1997 1996 ----------- ----------- ----------- Cash flows from operating activities: Net loss.................................................. $(28,952) $(12,429) $(63,286) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Provision for doubtful accounts......................... 8,636 6,680 5,878 Deferred income taxes................................... (7,877) 5,270 Provision for depreciation and amortization............. 11,849 13,139 15,768 Loss on disposal of assets.............................. 665 1,737 6,640 Loss on equipment settlements........................... 74 7,458 Stock-based compensation expense........................ 85 Payment to general unsecured creditors.................. (82,215) Discontinued operations................................. (7,378) Extraordinary item...................................... 28,131 Changes in noncash assets and liabilities: Customer accounts receivable.......................... 2,473 (10,118) (9,621) Merchandise inventories............................... (10,657) (7,545) 23,980 Refundable income taxes............................... 10,336 Other current assets.................................. 2,308 (5,331) (2,841) Other long-term assets................................ 1,566 916 (1,202) Discontinued operations............................... 583 Accounts payable...................................... 16,423 (2,710) 66,850 Accrued liabilities................................... 1,113 (2,478) 8,063 Deferred items........................................ 365 1,048 -------- -------- -------- Net cash provided by (used in) operating activities....................................... (53,420) (10,316) 57,130 -------- -------- -------- Cash flows from investing activities: Capital expenditures...................................... (20,994) (4,759) (11,401) Proceeds from surrender of insurance policies............. 271 3,000 Proceeds from sale of property............................ 1,200 Proceeds from sale of investment.......................... 300 Acquisition of securitized receivables.................... (115,000) -------- -------- -------- Net cash used in investing activities.............. (20,994) (2,988) (123,401) -------- -------- -------- Cash flows from financing activities: Net borrowings under asset securitization agreement....... 123,015 Net borrowings (payments) on bankers' acceptance and revolving lines of credit............................... 10,960 29,500 Payments on long-term obligations......................... (748) (991) (1,200) Debt acquisition costs.................................... (1,634) (1,052) (3,875) Net borrowings (payments) under DIP Facility.............. (57,773) 7,773 50,000 -------- -------- -------- Net cash provided by financing activities.......... 73,820 5,730 74,425 -------- -------- -------- Increase (decrease) in cash and equivalents................. (594) (7,574) 8,154 Cash and equivalents -- beginning of year................... 7,091 14,665 6,511 -------- -------- -------- Cash and equivalents -- end of year......................... $ 6,497 $ 7,091 $ 14,665 ======== ======== ======== Supplemental cash flow information: Interest paid............................................. $ 6,945 $ 6,929 $ 11,053 Income taxes paid......................................... 497 335 300 Supplemental non-cash investing and financing activities: Property acquired from lease incentives................... $ 44 $ 366 $ 1,956 Property acquired from lease settlements.................. 235 3,142
See notes to consolidated financial statements. F-7 64 THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) 1. CHAPTER 11 CASE On October 17, 1995 (the "Filing Date") , The Elder-Beerman Stores Corp. and its Subsidiaries (collectively, the "Company") filed petitions for relief under chapter 11 of the United States Bankruptcy Code ("Chapter 11"). From that time until December 30, 1997, the Company operated its business as a debtor in possession subject to the jurisdiction of the United States Bankruptcy Court for the Southern District of Ohio, Western Division (the "Bankruptcy Court"). On December 30, 1997 (the "Effective Date"), the Company substantially consummated its Third Amended Joint Plan of Reorganization dated November 17, 1997, as amended, (the "Joint Plan"), which was confirmed by an order of the Bankruptcy Court entered on December 16, 1997. The consolidated financial statements of the Company during its Chapter 11 case are presented in accordance with American Institute of Certified Public Accountants Statement of Position 90-7, Financial Reporting by Entities in Reorganization under the Bankruptcy Code ("SOP 90-7"). As of the Effective Date, the reorganization value of assets of the Company exceeded total liabilities. As such, in accordance with SOP 90-7, fresh-start accounting and reporting was not adopted. The Joint Plan establishes a reorganized Company, including a new Board of Directors, new benefit and compensation programs and agreements, a reorganization bonus paid to certain executives, authorization and issuance of shares of new common and preferred stock and the issuance of warrants. In addition, the Joint Plan provides for the settlement of prepetition liabilities subject to compromise, in the Company's Chapter 11 case in exchange for cash, shares of new common stock or reinstatement as liabilities of the reorganized Company. The cash disbursements upon the effectiveness of the Joint Plan are as follows: Holders of general unsecured claims......................... $79,698 Holders of unsecured claims against the Company's discontinued Margo's operations........................... 2,517 ------- Total payments made to general unsecured creditors........................................ $82,215 =======
The new common shares issued upon the effectiveness of the Joint Plan are as follows: Holders of general unsecured claims......................... 12,279,611 Holders of old common stock interests....................... 124,036 Reorganization bonus to certain executives.................. 93,349 ---------- 12,496,996 ==========
In addition to receiving new common shares, the holders of common stock prior to the Company's emergence from bankruptcy received 249,809 Series A Stock Warrants and 374,713 Series B Stock Warrants at the Effective Date. The holders of preferred stock prior to the Company's emergence from bankruptcy were awarded allowed claims as general unsecured claimants and, accordingly, are included in the general unsecured distributions described above (see Note 9). The value of cash and common stock required to be distributed under the Joint Plan to the Company's general unsecured creditors exceeded the value of the liabilities settled. Therefore, the Company recorded an F-8 65 THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) extraordinary loss related to the discharge of these prepetition liabilities. The extraordinary loss recorded by the Company is determined as follows: Cash distribution to general unsecured creditors pursuant to the Joint Plan............................................ $ 79,698 Fair value of new common stock issued to general unsecured creditors................................................. 178,300 --------- 257,998 Less: General unsecured claims.............................. (229,867) --------- Extraordinary loss.......................................... $ 28,131 =========
The February 1, 1997, consolidated balance sheet includes liabilities subject to resolution in the Chapter 11 case. These liabilities are classified as liabilities subject to compromise under reorganization proceedings, and are comprised of the following:
FEBRUARY 1, 1997 ----------- Accounts payable and accrued liabilities.................... $ 92,209 Unsecured debt.............................................. 131,900 Secured debt................................................ 2,455 Capital lease obligations................................... 2,834 Accrued interest............................................ 2,277 -------- $231,675 ========
2. SIGNIFICANT ACCOUNTING POLICIES Nature of Operations -- The Company operates principally in midwestern states, through retail department stores and free-standing shoe stores. The women's specialty stores (Margo's La Mode, Inc.) were liquidated in 1995 (see Note 14). Estimates -- The preparation of the consolidated 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Principles of Consolidation -- The consolidated financial statements include the accounts of The Elder-Beerman Stores Corp. and subsidiaries (including The El-Bee Chargit Corp., a finance subsidiary). All significant intercompany balances and transactions have been eliminated in consolidation. Fiscal Year -- The Company's fiscal year ends on the Saturday nearest January 31. Fiscal years 1997 and 1996 consist of 52 weeks, and fiscal year 1995 consists of 53 weeks ended January 31, 1998, February 1, 1997, and February 3, 1996, respectively. Cash and Equivalents -- The Company considers all highly liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents. Customer Accounts Receivable -- Customer accounts receivable are classified as current assets since the average collection period is generally less than one year. Merchandise Inventories -- Retail inventory is determined principally by the retail method applied on a last-in, first-out (LIFO) basis and is stated at the lower of cost or market. If the first-in, first-out (FIFO) basis had been used, inventories would be higher by $6,657 at January 31, 1998 and $8,043 at February 1, 1997. F-9 66 THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Property is stated at cost less accumulated depreciation determined by the straight-line method over the expected useful lives of the assets. Assets held under capital leases and related obligations are recorded initially at the lower of fair market value or the present value of the minimum lease payments. The straight-line method is used to amortize such capitalized costs over the lesser of the expected useful life of the asset or the life of the lease. The estimated useful lives by class of asset are: Buildings................................................... 25 to 50 years Leasehold improvements...................................... 10 to 20 years Furniture, fixtures and equipment........................... 3 to 10 years
Other assets include the value assigned to lease agreements acquired in an acquisition that is being amortized over the lease terms. The Company continually evaluates, based upon income and/or cash flow projections and other factors as appropriate, whether events and circumstances have occurred that indicate that the remaining estimated useful life of the asset warrants revision or that the remaining balance of this asset may not be recoverable. During fiscal year 1995, the Company adopted Statement of Financial Accounting Standard (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. Upon the adoption of SFAS No. 121, the Company recognized an impairment loss of $551 related to the value assigned to lease agreements associated with closed stores, which is included in cost of merchandise sold, occupancy and buying expenses. Revenues are recognized on merchandise inventory sold upon receipt by the customer. Finance revenue is generated by outstanding customer accounts receivable and recognized as interest is accrued on these outstanding balances. Pre-opening costs associated with opening new stores are expensed as incurred. Advertising Expense -- The cost of advertising is expensed as incurred. Net earnings (loss) per common share are computed by dividing net earnings (loss) by the weighted average number of common shares outstanding during the year. Stock options, restricted shares and warrants outstanding at January 31, 1998, represent potential common shares and are not included in computing diluted earnings per share as the effect on the current year would be antidilutive. Share and per share amounts for all periods presented have been restated to reflect the adoption of SFAS No. 128, Earnings Per Share, and the effect of the issuance of new common stock upon the Company's emergence from bankruptcy. Stock Options -- The Company measures compensation cost for stock options issued to employees using the intrinsic value based method of accounting in accordance with Accounting Principles Board Opinion No. 25. Financial Instruments -- The Company utilizes interest rate swap agreements to manage its interest rate risks when receivables are sold under asset securitization programs or other borrowings. The Company does not hold or issue derivative financial instruments for trading purposes. The Company does not have derivative financial instruments that are held or issued and accounted for as hedges of anticipated transactions. Amounts currently due to or from interest rate swap counterparties are recorded in interest expense in the period in which they accrue. Gains or losses on terminated interest rate swap agreements are included in long-term liabilities or assets and amortized to interest expense over the shorter of the original term of the agreements or the life of the financial instruments to which they are matched. Gains or losses on the mark-to-market for interest rate swap agreements that do not qualify for hedge accounting are recorded as income or expense each period. F-10 67 THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Reclassifications -- Certain amounts in the fiscal 1996 and 1995 financial statements have been reclassified to conform with the fiscal 1997 presentation. 3. CUSTOMER ACCOUNTS RECEIVABLE Customer accounts receivable, which represent finance subsidiary receivables (Note 4), are classified as shown in the following table. Interest is charged at an annual rate of 18% to 21%, depending on state law.
JANUARY 31, FEBRUARY 1, TYPE OF ACCOUNT 1998 1997 --------------- ----------- ----------- Optional and other.......................................... $131,825 $140,623 Deferred payment............................................ 9,736 12,239 -------- -------- Total............................................. 141,561 152,862 Less: Allowance for doubtful accounts........................... (4,177) (3,800) Unearned interest on deferred contracts................... (679) (1,248) -------- -------- Customer accounts receivable, net...................... $136,705 $147,814 ======== ========
YEAR ENDED ----------------------------------------- JANUARY 31, FEBRUARY 1, FEBRUARY 3, 1998 1997 1996 ----------- ----------- ----------- Allowance for doubtful accounts: Balance, beginning of year..................... $3,800 $3,200 $1,700 Provision...................................... 8,636 6,680 5,878 Charge offs, net of recoveries................. (8,259) (6,080) (4,378) ------ ------ ------ Balance, end of year........................... $4,177 $3,800 $3,200 ====== ====== ======
Customer accounts receivable result from the Company's proprietary credit card sales to customers residing principally in the midwestern states. As such, the Company believes it is not dependent on a given industry or business for its customer base and therefore has no significant concentration of credit risk. Deferred payment accounts include the remaining unearned interest charge to be received. Unearned interest is amortized to finance income using the effective interest method. 4. FINANCE SUBSIDIARY The El-Bee Chargit Corp. ("Chargit") purchases substantially all Elder-Beerman and subsidiaries' proprietary credit card receivables; such receivables are purchased at a 2% discount (as of January 1998, 3% discount). Customer accounts receivable held by the finance subsidiary are included in Note 3; purchase discounts are eliminated in consolidation.
JANUARY 31, FEBRUARY 1, BALANCE SHEETS 1998 1997 -------------- ----------- ----------- Assets: Customer accounts receivable -- net....................... $136,705 $147,814 Unamortized purchase discount............................. (2,923) (3,057) Intercompany -- prepetition............................... 4,845 Other assets.............................................. 3,658 2,295 -------- -------- Total............................................. $137,440 $151,897 ======== ========
F-11 68 THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, FEBRUARY 1, BALANCE SHEETS 1998 1997 -------------- ----------- ----------- Liabilities and shareholder's equity: Liabilities............................................... $ 519 $ 2,286 Intercompany -- postpetition.............................. 7,230 114,769 Liabilities subject to compromise......................... 445 Long-term financing....................................... 123,015 Shareholder's equity...................................... 6,676 34,397 -------- -------- Total............................................. $137,440 $151,897 ======== ========
YEAR ENDED ----------------------------------------- JANUARY 31, FEBRUARY 1, FEBRUARY 3, STATEMENTS OF OPERATIONS 1998 1997 1996 ------------------------ ----------- ----------- ----------- Revenues: Financing (net of securitization expense of $5,933, for fiscal 1995).................... $26,574 $27,451 $18,913 Purchase discount.............................. 5,507 5,277 5,594 ------- ------- ------- Total revenues......................... 32,081 32,728 24,507 ------- ------- ------- Expenses: Occupancy costs................................ 322 298 300 Selling, general and administrative............ 6,691 6,219 6,186 Provision for doubtful accounts................ 8,636 6,680 5,878 Other (income) expense......................... 611 (1,106) Interest expense............................... 748 ------- ------- ------- Total expenses......................... 17,008 12,091 12,364 ------- ------- ------- Income before reorganization items and income taxes.......................................... 15,073 20,637 12,143 Reorganization items............................. (31) (5,288) ------- ------- ------- Income before income taxes and extraordinary item........................................... $15,042 $20,637 $ 6,855 ======= ======= =======
On December 30, 1997, Chargit entered into a three-year variable-rate securitization loan agreement ("Securitization Facility") with a commercial bank, in which Chargit's customer accounts receivable are pledged as collateral under the related Securitization Facility (see Note 6). The Securitization Facility is a revolving arrangement whereby Chargit can borrow up to $125,000. As of January 31, 1998, borrowings on Chargit's financial statements were $123,015. On December 30, 1997, as a requirement of the Securitization Facility, the Company entered into an interest rate swap agreement with a notional amount of $115,000, expiring September 28, 2001, to reduce the impact of interest rate changes on future interest expense. This agreement has been matched to the Securitization Facility to reduce the impact of interest rate changes on cash flows. Prior to the Filing Date, the Company had a variable rate asset securitization agreement with a commercial bank whereby it could sell up to $115,000 of customer accounts receivable. The Company sold approximately $115,000 of customer accounts receivable under this agreement. These receivables were sold with a repurchase liability for balances ultimately determined to be uncollectible. As a result of the bankruptcy filing, the Company discontinued its accounts receivable sale program and terminated its asset securitization agreement. Upon termination of the accounts receivable sale program, the notional amount of the effective interest rate swap agreements hedged against receivables sold was $55,000. This notional amount was unmatched and a F-12 69 THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) $5,025 mark-to-market adjustment was recorded as reorganization expense in fiscal 1995. For the period from the Filing Date to the Effective Date, the estimated market value of the interest rate swaps were recorded as liabilities subject to compromise. Mark-to-market adjustments of $619 and ($1,106) are recorded as other expense (income) in fiscal 1997 and 1996, respectively. The unmatched interest rate swap agreement was paid off in December 1997. The Company utilizes interest rate swap agreements to effectively establish long-term fixed rates on borrowings under the Securitization Facility, thus reducing the impact of interest rate changes on future income. These swap agreements involve the receipt of variable rate amounts in exchange for fixed rate interest payments over the life of the agreement. The differential between the fixed and variable rates to be paid or received is accrued as interest rates change and is recognized as an adjustment to interest expense. The Company has outstanding swap agreements with notional amounts totaling $115,000 and $55,000 for the fiscal years ended 1997 and 1996, respectively. The Company is exposed to credit related losses in the event of non-performance by the counterparties to the swap agreements. All counterparties are rated A or higher by Moody's and Standard and Poor's and the Company does not anticipate non-performance by any of its counterparties. 5. OTHER ASSETS
JANUARY 31, FEBRUARY 1, 1998 1997 ----------- ----------- Deferred tax asset.......................................... $ 5,282 $ Value assigned to lease agreements.......................... 3,042 3,554 Receivables from developers................................. 2,380 Unamortized debt issuance costs............................. 909 454 Import deposits............................................. 2,555 2,555 Other....................................................... 2,966 2,947 ------- ------- $14,754 $11,890 ======= =======
Receivables from developers represent receivables related to lease incentives, in the form of construction reimbursements and advertising allowances and are included in other long-term assets in fiscal 1996 because payment of certain construction reimbursements by the developer to the Company are contingent on the Company's lease assumption and/or payments for construction work performed. In fiscal 1997, these amounts are classified as current because the Company expects to receive all amounts in fiscal 1998. 6. LONG-TERM OBLIGATIONS On December 30, 1997, the Company entered into a three-year $125,000 Revolving Credit Facility ("Credit Facility") and Securitization Facility that effectively replaced the prior DIP Facility and paid certain liabilities subject to compromise and administrative claims. The Credit Facility provides for borrowings and letters of credit in an aggregate amount up to $125,000, subject to a borrowing base formula based primarily on merchandise inventories. There was a $30,000 sublimit for letters of credit, which was temporarily increased to $60,000 in fiscal 1998. Borrowings bear interest at either prime plus 37.5 basis points or LIBOR plus 137.5 basis points through January 1999. Subsequent to January 1999, the interest rate on these borrowings can fluctuate based on certain financial ratios of the Company. As of January 31, 1998, the Company had $10,960 in outstanding borrowings, $8,167 in outstanding letters of credit and approximately $51,000 available for additional borrowings under the Credit Facility. F-13 70 THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Securitization Facility provides for the Company to borrow up to $125,000. The borrowings under this facility are subject to a borrowing base formula based primarily on outstanding consumer accounts receivable. Borrowings bear interest at approximately 1-month LIBOR plus 50 basis points. Certain financial covenants related to debt, capital expenditures, interest and fixed charge expenditures are included in these agreements. Additionally, there are certain other restrictive covenants including limitations on the incurrence of additional liens, indebtedness, payment of dividends, distributions or other payments on and repurchases of outstanding capital stock, investments, mergers, stock transfers and sales of assets. Certain ratios related to the performance of the accounts receivable portfolio are also included. Long-term obligations consist of the following:
JANUARY 31, FEBRUARY 1, 1998 1997 ----------- ----------- DIP Facility................................................ $ $57,773 Revolving credit arrangement................................ 3,600 Unsecured credit facility: Eurodollar borrowings..................................... 40,000 Bankers' acceptances...................................... 13,300 Competitive bid advances.................................. 5,000 Unsecured senior notes payable, Series A-C.................. 50,000 Unsecured senior notes payable.............................. 20,000 Mortgage note payable, 9.75%................................ 2,669 2,727 Industrial development revenue bonds, variable rates based on published index of tax-exempt bonds (5.15%)............ 4,260 5,555 Capital lease obligations (Note 7).......................... 2,225 2,834 Credit facility (8.0%)...................................... 10,960 Securitization facility (5.9%).............................. 123,015 -------- ------- Total............................................. 143,129 200,789 Less: Liabilities subject to compromise......................... 137,189 DIP Facility.............................................. 57,773 Current portion of long-term obligations, not subject to compromise............................................. 1,105 158 -------- ------- Net long-term obligations................................... $142,024 $ 5,669 ======== =======
Maturities of borrowings are $1,105 in 1998, $951 in 1999, $134,942 in 2000, $870 in 2001, $362 in 2002, and $4,899 thereafter. Collateral for the industrial development revenue bonds and the mortgage note payable is land, buildings, furniture, fixtures and equipment with a net book value of $5,675 at January 31, 1998. Mechanics' liens have been filed in respect of improvements made to certain properties. 7. LEASES The Company leases retail store properties and certain equipment. Generally, leases are net leases that require the payment of executory expenses such as real estate taxes, insurance, maintenance and other operating costs, in addition to minimum rentals. Leases for retail stores generally contain renewal or purchase options, or both, and generally provide for contingent rentals based on a percentage of sales. F-14 71 THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Minimum annual rentals, for leases having initial or remaining noncancelable lease terms in excess of one year at January 31, 1998, are as follows:
OPERATING CAPITAL FISCAL YEAR LEASES LEASES ----------- --------- ------- 1998...................................................... $ 18,099 $ 824 1999...................................................... 16,203 584 2000...................................................... 13,676 525 2001...................................................... 11,459 347 2002...................................................... 10,358 174 Thereafter................................................ 77,872 121 -------- ------ Minimum lease payments.................................... $147,667 2,575 ======== Less imputed interest..................................... 350 ------ Present value of net minimum lease payments............... $2,225 ======
YEAR ENDED ----------------------------------------- JANUARY 31, FEBRUARY 1, FEBRUARY 3, RENT EXPENSE 1998 1997 1996 ------------ ----------- ----------- ----------- Operating leases: Minimum...................................... $17,677 $20,489 $23,228 Contingent................................... 2,108 2,136 2,766 ------- ------- ------- Total rent expense................... $19,785 $22,625 $25,994 ======= ======= =======
JANUARY 31, FEBRUARY 1, ASSETS HELD UNDER CAPITAL LEASES 1998 1997 -------------------------------- ----------- ----------- Buildings................................................... $11,033 $11,033 Equipment................................................... 235 Less accumulated depreciation and amortization.............. (9,997) (9,565) ------- ------- Net......................................................... $ 1,271 $ 1,468 ======= =======
Assets acquired under capital leases are included in the consolidated balance sheets as property, while the related obligations are included in long-term obligations (see Note 6). 8. INCOME TAXES Income tax expense (benefit) consists of the following:
YEAR ENDED ----------------------------------------- JANUARY 31, FEBRUARY 1, FEBRUARY 3, 1998 1997 1996 ----------- ----------- ----------- Current: Federal........................................ $ $ $(10,400) State and local................................ 465 360 504 ----------- -------- -------- 465 360 (9,896) ----------- -------- --------
F-15 72 THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED ----------------------------------------- JANUARY 31, FEBRUARY 1, FEBRUARY 3, 1998 1997 1996 ----------- ----------- ----------- Deferred: Net operating losses and tax credit carryforwards............................... (5,529) (13,560) (6,487) Interest....................................... (6,119) 6,119 Deferred income................................ 1,804 1,513 (270) Discontinued operations........................ 2,362 158 (274) Other.......................................... 3,364 (725) (4,200) Valuation allowance............................ (3,759) 6,495 20,787 ----------- -------- -------- (7,877) 9,556 ----------- -------- -------- Income tax expense (benefit)................ $ (7,412) $ 360 $ (340) =========== ======== ======== Income statement classification: Continuing operations.......................... $ (7,412) $ 360 $ (2,332) Discontinued operations........................ 1,992 ----------- -------- -------- Total.................................. $ (7,412) $ 360 $ (340) =========== ======== ========
The current tax benefit in fiscal 1995 includes the carryback of net operating losses for a refund of prior taxes paid. During fiscal 1997, this income tax refund was received by the Company. The following table summarizes the major differences between the actual income tax provision attributable to continuing operations and taxes computed at the federal statutory rates:
JANUARY 31, FEBRUARY 1, FEBRUARY 3, 1998 1997 1996 ----------- ----------- ----------- Federal statutory tax rate....................... $(5,464) $ (4,224) $(18,670) State and local taxes............................ 465 360 504 Valuation allowance.............................. (7,579) 3,767 15,824 Permanent items.................................. 5,166 457 10 ------- ----------- -------- Income taxes..................................... $(7,412) $ 360 $ (2,332) ======= =========== ======== Effective tax (benefit) rate..................... (47.5)% --% (4.4)% ======= =========== ========
Deferred income taxes consist of the following:
JANUARY 31, FEBRUARY 1, 1998 1997 ----------- ----------- Deferred tax assets: Net operating losses and tax credit carryforwards......... $25,576 $20,047 Discontinued operations................................... 2,362 Deferred income........................................... 602 2,406 Bad debts................................................. 1,518 1,414 Other..................................................... 4,280 7,517 ------- ------- 31,976 33,746 Valuation allowance....................................... (23,523) (27,282) ------- ------- Total deferred tax assets......................... 8,453 6,464 ------- -------
F-16 73 THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, FEBRUARY 1, 1998 1997 ----------- ----------- Deferred tax liabilities: Interest expense.......................................... 6,119 Other..................................................... 576 345 ------- ------- Total deferred tax liabilities.................... 576 6,464 ------- ------- Net.................................................... $ 7,877 $ ======= ======= Included in the balance sheets: Current assets -- deferred tax asset........................ $ 2,595 $ Other assets................................................ 5,282 ------- ------- Net deferred tax assets................................ $ 7,877 $ ======= =======
Permanent items consist primarily of bankruptcy related expenses that are not deductible for tax purposes. The net operating loss carryforwards, tax credit carryforwards, and other deferred tax assets will result in future benefits only if the Company has taxable income in future periods. In accordance with SFAS No. 109, Accounting for Income Taxes, a valuation allowance has been recorded for the tax effect of a portion of the future tax deductions and tax credit carryforwards. The federal net operating loss carryforward is approximately $64,000 and is available to reduce federal taxable income through 2012. The tax credit carryforward is approximately $2,600; of which $600 will expire in 2009 and 2010, and the balance is an indefinite carryforward. 9. EMPLOYEE BENEFIT PLANS A defined-contribution employee benefit plan (the "Plan") covers substantially all employees. The Company may contribute to the Plan based on a percentage of compensation and on a percentage of income before income taxes. No contributions were made in fiscal years 1997, 1996 and 1995. Eligible employees can make contributions to the Plan through payroll withholdings of one to fifteen percent of their annual compensation. The Plan includes an employee stock ownership component. At February 1, 1997, the Plan held all of the outstanding preferred shares of the Company. These preferred shares were included in the settlement of the general unsecured claims on December 30, 1997 (See Note 1). The preferred shares were settled with a distribution of $4,184 in cash and issuance of 644,680 common shares. A Stock Purchase Plan was established under the Joint Plan. The Stock Purchase Plan provides for the Company's employees to purchase Elder-Beerman common stock at a 15% discount. Employees can make contributions to the Plan through payroll withholdings of one percent to ten percent of their annual compensation, up to a maximum of $25 per year. A total of 625,000 shares of common stock are registered and unissued under this plan. 10. BONUS PLANS In 1995, the Company established a key employee retention program (the "KERP"). The KERP provided for bonus payments to be made during the Company's bankruptcy proceedings based on operating results and continued employment. Expenses of $4,000 and $4,994 were recorded in fiscal years 1997 and 1996, respectively. 11. TRANSACTIONS WITH RELATED PARTIES The Company leased real estate under operating leases from certain affiliated entities, and made payments to these related parties totaling $3,247, $3,742 and $4,129 in fiscal years 1997, 1996 and 1995, respectively. As a F-17 74 THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) result of the issuance of new common shares of the Company as of the Effective Date (see Note 1), these entities' are no longer related parties at January 31, 1998. Balances with related parties at February 1, 1997 were as follows: Customer accounts receivable................................ $368 Other current assets........................................ 60 Other long-term assets...................................... 460 Accounts payable and other liabilities...................... 536 Liabilities subject to compromise........................... 951
12. SHAREHOLDERS' EQUITY The Company authorized 25 million no par new common shares effective with the Company's bankruptcy emergence. Under a Rights Agreement, each outstanding common share presently has one right attached that trades with the common share. Generally, the rights become exercisable and trade separately after a third party acquires 20% or more of the common shares or commences a tender offer for a specified percentage of the common shares. Upon the occurrence of certain additional triggering events specified in the Rights Agreement, each right would entitle its holder (other than, in certain instances, the holder of 20% or more of the common shares) to purchase common shares of the Company at an exercise price of 50% of the then-current common share market value. The rights expire on December 30, 1998, unless the Board of Directors takes action prior to that date to extend the rights, and are presently redeemable at $.01 per right. At December 30, 1997, the Company issued shares of common stock to its general unsecured claimants, which included 644,680 shares of common stock issued in satisfaction of the claims of the old Series B Preferred Shareholders. The Board of Directors has the authority to issue five million shares of new preferred stock. At January 31, 1998, these shares are unissued. 13. STOCK-BASED COMPENSATION During the fourth quarter of 1997, stock options and restricted shares were granted to designated employees and nonemployee directors under the new Equity and Performance Incentive Plan. This plan also authorizes the Company's Board of Directors to grant appreciation rights, deferred shares, performance shares and performance units. Awards relating to 2,250,000 shares are authorized for issuance under this plan and awards related to 1,310,000 shares have been issued as of January 31, 1998. On December 30, 1997, 773,000 stock options with an exercise price of $10.89 per share were granted to directors, officers and key employees under the Equity and Performance Incentive Plan. The options granted have a maximum term of ten years and vest over a period of three to five years. At January 31, 1998, none of the 773,000 stock options outstanding are exercisable. The following table summarizes the fair value of options granted using the Black-Scholes Option Pricing Model: Fair value of options granted during the year............... $ 8.63 Weighted average assumptions used for grants: Expected dividend yield................................... 0% Expected volatility....................................... 35% Risk-free interest rate................................... 6.5% Expected life............................................. 7 years
The Restricted Stock Plan provides for the issuance of restricted common shares to certain employees and nonemployee directors of the Company. These shares have a vesting period of three years. There were 86,793 shares awarded under this plan in January 1998. The fair value of the restricted shares awarded is $1,260 and is being amortized over the three year vesting period. F-18 75 THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Total compensation costs charged to loss from continuing operations before income taxes for all stock-based compensation awards was approximately $85 in fiscal 1997. Had compensation costs been determined based on the fair value method of SFAS No. 123 for all plans, the Company's net loss and loss per common share would have been increased to the following pro forma amounts:
YEAR ENDED JANUARY 31, 1998 ----------- Net loss: As reported............................................... $(28,952) Pro forma................................................. (29,018) Loss per common share: As reported............................................... (23.24) Pro forma................................................. (23.29)
14. DISCONTINUED OPERATIONS In fiscal 1994, the Company adopted formal plans to dispose of its subsidiaries, Margo's La Mode, Inc. ("Margo's") and The Bee-Gee Shoe Corp. ("Bee Gee") and recorded reserves for loss on disposal of $9,834, net of tax benefit of $5,066. During fiscal 1995, the Company was unsuccessful in its attempt to sell Margo's and decided to liquidate the subsidiary. During fiscal 1996, management determined the value of Bee Gee would be more effectively realized by retaining Bee Gee as a part of the Company's ongoing operations. Based on management's estimates and the change in the disposition strategy of Margo's in 1995, the Company provided an additional reserve of $19,262 (including income tax expense of $1,992) for the discontinued operations of Margo's. The discontinued operations expense of $12,276 for fiscal 1995 includes the additional reserve for Margo's net of the reversal of reserves for Bee Gee of $6,986 as a result of management's decision in fiscal 1996, previously discussed. Margo's operating losses of $322, $451 and $16,419 were charged against the reserve for discontinued operations for fiscal years 1997, 1996 and 1995, respectively. Margo's net sales were $34,227 in 1995. Margo's did not have any sales subsequent to fiscal 1995. The settlement of Margo's liabilities subject to compromise and other liabilities upon the Company's emergence from bankruptcy during fiscal 1997 resulted in a net gain from discontinued operations of $7,378. The Company was able to utilize operating loss carryforwards that were fully reserved in prior years to offset the income tax expense related to the gain on discontinued operations. Therefore, there is no income tax expense recorded in connection with this gain. 15. REORGANIZATION ITEMS Reorganization costs consist of the following:
YEAR ENDED ----------------------------------------- JANUARY 31, FEBRUARY 1, FEBRUARY 3, 1998 1997 1996 ----------- ----------- ----------- Professional fees................................ $15,505 $ 8,612 $ 3,586 Equipment lease settlements...................... 74 7,458 Restructuring.................................... 6,852 4,497 8,897 Adjustment to liabilities subject to compromise..................................... 2,326 Reorganization bonus............................. 2,100 Financing costs.................................. 685 3,081 2,203 Market value adjustments of interest rate swaps.......................................... 5,025 ------- ------- ------- Total.................................. $27,542 $23,648 $19,711 ======= ======= =======
F-19 76 THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Subsequent to the Chapter 11 filings, the Company began restructuring its business and decided, among other things, to close two outlet stores and certain Bee Gee locations and discontinue certain vendors in fiscal 1995 and closed a furniture store in fiscal 1996. In fiscal 1997 the Company closed two department stores and discontinued certain departments. Property impairment, severance and certain store closing costs are included in restructuring costs. The Company negotiated various equipment lease settlements primarily during fiscal 1996. Equipment lease settlement costs primarily resulted from renegotiated leases where cash payments and unsecured claims satisfied under the Joint Plan were granted in exchange for ownership of the equipment and relief from other claims previously filed in connection with the underlying leases. In 1995, the market value adjustments of interest rate swaps represent the recognition of losses on interest rate swaps previously hedged against accounts receivable sold. Financing costs include the write-off of the unamortized balance of previously deferred financing costs and amortization of fees associated with the DIP facility. 16. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments: Cash and Equivalents -- The carrying amount approximates fair value because of the short maturity of those instruments. Accounts Receivable and DIP Facility -- The net carrying amount approximates fair value because of the relatively short average maturity of the instruments. Long-term Debt -- The carrying amount approximates fair value as a result of the variable-rate based borrowings. Interest Rate Swap Agreements -- The fair value of interest rate swaps is based on the quoted market prices that the Company would pay to terminate the swap agreements at the reporting date. The following table summarizes the carrying amount and estimated fair value of the interest rate swap agreements.
JANUARY 31, 1998 FEBRUARY 1, 1997 ------------------- ------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- ------- -------- ------- Financial instruments -- interest rate swaps...................................... $ $ $(1,415) $(1,415) Unrecognized financial instruments -- interest rate swaps......... (1,548) (579) (844)
17. COMMITMENTS AND CONTINGENCIES Litigation -- The Company is a party to various legal actions and administrative proceedings and subject to various claims arising in the ordinary course of business. In addition, as a result of the bankruptcy case, the Company remains subject to the jurisdiction of the Bankruptcy Court for matters relating to the consummation of the Joint Plan. Management believes the outcome of any of the litigation matters that will have a material effect on the Company's results of operations, cash flows or financial position have been appropriately accrued. Insurance -- The Company is self-insured for employee medical and workers' compensation subject to limitations for which insurance has been purchased. Management believes that those claims reported and not paid and claims incurred, but not yet reported, are appropriately accrued. F-20 77 THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) (UNAUDITED)
MAY 2, 1998 JANUARY 31, 1998 ----------- ---------------- ASSETS Current assets: Cash and equivalents...................................... $ 6,413 $ 6,497 Customer accounts receivable (less allowance for doubtful accounts: May 2, 1998 -- $3,883; January 31, 1998 -- $4,177)..... 126,762 136,705 Merchandise inventories................................... 154,772 137,507 Other current assets...................................... 11,524 12,646 -------- -------- Total current assets.............................. 299,471 293,355 Property, fixtures and equipment, less accumulated depreciation and amortization............................. 62,589 63,256 Other assets................................................ 15,105 14,754 -------- -------- Total assets...................................... $377,165 $371,365 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term obligations.................. $ 1,105 $ 1,105 Accounts payable.......................................... 42,658 49,005 Other accrued liabilities................................. 26,069 29,186 -------- -------- Total current liabilities......................... 69,832 79,296 Long-term obligations, less current portion................. 153,059 142,024 Deferred items.............................................. 9,002 4,534 -------- -------- Total liabilities................................. 231,893 225,854 Shareholders' equity: Common stock, no par, 12,671,777 shares on May 2, 1998 and 12,583,789 shares on January 31, 1998 issued and outstanding............................................ 201,031 199,351 Unearned compensation -- restricted stock, net............ (2,708) (1,225) Deficit................................................... (53,051) (52,615) -------- -------- Total shareholders' equity........................ 145,272 145,511 -------- -------- Total liabilities and shareholders' equity........ $377,165 $371,365 ======== ========
See notes to condensed financial statements. F-21 78 THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
13 WEEKS ENDED -------------------------------- MAY 2, 1998 MAY 3, 1997 -------------- -------------- Revenues: Net sales................................................. $ 126,724 $ 119,821 Financing................................................. 6,498 6,734 ----------- ----------- Total revenues.................................... 133,222 126,555 Costs and expenses: Cost of merchandise sold, occupancy, and buying expenses............................................... 91,827 86,677 Selling, general, administrative, and other expenses...... 37,724 37,480 Provision for doubtful accounts........................... 1,577 1,080 Interest expense.......................................... 2,804 1,468 Other income.............................................. (244) ----------- ----------- Total costs and expenses.......................... 133,932 126,461 Income (loss) before reorganization items and income tax benefit................................................... (710) 94 Reorganization items........................................ (3,363) ----------- ----------- Loss before income tax benefit.............................. (710) (3,269) Income tax benefit.......................................... 274 ----------- ----------- Net loss.................................................... $ (436) $ (3,269) =========== =========== Basic and diluted net loss per common share................. $ (0.03) $ (26.36) ----------- ----------- Weighted average number of shares outstanding............... 12,496,996 124,036 =========== ===========
See notes to condensed financial statements. F-22 79 THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) (UNAUDITED)
13 WEEKS ENDED -------------------------- MAY 2, 1998 MAY 3, 1997 ----------- ----------- Cash flows from operating activities: Net loss.................................................. $ (436) $ (3,269) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization.......................... 3,227 2,997 Changes in operating assets and liabilities, net....... (11,383) (6,521) -------- -------- Net cash used in operating activities................ (8,592) (6,793) Cash flows from investing activities Capital expenditures, net................................. (2,492) (2,248) -------- -------- Net cash used in investing activities................ (2,492) (2,248) Cash flows from financing activities: Net borrowings under debtor-in-possession agreement....... 11,097 Net payments under asset securitization agreement......... (10,937) Net borrowings under revolving lines of credit............ 22,253 Payments on long-term obligations......................... (281) (114) Other..................................................... (35) -------- -------- Net cash provided by financing activities.............. 11,000 10,983 -------- -------- Increase (decrease) in cash and equivalents................. (84) 1,942 Cash and equivalents -- beginning of period................. 6,497 7,091 -------- -------- Cash and equivalents -- end of period....................... $ 6,413 $ 9,033 ======== ======== Supplemental cash flow information Interest paid............................................. $ 2,568 $ 1,736
See notes to condensed financial statements. F-23 80 THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements include accounts of The Elder-Beerman Stores Corp. and its wholly-owned subsidiaries (the "Company"). All intercompany transactions and balances have been eliminated in consolidation. In the opinion of management, all adjustments (primarily consisting of normal recurring accruals) considered necessary for a fair presentation for all periods presented have been made. On December 30, 1997, the Company substantially consummated its Third Amended Joint Plan of Reorganization, dated November 17, 1997, as amended (the "Plan"), which was confirmed by an order of the United States Bankruptcy Court for the Southern District of Ohio, Western Division (the "Bankruptcy Court") entered on December 16, 1997. Accordingly, the condensed consolidated financial statements as of and for the 13 weeks ended May 3, 1997, are presented in accordance with American Institute of Certified Public Accountants Statement of Position 90-7, Financial Reporting by Entities in Reorganization under the Bankruptcy Code. The reorganization expense for the 13 weeks ended May 3, 1997 consists of professional fees and other bankruptcy related expenses. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The Company's business is seasonal in nature and the results of operations for the interim periods are not necessarily indicative of the results for the full fiscal year. It is suggested these condensed consolidated financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended January 31, 1998. 2. PER SHARE AMOUNTS Net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding. Stock options, restricted shares, and warrants outstanding represent potential common shares and are not included in computing diluted earnings per share as the effect would by antidilutive. 3. STOCK-BASED COMPENSATION During the first quarter of 1998, stock options and restricted shares were granted to designated employees under the Company's Equity and Performance Incentive Plan. A total of 15,000 stock options with an exercise price of $10.89 per share and 135,000 stock options with an exercise price of $21.00 per share were granted. These options granted have a maximum term of ten years and vest over a period of five years. Also, during the first quarter of 1998, 80,000 shares of restricted stock were awarded under the Company's Equity and Performance Incentive Plan. These shares have a vesting period of three years. The fair value of the restricted shares awarded is $1,680 and is being amortized over the three-year period. Non-employee directors may take all or a portion of their annual base retainer fee in the form of a discounted stock option. During the first quarter of 1998, a total of 4,722 stock options, with an exercise price of $12.375, were granted under this plan. These options become vested on January 31, 1999. 4. LEASES During the first quarter of 1998, the Company entered into two operating lease commitments for retail department store property and leasehold improvements. These lease agreements have minimum lease payments in fiscal 1998 of $2,791 and $3,513 each year from fiscal 1999 through fiscal 2002. 5. COMPREHENSIVE INCOME Effective February 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income. Adoption of this standard had no impact on the Company's financial position and results of operations. Accordingly, comprehensive income was a loss of $436 for the 13 weeks ended May 2, 1998 and a loss of $3,469 for the 13 weeks ended May 3, 1997. F-24 81 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Stone & Thomas: We have audited the accompanying consolidated balance sheets of Stone & Thomas and subsidiaries (the "Company") as of January 31, 1998 and February 1, 1997 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three fiscal years in the period ended January 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Stone & Thomas and subsidiaries as of January 31, 1998 and February 1, 1997, and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 31, 1998 in conformity with generally accepted accounting principles. The accompanying consolidated financial statements for the fiscal year ended January 31, 1998 have been prepared assuming the Company will continue as a going concern. As discussed in Note 9 to the consolidated financial statements, the Company's recurring losses from operations and difficulty in generating sufficient cash flow to meet its obligations and sustain its operations raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also described in Note 9. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. As discussed in Note 10 to the consolidated financial statements, on June 12, 1998 the Company entered into a letter of intent, subject to certain conditions, with The Elder-Beerman Stores Corp., which provides for the purchase of all of the Company's outstanding stock. DELOITTE & TOUCHE LLP May 21, 1998 (June 18, 1998 as to Notes 3, 9 and 10) Pittsburgh, Pennsylvania F-25 82 STONE & THOMAS AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
MAY 2, JANUARY 31, FEBRUARY 1, 1998 1998 1997 ------ ----------- ----------- (UNAUDITED) ASSETS Current assets: Accounts receivable -- trade, net of allowance for doubtful accounts of $418,000.................. $ 877,893 $ 684,008 $ 892,156 Income tax receivable............................. 33,487 33,487 1,368,000 Inventories....................................... 32,913,778 28,646,453 35,526,803 Prepaid expenses.................................. 899,400 1,016,604 972,006 Other current assets.............................. 1,749,701 1,906,113 2,546,405 Deferred income taxes............................. 192,820 192,820 1,012,432 ----------- ----------- ----------- Total current assets...................... 36,667,079 32,479,485 42,317,802 Property, fixtures and equipment: Land.............................................. 530,047 530,047 530,047 Buildings and leasehold improvements.............. 9,800,142 9,748,398 9,362,173 Furniture, fixtures and equipment................. 19,720,973 19,697,368 19,201,619 ----------- ----------- ----------- 30,051,162 29,975,813 29,093,839 Less accumulated depreciation..................... 23,782,085 23,535,433 22,445,738 ----------- ----------- ----------- 6,269,077 6,440,380 6,648,101 Construction in progress.......................... -- -- 89,471 ----------- ----------- ----------- 6,269,077 6,440,380 6,737,572 Other assets........................................ 1,890,200 2,029,441 1,855,441 Deferred income taxes............................... 1,768,277 1,768,277 948,665 ----------- ----------- ----------- Total assets.............................. $46,594,633 $42,717,583 $51,859,480 =========== =========== ===========
(Continued) F-26 83 STONE & THOMAS AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
MAY 2, JANUARY 31, FEBRUARY 1, 1998 1998 1997 ------ ----------- ----------- (UNAUDITED) LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.................................. $ 6,957,711 $ 4,447,606 $ 2,346,046 Gift certificates................................. 831,766 1,054,105 876,514 Accrued salaries and wages........................ 1,572,119 1,631,328 1,815,035 Accrued taxes other than taxes on income.......... 665,160 875,170 877,292 Other current liabilities......................... 432,827 331,593 337,773 Current maturities of long-term debt.............. 15,286 44,912 117,402 Accrued restructuring charges..................... -- -- 150,000 ----------- ----------- ----------- Total current liabilities................. 10,474,869 8,384,714 6,520,062 Long-term debt -- less current maturities........... 17,297,093 12,577,486 15,182,292 Deferred compensation............................... 1,684,550 1,666,875 1,536,244 Other long-term liabilities......................... 1,148,937 1,151,402 1,278,479 Commitments and contingencies....................... -- -- -- Stockholders' equity: Preferred stock -- par value $100; 6,000 shares authorized; 530 shares outstanding............. 53,000 53,000 53,000 Common stock -- no par value; 50,000 shares authorized; 42,317 shares issued including shares held in treasury........................ 1,819,229 1,819,229 1,819,229 Retained earnings................................. 16,234,116 19,182,038 27,587,035 Common stock in treasury -- 12,092 shares as of May 2, 1998 and January 31, 1998, and 12,090 shares as of February 1, 1997.................. (2,117,161) (2,117,161) (2,116,861) ----------- ----------- ----------- Total stockholders' equity................ 15,989,184 18,937,106 27,342,403 ----------- ----------- ----------- Total liabilities and stockholders' equity............................... $46,594,633 $42,717,583 $51,859,480 =========== =========== ===========
See notes to consolidated financial statements. F-27 84 STONE & THOMAS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED 13 WEEKS ENDED ------------------------------------------ ------------------------- JANUARY 31, FEBRUARY 1, FEBRUARY 3, MAY 2, 1998 MAY 3, 1997 1998 1997 1996 ----------- ----------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) Net sales -- including leased departments................ $21,422,237 $27,190,014 $121,464,086 $122,926,265 $128,597,780 ----------- ----------- ------------ ------------ ------------ Cost of sales -- including occupancy and buying costs...................... 17,232,679 21,602,870 96,003,855 95,374,697 96,133,783 Selling, general and administrative expenses.... 6,700,374 7,966,550 32,266,632 33,119,285 33,993,095 Related party expense........ 17,750 17,750 71,000 71,000 71,000 Restructuring charges........ -- -- -- 150,000 204,000 ----------- ----------- ------------ ------------ ------------ (23,950,803) (29,587,170) (128,341,487) (128,714,982) (130,401,878) ----------- ----------- ------------ ------------ ------------ Operating loss............... (2,528,566) (2,397,156) (6,877,401) (5,788,717) (1,804,098) ----------- ----------- ------------ ------------ ------------ Other income (expense): Gain on sale of marketable securities.............. -- -- -- -- 1,604,000 Interest income............ 4,208 12,345 26,696 883,944 3,413,978 Interest expense........... (355,599) (379,793) (1,643,869) (1,612,724) (3,105,984) Other -- net............... (67,303) 42,640 92,227 143,936 393,780 ----------- ----------- ------------ ------------ ------------ (418,694) (324,808) (1,524,946) (584,844) 2,305,774 ----------- ----------- ------------ ------------ ------------ (Loss) Earnings before income taxes...................... (2,947,260) (2,721,964) (8,402,347) (6,373,561) 501,676 Income tax benefit........... -- -- -- 2,555,000 13,000 ----------- ----------- ------------ ------------ ------------ Net (loss) earnings.......... $(2,947,260) $(2,721,964) $ (8,402,347) $ (3,818,561) $ 514,676 =========== =========== ============ ============ ============
See notes to consolidated financial statements. F-28 85 STONE & THOMAS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
UNREALIZED GAIN ON MARKETABLE PREFERRED COMMON RETAINED EQUITY TREASURY STOCK STOCK EARNINGS SECURITIES STOCK TOTAL --------- ------ -------- ---------- -------- ----- Balance, January 28, 1995.... $53,200 $1,819,229 $30,896,224 $ 1,317,306 $(2,116,861) $31,969,098 Net earnings............... -- -- 514,676 -- -- 514,676 Cash dividends paid........ -- -- (2,656) -- -- (2,656) Purchase of preferred shares.................. (100) -- -- -- -- (100) Sale of marketable equity securities.............. -- -- -- (1,317,306) -- (1,317,306) ------- ---------- ----------- ----------- ----------- ----------- Balance, February 3, 1996.... 53,100 1,819,229 31,408,244 -- (2,116,861) 31,163,712 Net loss................... -- -- (3,818,561) -- -- (3,818,561) Cash dividends paid........ -- -- (2,648) -- -- (2,648) Purchase of preferred shares.................. (100) -- -- -- -- (100) ------- ---------- ----------- ----------- ----------- ----------- Balance, February 1, 1997.... 53,000 1,819,229 27,587,035 -- (2,116,861) 27,342,403 Net loss................... -- -- (8,402,347) -- -- (8,402,347) Cash dividends paid........ -- -- (2,650) -- -- (2,650) Purchase of treasury stock................... -- -- -- -- (300) (300) ------- ---------- ----------- ----------- ----------- ----------- Balance, January 31, 1998.... 53,000 1,819,229 19,182,038 -- (2,117,161) 18,937,106 Net loss (unaudited)....... -- -- (2,947,260) -- -- (2,947,260) Cash dividends paid (unaudited)............. -- -- (662) -- -- (662) ------- ---------- ----------- ----------- ----------- ----------- Balance, May 2, 1998 (unaudited)................ $53,000 $1,819,229 $16,234,116 $ -- $(2,117,161) $15,989,184 ======= ========== =========== =========== =========== ===========
See notes to consolidated financial statements. F-29 86 STONE & THOMAS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
13 WEEKS ENDED YEAR ENDED ------------------------- --------------------------------------- MAY 2, MAY 3, JANUARY 31, FEBRUARY 1, FEBRUARY 3, 1998 1997 1998 1997 1996 ------ ------ ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) Cash Flows From Operating Activities: Net (loss) earnings..................... $(2,947,260) $(2,721,964) $(8,402,347) $(3,818,561) $ 514,676 Adjustments to reconcile net (loss) earnings to net cash (used in) provided by operating activities: Depreciation.......................... 271,958 278,198 1,158,838 1,226,498 1,241,127 Deferred income taxes................. -- -- -- (1,187,000) (467,000) Gain on sale of marketable equity securities.......................... -- -- -- -- (1,604,000) Bad debt expense...................... -- -- 285,000 -- -- ----------- ----------- ----------- ----------- ----------- (2,675,302) (2,443,766) (6,958,509) (3,779,063) (315,197) Sale of accounts receivable........... -- -- -- 21,153,577 -- (Increase) decrease in accounts receivable.......................... (193,885) (404,458) (76,852) 2,973,423 2,261,615 (Increase) decrease in inventories.... (4,267,325) (10,487,559) 6,880,350 (1,890,634) (4,405,768) Decrease (increase) in prepaid expenses and other current assets... 273,616.... 466,044 595,694 (1,247,463) 407,996 Increase (decrease) in income taxes payable............................. 11,555 (511,425) -- (433,341) (723,579) Decrease (increase) in income taxes receivable.......................... -- -- 1,334,513 (1,368,000) -- Decrease (increase) in other assets... 139,241 (156,956) (174,000) (202,813) (213,051) Increase (decrease) in accounts payable and other current liabilities......................... 2,258,268 9,954,925 3,430,800 (3,669,297) 137,103 (Decrease) increase in accrued restructuring charges............... -- -- (150,000) 150,000 (99,607) Increase in deferred compensation and other long-term liabilities......... 15,210 51,868 3,554 95,854 637,846 ----------- ----------- ----------- ----------- ----------- Net cash (used in) provided by operating activities............. (4,438,622) (3,531,327) 4,885,550 11,782,243 (2,312,642) ----------- ----------- ----------- ----------- ----------- Cash Flows From Investing Activities: Acquisition of property, fixtures and equipment............................. (100,655) (575,889) (861,646) (751,741) (725,322) Proceeds from sale of marketable equity securities............................ -- -- -- -- 1,699,000 ----------- ----------- ----------- ----------- ----------- Net cash (used in) provided by investing activities............. (100,655) (575,889) (861,646) (751,741) 973,678 ----------- ----------- ----------- ----------- ----------- Cash Flows From Financing Activities: Net borrowings (repayments) of revolving credit facility....................... 4,719,607 4,143,162 (2,537,360) 15,114,846 883,620 Repayments of long-term debt............ (29,626) (34,984) (139,936) (26,127,400) -- Book balance bank overdraft............. (150,042) -- (1,343,658) (15,200) 458,100 Cash dividends paid..................... (662) (662) (2,650) (2,648) (2,656) Purchase of preferred stock............. -- -- -- (100) (100) Purchase of treasury stock.............. -- (300) (300) -- -- ----------- ----------- ----------- ----------- ----------- Net cash provided by (used in) financing activities............. 4,539,277 4,107,216 (4,023,904) (11,030,502) 1,338,964 ----------- ----------- ----------- ----------- ----------- Change in Cash............................ -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- Cash, Beginning and End of Period......... $ -- $ -- $ -- $ -- $ -- =========== =========== =========== =========== ===========
See notes to consolidated financial statements. F-30 87 STONE & THOMAS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Business Operations -- Stone & Thomas operates retail department stores predominantly in West Virginia and in surrounding markets. The consolidated financial statements include the accounts of Stone & Thomas and its subsidiaries, S&T Financial Corporation and S&T Securities Corporation (collectively the "Company"). All intercompany accounts and transactions have been eliminated. b. Fiscal Year -- The Company's fiscal year ends on the Saturday closest to January 31, consists of 52 or 53 weeks and is presented in the accompanying consolidated financial statements as follows:
FISCAL YEAR ENDED WEEKS - ----------- ---------------- ----- 1997 January 31, 1998 52 1996 February 1, 1997 52 1995 February 3, 1996 53
c. Use of Estimates in the Preparation of Financial Statements -- The preparation of the 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 the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of income and expense during the reporting period. Actual results could differ from those estimates. d. Interim Financial Information -- The interim condensed consolidated financial statements as of May 2, 1998 and for the thirteen weeks ended May 2, 1998 and May 3, 1997, are unaudited. The interim condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments that, in the opinion of management, are necessary to present fairly the financial position and results of operations of the Company for the periods indicated. Results of operations for interim periods which exclude the Christmas season may not be indicative of the operating results that may be expected for the full fiscal year. The interim condensed consolidated financial statements do not include all footnotes which would be required for complete financial statements prepared in accordance with generally accepted accounting principles. e. Cash -- The Company utilizes a cash management system under which a book balance cash overdraft exists for the Company's primary disbursement account. This overdraft represents uncleared checks in excess of cash balances in bank accounts. The Company borrows funds as checks clear. As of January 31, 1998 and February 1, 1997, cash overdrafts of $150,042 and $1,493,700, respectively, were included in accounts payable. f. Accounts Receivable -- On May 13, 1996, the Company sold its proprietary accounts receivable credit portfolio for the recorded book value, recognizing no gain or loss (see Note 3). The balance in accounts receivable subsequent to the sale consists mainly of bank card charges and current proprietary accounts receivable amounts prior to collection. g. Inventories -- Inventories are valued at the lower-of-cost (both first-in, first-out ("FIFO") and last-in, first-out ("LIFO")) as determined by the retail inventory method, or market. The Company used the LIFO method of valuation for approximately 77% and 76% of its merchandise inventories in 1997 and 1996, respectively. The carrying value of inventories stated at LIFO cost is approximately $2,985,600 and $2,025,100 below the FIFO cost at January 31, 1998 and February 1, 1997, respectively. During fiscal 1997, LIFO inventory quantities were reduced resulting in a partial liquidation of the LIFO bases, the effects of which did not have a material impact on operations. There was a $1,000,000 lower-of-cost or market reserve at February 1, 1997. h. Property, Fixtures and Equipment -- Property, fixtures and equipment are depreciated on the straight-line method over the estimated useful lives of the related assets. Amortization of improvements to leased F-31 88 STONE & THOMAS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) premises is provided for by the straight-line method over the shorter of the life of the lease or the useful life of the improvement. The Company reviews the carrying value of its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. Measurement of any impairment would include a comparison of estimated future operating cash flows anticipated to be generated during the remaining life of the assets with their net carrying value. An impairment loss would be recognized as the amount by which the carrying value of the assets exceeds their estimated fair value. No such write downs due to impairment have been recorded in fiscal years 1997, 1996, and 1995. i. Revenue Recognition -- Sales are recognized on merchandise inventory sold upon receipt by the customer and are recorded net of returns. Cash received for gift certificates is deferred and revenue is recognized upon redemption of the gift certificates. j. Cost of Sales -- Cost of sales includes buying and occupancy costs of $12,790,000, $12,744,200, and $12,017,000 in fiscal 1997, 1996, and 1995, respectively. k. Other Long-Term Liabilities -- Other long-term liabilities consist mainly of pension costs and deferred rent. The Company's policy regarding pension costs is to fund annually the minimum amount deductible for federal income tax purposes. Prior service cost is included in net periodic pension cost over the future service periods of the related active employees. l. Deferred Compensation -- The Company has supplemental compensation agreements with certain members of management. This program (see Note 6) is funded by life insurance policies. m. Pre-opening Expenses -- Pre-opening expenses for retail stores are charged to operations as incurred. n. Income Taxes -- The Company applies the provisions of Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." Under the provisions of SFAS No. 109, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. o. Related Party Agreement -- The Company has a consulting agreement with a former officer and current member of the Board of Directors. The agreement allows for a monthly payment of $5,916 for life which is charged to operations as incurred. The Company made payments of approximately $71,000 for each of the fiscal years 1997, 1996, and 1995. p. Impact of Recently Issued Accounting Standards -- In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting comprehensive income and its components. SFAS No. 130 also requires that the cumulative balance of these items of other comprehensive income be reported separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. The Company has adopted SFAS No. 130 in the 13 weeks ended May 2, 1998 (unaudited) and the adoption did not have a material impact on the Company's disclosures in its consolidated financial statements. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for the way public companies report selected information about operating segments in both quarterly and annual financial statements to their shareholders. It also establishes standards for related disclosures about products and services, geographic F-32 89 STONE & THOMAS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) areas, and major customers. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. This statement is not required to be applied to interim financial statements in the initial year of its application. The Company has not yet determined the effects, if any, that SFAS No. 131 will have on the disclosures in its consolidated financial statements. In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." SFAS No. 132 revises employers' disclosures about pension and other postretirement benefit plans by standardizing the disclosure requirements for pensions and other postretirement benefits to the extent practicable, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis and eliminates certain disclosures that are no longer considered useful. It does not change the measurement or recognition of these plans. SFAS No. 132 is effective for fiscal years beginning after December 15, 1997. The Company has not yet determined the effects that SFAS No. 132 will have on the disclosures in its consolidated financial statements. q. Reclassifications -- Certain reclassifications have been made to the 1995 and 1996 consolidated financial statements to conform to the presentation of the 1997 consolidated financial statements. 2. OTHER ASSETS Other assets include the following:
JANUARY 31, FEBRUARY 1, 1998 1997 ----------- ----------- Cash surrender value of life insurance policies........... $1,501,814 $1,327,814 Long-term investments..................................... 390,830 390,830 Notes receivable.......................................... 136,797 136,797 ---------- ---------- $2,029,441 $1,855,441 ========== ==========
3. BORROWING ARRANGEMENTS In September 1992, the Company refinanced its existing debt facilities by consolidating substantially all of its debt under one agreement established with a group of participating lenders (the "Credit Agreement"). The Credit Agreement included a revolving credit facility and a letter of credit facility. The revolving credit facility provided for borrowings based on and collateralized by certain percentages of accounts receivable, inventory and marketable equity securities (the "Borrowing Base"). In May 1996, the Company consummated a financing agreement with a lender that provided the Company with a $22,000,000 (subsequently increased to $26,000,000) revolving line of credit (the "Financing Agreement"), and the Company used the proceeds received from the sale of its accounts receivable portfolio and borrowings under the Financing Agreement of approximately $9,804,000 to repay all outstanding borrowings under the Credit Agreement and subsequently terminated that agreement. The Financing Agreement provides for borrowings based on 55% (subsequently increased to 60%) of eligible inventory; borrowings are collateralized by inventory. The Financing Agreement requires that the Company maintain a minimum amount of tangible net worth and also limits borrowings and restricts cash dividends and redemptions of the Company's stock. The Financing Agreement terminates in 2001. At January 31, 1998, the Company was in violation of the minimum net worth covenant and the covenant requiring timely delivery of audited financial statements. The violations were waived by the lender in June 1998. F-33 90 STONE & THOMAS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) On June 18, 1998, the Company obtained an amendment to the Financing Agreement that eliminated the tangible net worth covenant, effective February 1, 1998, and provides for borrowings based upon 65% of eligible inventory, effective March 5, 1998. Amounts available under lines of credit at May 2, 1998, January 31, 1998 and February 1, 1997 were $1,126,004 (unaudited), $3,292,171 and $3,510,118, respectively, after deducting a $1,000,000 letter of credit used primarily to support the self-insured portion of workers' compensation. Long-term debt consists of the following:
MAY 2, JANUARY 31, FEBRUARY 1, 1998 1998 1997 ----------- ----------- ----------- (UNAUDITED) Revolving credit under the Financing Agreement with an interest rate equal to the prime rate plus .5%, or London Interbank Offering Rate ("LIBOR") plus 3%...................................... $17,297,093 $12,577,486 $15,114,846 Mortgage note collateralized by a deed of trust on certain real property with interest at 10.5% and principal payable in 44 equal quarterly installments of $15,050 and final payment due June 1998.................................... 15,286 30,514 87,826 Other..................................... -- 14,398 97,022 ----------- ----------- ----------- 17,312,379 12,622,398 15,299,694 Less current maturities................... 15,286 44,912 117,402 ----------- ----------- ----------- $17,297,093 $12,577,486 $15,182,292 =========== =========== ===========
The Company elected the prime rate option and the prime interest rate was 8.5% and 8.25% at January 31, 1998 and February 1, 1997, respectively. The aggregate principal payments on long-term debt at January 31, 1998 are as follows: 1998........................................................ $ 44,912 1999........................................................ -- 2000........................................................ -- 2001........................................................ 12,577,486 2002........................................................ -- ----------- $12,622,398 ===========
Interest paid was $1,644,000, $1,613,000 and $3,053,000 in fiscal 1997, 1996 and 1995, respectively. 4. LEASE COMMITMENTS The Company has operating leases covering its retail store locations. Most of the leases contain renewal options and escalation clauses. The leases require minimum monthly rental payments and most provide for a pro-rata share of operating expenses and additional rental payments based on a percentage of sales in excess of specified levels. Other operating leases cover transportation and data processing equipment and certain store fixtures. F-34 91 STONE & THOMAS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Rent expense for each of the fiscal years was as follows:
1997 1996 1995 ---------- ---------- ---------- Minimum rentals.............................. $5,798,000 $5,271,000 $4,373,000 Common operating expense..................... 1,173,000 721,000 897,000 Contingent rentals........................... 302,000 376,000 413,000 ---------- ---------- ---------- $7,273,000 $6,368,000 $5,683,000 ========== ========== ==========
Future minimum annual rental payments, including common operating expense, for noncancelable operating leases in effect at January 31, 1998 are as follows: 1998...................................................... $ 6,508,575 1999...................................................... 6,326,918 2000...................................................... 5,965,126 2001...................................................... 5,783,952 2002...................................................... 5,708,966 Thereafter.................................................. 41,645,303 ----------- $71,938,840 ===========
5. INCOME TAXES The income tax provision is summarized as follows:
1997 1996 1995 ---------- ---------- --------- Current income tax benefit (expense): Federal..................................... $ -- $1,368,000 $(454,000) State....................................... -- -- -- ---------- ---------- --------- -- 1,368,000 (454,000) ---------- ---------- --------- Deferred income tax benefit: Federal..................................... -- 712,000 409,000 State....................................... -- 475,000 58,000 ---------- ---------- --------- -- 1,187,000 467,000 ---------- ---------- --------- $ -- $2,555,000 $ 13,000 ========== ========== =========
Deferred income taxes included in the accompanying balance sheets consisted of the following:
JANUARY 31, FEBRUARY 1, 1998 1997 ----------- ----------- Current assets: Vacation pay........................................... $ 294,123 $ 302,487 Accounts receivable reserve............................ 167,200 167,200 Inventory lower-of-cost or market reserve.............. -- 400,000 Other.................................................. 65,497 142,745 ----------- ---------- 526,820 1,012,432 Valuation allowance...................................... (334,000) -- ----------- ---------- Total current assets........................... 192,820 1,012,432 ----------- ----------
F-35 92 STONE & THOMAS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31, FEBRUARY 1, 1998 1997 ----------- ----------- Non-current assets (liabilities): Deferred compensation.................................. $ 666,750 $ 614,498 Pension liability...................................... 203,835 253,402 Depreciation........................................... (353,235) (481,286) Net operating losses and AMT credit.................... 4,331,863 576,196 Other.................................................. (19,936) (14,145) ----------- ---------- 4,829,277 948,665 Valuation allowance...................................... (3,061,000) -- ----------- ---------- Total net non-current assets................... 1,768,277 948,665 ----------- ---------- Total net deferred taxes....................... $ 1,961,097 $1,961,097 =========== ==========
The Company's effective tax rate differed from the statutory federal tax rate for the following reasons:
FISCAL YEAR ----------------------- 1997 1996 1995 ----- ----- ----- Percent of pre tax (loss) earnings: Statutory federal tax rate.............................. (35.0)% (35.0)% 35.0% State income taxes, net of federal effect............... 5.4 (5.1) -- Change in valuation allowance........................... 40.4 -- -- State net operating losses.............................. -- -- (37.6) ----- ----- ----- Effective tax rate........................................ 0.0% (40.1)% (2.6)% ===== ===== =====
The Company received an income tax refund of approximately $1,330,000 in fiscal 1997 and paid approximately $512,000 and $1,178,000 in income taxes during fiscal 1996 and 1995, respectively. At January 31, 1998, the Company had recorded a valuation allowance with respect to the future tax benefits of the net operating losses ("NOL") reflected as a deferred tax asset due to the uncertainty of their ultimate realization. At January 31, 1998, the Company had approximately $9,600,000 of NOLs and approximately $103,000 AMT tax credits for federal tax purposes and approximately $17,500,000 of NOLs for state tax purposes. The NOLs have a 15-year carryforward period and begin expiring in fiscal 2011. 6. EMPLOYEE BENEFITS The Company has a defined benefit pension plan that covers substantially all full-time employees. The Company annually funds the actuarially determined minimum funding requirements in accordance with the applicable ERISA guidelines. Net periodic pension cost for the fiscal years included the following components:
1997 1996 1995 ----------- -------- -------- Service cost -- benefits earned during the year......................................... $ 161,928 $163,764 $170,514 Interest cost on projected benefit obligation................................... 415,311 407,538 405,932 Actual return on plan assets................... (1,037,578) (829,981) (858,287) Net amortization and deferral.................. 500,165 333,932 424,288 ----------- -------- -------- Net periodic pension cost...................... $ 39,826 $ 75,253 $142,447 =========== ======== ========
F-36 93 STONE & THOMAS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Assumptions used in fiscal 1997, 1996 and 1995 to develop the net periodic pension cost were:
1997 1996 1995 ---- ---- ---- Discount rate............................................... 7.0% 8.5% 8.5% Expected long-term rate of return on assets................. 8.5% 8.5% 8.5% Rate of increase in future compensation..................... 3.0% 3.0% 3.0%
Plan assets are comprised primarily of equity securities and fixed income obligations. The following table sets forth the plan's funded status and amounts recognized in the Company's balance sheet at:
JANUARY 31, FEBRUARY 1, 1998 1997 ----------- ----------- Actuarial present value of accumulated benefit obligations: Vested.................................................. $5,737,266 $4,940,229 Non-vested.............................................. 76,005 74,619 ---------- ---------- $5,813,271 $5,014,848 ========== ========== Fair value of plan assets................................. $6,094,283 $5,638,436 Projected benefit obligation.............................. 5,846,962 5,045,068 ---------- ---------- Funded status............................................. 247,321 593,368 Unrecognized prior service cost........................... -- 2,529 Unrecognized transition liabilities....................... 1,004,106 337,228 Unrecognized net gain..................................... (1,760,993) (1,566,629) ---------- ---------- Accrued pension cost...................................... $ (509,566) $ (633,504) ========== ==========
Under the terms of the supplemental compensation agreements with certain employees, the Company is to provide monthly retirement benefits for a maximum period of 15 years or until death, whichever comes first. The present value, calculated using a 9% discount rate, of the estimated future payments required under each of the agreements is being charged to operations over the remaining service life of the employee. 7. RESTRUCTURING AND OTHER CHARGES In January 1994, management adopted a plan to restructure certain aspects of the Company's operations that included the closing of three marginally profitable stores in West Virginia, the sale of certain corporate assets (including the Corporate plane) and the reduction of corporate staff. As a result of the restructuring, the Company charged $204,000 to operations for fiscal year 1995. During 1996, management, with approval from the Board of Directors, adopted a plan to further reduce corporate staff. As a result, the Company charged $150,000 to operations for the fiscal year 1997. In fiscal 1997, management implemented a restructuring plan that included downsizings of staff as well as store selling space. Certain slow-moving departments were eliminated and the furniture department was discontinued. As a result of these activities, the Company incurred $366,000 of expense. F-37 94 STONE & THOMAS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8. VALUATION AND QUALIFYING ACCOUNTS Activity in the Company's allowance accounts for the fiscal years 1995, 1996, and 1997 were as follows:
BALANCE, CHARGED TO BALANCE, BEGINNING COST DEDUCTIONS- END OF AND CHARGE- OF DESCRIPTION PERIOD EXPENSE OFFS PERIOD ----------- ---------- ---------- ----------- ---------- Allowance for doubtful accounts: 53 weeks ended February 3, 1996...................... $ 418,000 $ -- $ -- $ 418,000 52 weeks ended February 1, 1997...................... 418,000 -- -- 418,000 52 weeks ended January 31, 1998...................... 418,000 285,000 (285,000) 418,000 Inventory lower-of-cost or market: 53 weeks ended February 3, 1996...................... $ -- $ -- $ -- $ -- 52 weeks ended February 1, 1997...................... -- 1,000,000 -- 1,000,000 52 weeks ended January 31, 1998...................... 1,000,000 -- (1,000,000) -- Deferred tax asset valuation allowance: 53 weeks ended February 3, 1996...................... $ -- $ -- $ -- $ -- 52 weeks ended February 1, 1997...................... -- -- -- -- 52 weeks ended January 31, 1998...................... -- 3,395,000 -- 3,395,000
9. GOING CONCERN The Company incurred a net loss of $8,402,347 and $3,818,561 for the fiscal years ended January 31, 1998 and February 1, 1997, respectively, which management believes resulted principally from overstocking of merchandise that increased carrying costs and created the need for additional markdowns, operational inefficiencies due to conversion problems encountered in the implementation of an information system, certain other charges (see Note 7) and lost customer sales due to issues concerning customer credit and limits, which arose from the sale of the receivables portfolio to an outside service provider and its subsequent resale to a third-party. Management's projections for fiscal 1998 indicate a potential shortage of availability under the revolving credit facility due to difficulty in generating sufficient cash flow to meet its obligations and sustain its operations. These conditions raise doubt regarding the Company's ability to continue as a going concern. The Company has changed merchandise management and since taken actions intended to control ordering, processing and pricing of merchandise. Management is working with the new service provider to mitigate customer relations problems and customer credit issues. Management also developed a detailed plan for fiscal 1998 intended to reduce advertising, payroll and other store and corporate expenses by approximately $4,000,000. On June 17, 1998, the Company requested an overadvance of $3,000,000 on the revolving credit facility to fund current operations. The overadvance is to be secured by The Elder-Beerman Stores Corp. (See Note 10). 10. LETTER OF INTENT On June 12, 1998, the Company entered into a letter of intent with The Elder-Beerman Stores Corp. Under the terms of the letter of intent, The Elder-Beerman Stores Corp. will purchase all of the outstanding stock of the Company for $21,000,000 in cash. Closing of the transaction is subject to certain terms and conditions. F-38 95 - ------------------------------------------------------------ - ------------------------------------------------------------ NO DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY COMMON SHARES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER TO SELL OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING THE OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. ------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary......................... 3 Risk Factors............................... 9 Use of Proceeds............................ 14 Dividend Policy............................ 14 Price Range of Common Shares............... 14 Capitalization............................. 15 Dilution................................... 16 Pro Forma Condensed Consolidated Financial Data..................................... 17 Selected Consolidated Financial Information.............................. 21 Management's Discussion and Analysis of Financial Condition and Results of Operations............................... 22 Business................................... 31 Management................................. 37 Principal Shareholders..................... 46 Description of Capital Stock............... 47 Underwriting............................... 53 Validity of Shares......................... 54 Experts.................................... 54 Available Information...................... 54 Index to Financial Statements.............. F-1
- ------------------------------------------------------------ - ------------------------------------------------------------ - ------------------------------------------------------------ - ------------------------------------------------------------ 2,800,000 SHARES THE ELDER-BEERMAN STORES CORP. [ELDER-BEERMAN LOGO] COMMON SHARES --------------------- PROSPECTUS --------------------- MCDONALD & COMPANY SECURITIES, INC. WARBURG DILLON READ LLC JOHNSON RICE & COMPANY L.L.C. , 1998 - ------------------------------------------------------------ - ------------------------------------------------------------ 96 PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the estimated expenses (except for the Securities and Exchange Commission registration fee, the National Association of Securities Dealers, Inc. filing fee and the Nasdaq National Market listing fee) payable by the Company in connection with the distribution of the Common Shares: Securities and Exchange Commission Registration Fee......... $ 24,816 National Association of Securities Dealers, Inc. Filing Fee....................................................... 8,913 Nasdaq National Market Listing Fee.......................... 17,500 Printing and Engraving Costs................................ 275,000 Accounting Fees and Expenses................................ 125,000 Legal Fees and Expenses..................................... 500,000 Blue Sky Qualification Fees and Expenses.................... 5,000 Transfer Agent Fees......................................... 5,000 Miscellaneous Expenses...................................... 38,771 ---------- Total............................................. $1,000,000 ==========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Code of Regulations provides for the indemnification of the directors and officers of the Company, and persons serving at the request of the Board of Directors as a director, trustee, officer, employee, or agent of another entity, for claims against them arising from and after the Effective Date to the fullest extent permitted by Ohio law. Under Ohio law, a director is not liable for monetary damages unless it is proven by clear and convincing evidence that his action or failure to act was undertaken with deliberate intent to cause injury to the corporation or with reckless disregard for the best interests of the corporation. There is, however, no comparable provision limiting the liability of officers or other agents of a corporation. Under Ohio law, Ohio corporations are authorized to indemnify directors, officers, and agents within prescribed limits and must indemnify them under certain circumstances. Determinations regarding discretionary indemnification are to be made by a majority vote of a quorum of disinterested directors or, if a quorum is not available, by independent counsel, the shareholders, the court of common pleas, or the court in which the proceeding was brought. Ohio law does not provide statutory authorization for a corporation to indemnify directors and officers for settlements, fines, or judgments in the context of derivative suits. It provides, however, that directors (but not officers) are entitled to mandatory advancement of expenses, including attorneys' fees, incurred in defending any action, including derivative actions, brought against the director, provided the director agrees to cooperate with the corporation concerning the matter and to repay the amount advanced if it is proved by clear and convincing evidence that his act or failure to act was done with deliberate intent to cause injury to the corporation or with reckless disregard for the corporation's best interests. Ohio law does not authorize payment of expenses or judgments to an officer or other agent after a finding of negligence or misconduct in a derivative suit absent a court order. Indemnification is required, however, to the extent such person succeeds on the merits. In all other cases, if a director or officer acted in good faith and in a manner he reasonably believed to be in (or not opposed to) the best interests of the company, indemnification is discretionary except as otherwise provided by a company's articles of incorporation, code of regulations, or by contract except with respect to the advancement of expenses of directors. In addition to the statutory right to indemnify, Ohio law provides express authority for Ohio corporations to procure not only insurance policies, but also to furnish protection similar to insurance, including trust funds, letters of credit, and self-insurance, or to provide similar protection such as indemnity against loss of insurance. II-1 97 The obligations of the Company to indemnify any person serving as one of its directors, officers, or employees as of or following the Petition Date, by reason of such person's prior or future service in such a capacity, or as a director, officer, or employee of another corporation, partnership, or other legal entity, to the extent provided in the applicable articles of incorporation, code of regulations, or similar constituent documents or by statutory law or written agreement of or with the Company, were deemed and treated as executory contracts and were assumed by the Company or applicable subsidiary of the Company pursuant to the Plan and section 365 of the Bankruptcy Code as of the Effective Date. Accordingly, such indemnification obligations survived and were unaffected by entry of the confirmation order, irrespective of whether such indemnification is owed for an act or event occurring before or after the Petition Date. The obligations of the Company or applicable subsidiary of the Company to indemnify any person who, as of the Petition Date, was no longer serving as a director or officer of such entity, which indemnity obligation arose by reason of such person's prior service in any such capacity, or as a director, officer, or employee of another corporation, partnership, or other legal entity, whether provided in the applicable articles of incorporation, code of regulations, or similar constituent documents or by statutory law (including Texas law with respect to Margo's and Ohio law with respect to the other Old Elder-Beerman Companies), written agreement, policies, or procedures of or with such entity, terminated and were discharged pursuant to section 502(e) of the Bankruptcy Code or otherwise, as of the Effective Date; provided, however, that, to the extent that such indemnification obligations no longer gave rise to contingent Claims that can be disallowed pursuant to section 502(e) of the Bankruptcy Code, such indemnification obligations were deemed and treated as executory contracts that were rejected by the applicable entity pursuant to the Plan and section 365 of the Bankruptcy Code, as of the Effective Date, and any Claims arising from such indemnification obligations (including any rejection damage claims) were subject to the bar date provisions of the Plan. The Company entered into indemnification agreements, effective as of the Effective Date, with each of its directors and executive officers and each of the directors and executive officers of the Company's subsidiaries. The indemnification agreements provide for, among other things, (a) the indemnification of the indemnitee by the Company for conduct in the capacities described above, (b) the advancement of attorneys' fees and other expenses, and (c) the establishment, upon approval by the Board of Directors at its option, of trusts or other funding mechanisms to fund the Company's indemnification obligations thereunder. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. Except as set forth below, the Company does not have any recent sales of unregistered securities. The issued and outstanding Common Shares and the Series A Warrants and Series B Warrants (as defined in the Plan) were issued pursuant to the Plan in satisfaction of certain allowed claims against, or interests in, the Company. Based upon the exemptions provided by section 1145 of the Bankruptcy Code, the Company believes that none of such securities were required to be registered under the Securities Act in connection with their issuance and distribution pursuant to the Plan. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. A. Exhibit Index EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ----------- ------------------------------------------------------------ 1 Form of Underwriting Agreement* 2(a) Third Amended Joint Plan of Reorganization of The Elder-Beerman Stores Corp. and its Subsidiaries dated November 17, 1997 (previously filed as Exhibit 2 to the Company's Form 10 filed on November 26, 1997 (the "Form 10"), and incorporated herein by reference) 2(b) Agreement and Plan of Merger By and Among The Elder-Beerman Stores Corp., The Elder-Beerman Acquisition Corp. and Stone & Thomas dated June 18, 1998* 2(c) First Amendment to Agreement and Plan of Merger By and Among The Elder-Beerman Stores Corp., The Elder-Beerman Acquisition Corp., and Stone & Thomas dated July 27, 1998*
II-2 98 3(a) Amended Articles of Incorporation (previously filed as Exhibit 3(a) to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1998 (the "Form 10-K") and incorporated herein by reference) 3(b) Amended Code of Regulations (previously filed as Exhibit 3(b) to the Form 10 and incorporated herein by reference) 4(a) Stock Certificate for Common Share (previously filed as Exhibit 4(a) to the Company's Form 10/A-1 filed on January 23, 1998 (the "Form 10/A-1") and incorporated herein by reference) 4(c) Rights Agreement By and Between The Elder-Beerman Stores Corp. and Norwest Bank Minnesota, N.A., dated as of December 30, 1997 (previously filed as Exhibit 4(c) to the Form 10-K and incorporated herein by reference) 4(d) Warrant Agreement by and Between Beerman-Peal Holdings, Inc. and the Elder-Beerman Stores Corp. for 249,809 Common Shares at a strike price of $12.80 per share dated December 30, 1997 (previously filed as Exhibit 4(d) to the Form 10-K and incorporated herein by reference) 4(e) Warrant Agreement by and Between Beerman-Peal Holdings, Inc. and the Elder-Beerman Stores Corp. for 374,713 Common Shares at a strike price of $14.80 per share dated December 30, 1997 (previously filed as Exhibit 4(e) to the Form 10-K and incorporated herein by reference) 5 Opinion of Jones, Day, Reavis and Pogue* 10(a)(i) Pooling and Servicing Agreement Among The El-Bee Receivables Corporation, The El-Bee Chargit Corp. and Bankers Trust Company, dated December 30, 1997 (previously filed as Exhibit 10(a)(i) to the Form 10/A-1 and incorporated herein by reference) 10(a)(ii) Series 1997-1 Supplement Among The El-Bee Receivables Corporation, The El-Bee Chargit Corp. and Bankers Trust Company, dated December 30, 1997 (previously filed as Exhibit 10(a)(ii) to the Form 10/A-1 and incorporated herein by reference) 10(a)(iii) Certificate Purchase Agreement Among The El-Bee Receivables Corporation, Corporate Receivables Corporation, The Liquidity Providers Named Herein, CitiCorp North American, Inc. and Bankers Trust Company, dated December 30, 1997 (previously filed as Exhibit 10(a)(iii) to the Form 10/A-1 and incorporated herein by reference) 10(a)(iv) Loan Agreement Among The El-Bee Receivables Corporation, The El-Bee Chargit Corp., Bankers Trust Company, The Collateral Investors Parties Hereto and CitiCorp North America, Inc., dated as of December 30, 1997 (previously filed as Exhibit 10(a)(iv) to the Form 10/A-1 and incorporated herein by reference) 10(a)(v) Intercreditor Agreement By and Among The El-Bee Chargit Corp., The Elder-Beerman Stores Corp., Bankers Trust Company, CitiCorp USA, Inc., CitiCorp North America, Inc., Corporate Receivables Corporation and the Liquidity Providers Named Herein, dated as of December 30, 1997 (previously filed as Exhibit 10(a)(v) to the Form 10/A-1 and incorporated herein by reference) 10(a)(vi) Parent Undertaking Agreement Among The Elder-Beerman Stores Corp. and Bankers Trust Company, dated as of December 30, 1997 (previously filed as Exhibit 10(a)(vi) to the Form 10/A-1 and incorporated herein by reference) 10(a)(vii) Purchase Agreement (Chargit) Among The El-Bee Chargit Corp. and The El-Bee Receivables Corporation, dated as of December 30, 1997 (previously filed as Exhibit 10(a)(vii) to the Form 10/A-1 and incorporated herein by reference) 10(a)(viii) Purchase Agreement (Elder-Beerman) Among The Elder-Beerman Stores Corp. and The El-Bee Chargit Corp., dated as of December 30, 1997 (previously filed as Exhibit 10(a)(viii) to the Form 10/A-1 and incorporated herein by reference) 10(a)(ix) Subordinated Note Between The El-Bee Receivables Corporation and The El-Bee Chargit Corp, dated December 30, 1997 (previously filed as Exhibit 10(a)(ix) to the Form 10/A-1 and incorporated herein by reference)
II-3 99 10(b)(i) Amended and Restated Credit Agreement Among The Elder-Beerman Stores Corp., The Lenders Party Hereto, Citibank, N.A. and CitiCorp USA, Inc., dated as of July 27, 1998 10(b)(ii) Borrower Pledge Agreement Made by The Elder-Beerman Stores Corp. to Citibank, N.A., dated December 30, 1997 (previously filed as Exhibit 10(b)(ii) to the Form 10/A-1 and incorporated herein by reference) 10(b)(iii) Chargit Pledge Agreement Made By The El-Bee Chargit Corp. to Citibank, N.A., dated December 30, 1997 (previously filed as Exhibit 10(b)(iii) to the Form 10/A-1 and incorporated herein by reference) 10(b)(iv) Amended and Restated Security Agreement Made By The Elder-Beerman Stores Corp., The El-Bee Chargit Corp., The Bee-Gee Shoe Corp. and Elder-Beerman West Virginia, Inc. in Favor of CitiCorp USA, Inc., dated July 27, 1998 10(b)(v) Subsidiary Guaranty Made by The El-Bee Chargit Corp., dated December 30, 1997 (previously filed as Exhibit 10(b)(v) to the Form 10/A-1 and incorporated herein by reference) 10(b)(vi) Subsidiary Guaranty Made by The Bee-Gee Shoe Corp., dated December 30, 1997 (previously filed as Exhibit 10(b)(vi) to the Form 10/A-1 and incorporated herein by reference) 10(b)(vii) Subsidiary Guaranty Made by Elder-Beerman West Virginia, Inc., dated July 27, 1998 10(b)(viii) Form of Revolving Note (previously filed as Exhibit 10(b)(vii) to the Form 10/A-1 and incorporated herein by reference) 10(b)(ix) Letter Agreement Re: Assignment of Account By and Between The Elder-Beerman Stores Corp., CitiCorp USA, Inc., and Bankers Trust Company, dated December 30, 1997 (previously filed as Exhibit 10(b)(viii) to the Form 10/A-1 and incorporated herein by reference) 10(c) Form of Employment Agreement for Senior Vice Presidents (previously filed as Exhibit 10(c) to the Form 10 and incorporated herein by reference) 10(d) Form of Employment Agreement for Executive Vice Presidents (previously filed as Exhibit 10(d) to the Form 10 and incorporated herein by reference) 10(f) Form of Director Indemnification Agreement (previously filed as Exhibit 10(f) to the Form 10 and incorporated herein by reference) 10(g) Form of Officer Indemnification Agreement (previously filed as Exhibit 10(g) to the Form 10 and incorporated herein by reference) 10(h) Form of Director and Officer Indemnification Agreement (previously filed as Exhibit 10(h) to the Form 10 and incorporated herein by reference) 10(i) The Elder-Beerman Stores Corp. Equity and Performance Incentive Plan, Effective December 30, 1997 (previously filed as Exhibit 10(i) to the Form 10-K and incorporated herein by reference) 10(j) Form of Restricted Stock Agreement for Non-Employee Director (previously filed as Exhibit 10(j) to the Form 10 and incorporated herein by reference) 10(k) Form of Restricted Stock Agreement (previously filed as Exhibit 10(k) to the Form 10 and incorporated herein by reference) 10(l) Form of Deferred Shares Agreement (previously filed as Exhibit 10(l) to the Form 10 and incorporated herein by reference) 10(m) Form of Nonqualified Stock Option Agreement for Non-Employee Director (previously filed as Exhibit 10(m) to the Form 10 and incorporated herein by reference) 10(n) Form of Nonqualified Stock Option Agreement (previously filed as Exhibit 10(n) to the Form 10 and incorporated herein by reference) 10(o) Employee Stock Purchase Plan (previously filed as Exhibit 10(o) to the Form 10 and incorporated herein by reference)
II-4 100 10(p) Comprehensive Settlement Agreement By and Among The Debtors, The ESOP and the ESOP Committee and the Shareholders of The Elder-Beerman Stores Corp., dated as of December 30, 1997 (previously filed as Exhibit 10(p) to the Form 10-K and incorporated herein by reference) 10(q) Tax Indemnification Agreement By and Among The Elder-Beerman Stores Corp., the Direct and Indirect Subsidiaries of Elder-Beerman, Beerman-Peal Holdings, Inc., The Beerman-Peal Corporation, Beerman Investments, Inc., The Beerman Corporation and The Individuals, Partnerships and Trusts named Herein dated as of December 15, 1997 (previously filed as Exhibit 10(q) to the Form 10 and incorporated herein by reference) 10(r) Tax Sharing Agreement By and Among The Elder-Beerman Stores Corp., The Bee-Gee Shoe Corp. and The El-Bee Chargit Corp., dated as of December 30, 1997 (previously filed as Exhibit 10(r) to the Form 10 and incorporated herein by reference) 10(s) Employment Agreement Between The Elder-Beerman Stores Corp. and John A. Muskovich, dated December 30, 1997 (previously filed as Exhibit 10(s) to the Form 10-K and incorporated herein by reference) 10(t) Amended and Restated Employment Agreement Between The Elder-Beerman Stores Corp. and Frederick J. Mershad, dated December 30, 1997 (previously filed as Exhibit 10(t) to the Form 10-K and incorporated herein by reference) 21 Subsidiaries of the Company 23(a) Consent of Counsel (included in Exhibit 5 hereto) 23(b) Consent of Deloitte & Touche LLP, independent auditors for the Company 23(c) Consent of Deloitte & Touche LLP, independent auditors for Stone & Thomas 24 Powers of Attorney*
- --------------- * Previously filed B. Financial Statement Schedules None. ITEM 17. UNDERTAKINGS (a) The undersigned registrant hereby undertakes that: (1) For the purpose of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall he deemed to be the initial bona fide offering thereof. (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-5 101 (c) The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. II-6 102 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS DULY CAUSED THIS AMENDMENT NO. 3 TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF DAYTON, STATE OF OHIO, ON THIS 30TH DAY OF JULY, 1998. THE ELDER-BEERMAN STORES CORP. By: /s/ Scott J. Davido ------------------------------------ Scott J. Davido Senior Vice President, General Counsel and Secretary PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT NO. 3 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED ON JULY 30, 1998.
SIGNATURE TITLE --------- ----- * Chairman of the Board of Directors and Chief - ----------------------------------------------------- Executive Officer (Principal Executive Frederick J. Mershad Officer) * President, Chief Operating Officer, and Chief - ----------------------------------------------------- Financial Officer; Director John A. Muskovich (Principal Financial Officer) * Senior Vice President, Controller - ----------------------------------------------------- (Principal Accounting Officer) Steven D. Lipton * Director - ----------------------------------------------------- Stewart M. Kasen * Director - ----------------------------------------------------- Steven C. Mason * Director - ----------------------------------------------------- Thomas J. Noonan, Jr. * Director - ----------------------------------------------------- Bernard Olsoff * Director - ----------------------------------------------------- Laura H. Pomerantz * Director - ----------------------------------------------------- Jack A. Staph * Director - ----------------------------------------------------- John J. Wiesner
* This Amendment No. 3 to the Registration Statement has been signed on behalf of the above-named directors and officers of the Company by Scott J. Davido, Senior Vice President, General Counsel and Secretary of the Company, as attorney-in-fact pursuant to a power of attorney filed with the Securities and Exchange Commission as Exhibit 24 to this Amendment No. 3 to the Registration Statement. Dated: July 30, 1998 By: /s/ Scott J. Davido ---------------------------------------------------- Scott J. Davido Attorney-in-Fact
II-7 103 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 1 Form of Underwriting Agreement* 2(a) Third Amended Joint Plan of Reorganization of The Elder-Beerman Stores Corp. and its Subsidiaries dated November 17, 1997 (previously filed as Exhibit 2 to the Company's Form 10 filed on November 26, 1997 (the "Form 10"), and incorporated herein by reference)* 2(b) Agreement and Plan of Merger By and Among The Elder-Beerman Stores Corp., The Elder-Beerman Acquisition Corp. and Stone & Thomas dated June 18, 1998* 2(c) First Amendment to Agreement and Plan of Merger By and Among The Elder-Beerman Stores Corp., The Elder-Beerman Acquisition Corp., and Stone & Thomas dated July 27, 1998* 3(a) Amended Articles of Incorporation (previously filed as Exhibit 3(a) to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1998 (the "Form 10-K") and incorporated herein by reference) 3(b) Amended Code of Regulations (previously filed as Exhibit 3(b) to the Form 10 and incorporated herein by reference) 4(a) Stock Certificate for Common Share (previously filed as Exhibit 4(a) to the Company's Form 10/A-1 filed on January 23, 1998 (the "Form 10/A-1") and incorporated herein by reference) 4(c) Rights Agreement By and Between The Elder-Beerman Stores Corp. and Norwest Bank Minnesota, N.A., dated as of December 30, 1997 (previously filed as Exhibit 4(c) to the Form 10-K and incorporated herein by reference) 4(d) Warrant Agreement by and Between Beerman-Peal Holdings, Inc. and the Elder-Beerman Stores Corp. for 249,809 Common Shares at a strike price of $12.80 per share dated December 30, 1997 (previously filed as Exhibit 4(d) to the Form 10-K and incorporated herein by reference) 4(e) Warrant Agreement by and Between Beerman-Peal Holdings, Inc. and the Elder-Beerman Stores Corp. for 374,713 Common Shares at a strike price of $14.80 per share dated December 30, 1997 (previously filed as Exhibit 4(e) to the Form 10-K and incorporated herein by reference) 5 Opinion of Jones, Day, Reavis & Pogue* 10(a)(i) Pooling and Servicing Agreement Among The El-Bee Receivables Corporation, The El-Bee Chargit Corp. and Bankers Trust Company, dated December 30, 1997 (previously filed as Exhibit 10(a)(i) to the Form 10/A-1 and incorporated herein by reference) 10(a)(ii) Series 1997-1 Supplement Among The El-Bee Receivables Corporation, The El-Bee Chargit Corp. and Bankers Trust Company, dated December 30, 1997 (previously filed as Exhibit 10(a)(ii) to the Form 10/A-1 and incorporated herein by reference) 10(a)(iii) Certificate Purchase Agreement Among The El-Bee Receivables Corporation, Corporate Receivables Corporation, The Liquidity Providers Named Herein, CitiCorp North American, Inc. and Bankers Trust Company, dated December 30, 1997 (previously filed as Exhibit 10(a)(iii) to the Form 10/A-1 and incorporated herein by reference) 10(a)(iv) Loan Agreement Among The El-Bee Receivables Corporation, The El-Bee Chargit Corp., Bankers Trust Company, The Collateral Investors Parties Hereto and CitiCorp North America, Inc., dated as of December 30, 1997 (previously filed as Exhibit 10(a)(iv) to the Form 10/A-1 and incorporated herein by reference) 10(a)(v) Intercreditor Agreement By and Among The El-Bee Chargit Corp., The Elder-Beerman Stores Corp., Bankers Trust Company, CitiCorp USA, Inc., CitiCorp North America, Inc., Corporate Receivables Corporation and the Liquidity Providers Named Herein, dated as of December 30, 1997 (previously filed as Exhibit 10(a)(v) to the Form 10/A-1 and incorporated herein by reference)
104
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 10(a)(vi) Parent Undertaking Agreement Among The Elder-Beerman Stores Corp. and Bankers Trust Company, dated as of December 30, 1997 (previously filed as Exhibit 10(a)(vi) to the Form 10/A-1 and incorporated herein by reference) 10(a)(vii) Purchase Agreement (Chargit) Among The El-Bee Chargit Corp. and The El-Bee Receivables Corporation, dated as of December 30, 1997 (previously filed as Exhibit 10(a)(vii) to the Form 10/A-1 and incorporated herein by reference) 10(a)(viii) Purchase Agreement (Elder-Beerman) Among The Elder-Beerman Stores Corp. and The El-Bee Chargit Corp., dated as of December 30, 1997 (previously filed as Exhibit 10(a)(viii) to the Form 10/A-1 and incorporated herein by reference) 10(a)(ix) Subordinated Note Between The El-Bee Receivables Corporation and The El-Bee Chargit Corp, dated December 30, 1997 (previously filed as Exhibit 10(a)(ix) to the Form 10/A-1 and incorporated herein by reference) 10(b)(i) Amended and Restated Credit Agreement Among The Elder-Beerman Stores Corp., The Lenders Party Hereto, Citibank, N.A. and CitiCorp USA, Inc., dated as of July 27, 1998 10(b)(ii) Borrower Pledge Agreement Made by The Elder-Beerman Stores Corp. to Citibank, N.A., dated December 30, 1997 (previously filed as Exhibit 10(b)(ii) to the Form 10/A-1 and incorporated herein by reference) 10(b)(iii) Chargit Pledge Agreement Made By The El-Bee Chargit Corp. to Citibank, N.A., dated December 30, 1997 (previously filed as Exhibit 10(b)(iii) to the Form 10/A-1 and incorporated herein by reference) 10(b)(iv) Amended and Restated Security Agreement Made By The Elder-Beerman Stores Corp., The El-Bee Chargit Corp., The Bee-Gee Shoe Corp. in Favor of CitiCorp USA, Inc., dated July 27, 1998 10(b)(v) Subsidiary Guaranty Made by The El-Bee Chargit Corp., dated December 30, 1997 (previously filed as Exhibit 10(b)(v) to the Form 10/A-1 and incorporated herein by reference) 10(b)(vi) Subsidiary Guaranty Made by The Bee-Gee Shoe Corp., dated December 30, 1997 (previously filed as Exhibit 10(b)(vi) to the Form 10/A-1 and incorporated herein by reference) 10(b)(vii) Subsidiary Guaranty Made by Elder-Beerman West Virginia, Inc., dated July 27, 1998 10(b)(viii) Form of Revolving Note (previously filed as Exhibit 10(b)(vii) to the Form 10/A-1 and incorporated herein by reference) 10(b)(ix) Letter Agreement Re: Assignment of Account By and Between The Elder-Beerman Stores Corp., CitiCorp USA, Inc., and Bankers Trust Company, dated December 30, 1997 (previously filed as Exhibit 10(b)(viii) to the Form 10/A-1 and incorporated herein by reference) 10(c) Form of Employment Agreement for Senior Vice Presidents (previously filed as Exhibit 10(c) to the Form 10 and incorporated herein by reference) 10(d) Form of Employment Agreement for Executive Vice Presidents (previously filed as Exhibit 10(d) to the Form 10 and incorporated herein by reference) 10(f) Form of Director Indemnification Agreement (previously filed as Exhibit 10(f) to the Form 10 and incorporated herein by reference) 10(g) Form of Officer Indemnification Agreement (previously filed as Exhibit 10(g) to the Form 10 and incorporated herein by reference) 10(h) Form of Director and Officer Indemnification Agreement (previously filed as Exhibit 10(h) to the Form 10 and incorporated herein by reference) 10(i) The Elder-Beerman Stores Corp. Equity and Performance Incentive Plan, Effective December 30, 1997 (previously filed as Exhibit 10(i) to the Form 10-K and incorporated herein by reference)
105
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 10(j) Form of Restricted Stock Agreement for Non-Employee Director (previously filed as Exhibit 10(j) to the Form 10 and incorporated herein by reference) 10(k) Form of Restricted Stock Agreement (previously filed as Exhibit 10(k) to the Form 10 and incorporated herein by reference) 10(l) Form of Deferred Shares Agreement (previously filed as Exhibit 10(l) to the Form 10 and incorporated herein by reference) 10(m) Form of Nonqualified Stock Option Agreement for Non-Employee Director (previously filed as Exhibit 10(m) to the Form 10 and incorporated herein by reference) 10(n) Form of Nonqualified Stock Option Agreement (previously filed as Exhibit 10(n) to the Form 10 and incorporated herein by reference) 10(o) Employee Stock Purchase Plan (previously filed as Exhibit 10(o) to the Form 10 and incorporated herein by reference) 10(p) Comprehensive Settlement Agreement By and Among The Debtors, The ESOP and the ESOP Committee and the Shareholders of The Elder-Beerman Stores Corp., dated as of December 30, 1997 (previously filed as Exhibit 10(p) to the Form 10-K and incorporated herein by reference) 10(q) Tax Indemnification Agreement By and Among The Elder-Beerman Stores Corp., the Direct and Indirect Subsidiaries of Elder-Beerman, Beerman-Peal Holdings, Inc., The Beerman-Peal Corporation, Beerman Investments, Inc., The Beerman Corporation and The Individuals, Partnerships and Trusts named Herein dated as of December 15, 1997 (previously filed as Exhibit 10(q) to the Form 10 and incorporated herein by reference) 10(r) Tax Sharing Agreement By and Among The Elder-Beerman Stores Corp., The Bee-Gee Shoe Corp. and The El-Bee Chargit Corp., dated as of December 30, 1997 (previously filed as Exhibit 10(r) to the Form 10 and incorporated herein by reference) 10(s) Employment Agreement Between The Elder-Beerman Stores Corp. and John A. Muskovich, dated December 30, 1997 (previously filed as Exhibit 10(s) to the Form 10-K and incorporated herein by reference) 10(t) Amended and Restated Employment Agreement Between The Elder-Beerman Stores Corp. and Frederick J. Mershad, dated December 30, 1997 (previously filed as Exhibit 10(t) to the Form 10-K and incorporated herein by reference) 21 Subsidiaries of the Company 23(a) Consent of Counsel (included in Exhibit 5 hereto) 23(b) Consent of Deloitte & Touche LLP, independent auditors for the Company 23(c) Consent of Deloitte & Touche LLP, independent auditors for Stone & Thomas 24 Powers of Attorney*
- --------------- * Previously filed EX-10.B.I 2 EXHIBIT 10(B)I 1 Exhibit 10(b)(i) EXECUTION COPY U.S. $150,000,000 AMENDED AND RESTATED CREDIT AGREEMENT Dated as of July 27, 1998 Among THE ELDER-BEERMAN STORES CORP. as Borrower ----------- and THE LENDERS PARTY HERETO CITIBANK, N.A. as Issuer --------- and CITICORP USA, INC. as Agent and Swing Loan Bank ---------------------------- 2
TABLE OF CONTENTS SECTION PAGE ARTICLE I DEFINITIONS AND ACCOUNTING TERMS..................................... 1 1.1. Defined Terms................................................................ 1 1.2. Computation of Time Periods.................................................. 33 1.3. Accounting Terms; Changes in GAAP............................................ 33 1.4. Certain Pre-Reorganization Matters........................................... 33 1.5. Certain Terms................................................................ 34 ARTICLE II AMOUNTS AND TERMS OF THE LOANS....................................... 34 2.1. The Revolving Credit Loans................................................... 34 2.2. Making the Loans............................................................. 35 2.3. Fees......................................................................... 36 2.4. Reduction and Termination of the Commitments................................. 37 2.5. Repayment.................................................................... 37 2.6. Prepayments.................................................................. 38 2.7. Conversion/Continuation Option............................................... 39 2.8. Interest..................................................................... 40 2.9. Interest Rate Determination and Protection................................... 41 2.10. Increased Costs.............................................................. 41 2.11. Illegality................................................................... 42 2.12. Capital Adequacy............................................................. 43 2.13. Payments and Computations.................................................... 43 2.14. Taxes........................................................................ 45 2.15. Sharing of Payments, Etc..................................................... 48 2.16. Letter of Credit Facility.................................................... 49 2.17. Swing Loans.................................................................. 55 2.18. Cash Collateral Account and Cash Management System........................... 56 2.19. Substitution of Lenders...................................................... 56 ARTICLE III CONDITIONS OF EFFECTIVENESS.......................................... 58 3.1. Conditions Precedent to the Effectiveness of This Agreement.................................................................... 58 3.2. Additional Conditions to the Effectiveness of This Agreement.................................................................... 60 3.3. Conditions Precedent to Each Loan and Letter of Credit....................................................................... 63 ARTICLE IV
i 3
SECTION PAGE REPRESENTATIONS AND WARRANTIES....................................... 64 4.1. Corporate Existence; Compliance with Law..................................... 64 4.2. Corporate Power; Authorization; Enforceable Obligations.................................................................. 64 4.3. Taxes........................................................................ 65 4.4. Full Disclosure.............................................................. 67 4.5. Financial Matters............................................................ 67 4.6. Litigation................................................................... 68 4.7. Margin Regulations........................................................... 68 4.8. ERISA........................................................................ 68 4.9. Liens........................................................................ 69 4.10. No Burdensome Restrictions; No Defaults...................................... 70 4.11. No Other Ventures............................................................ 70 4.12. Securitization Documents; Interest Rate Contracts............................ 70 4.13. Investment Company Act....................................................... 71 4.14. Public Utility Holding Company Act........................................... 71 4.15. Security Interests........................................................... 71 4.16. Insurance.................................................................... 71 4.17. Use of Proceeds.............................................................. 71 4.18. Environmental Protection..................................................... 72 4.19. Intellectual Property........................................................ 73 4.20. Leased Property.............................................................. 74 4.21. Certain Indebtedness......................................................... 74 4.22. Real Property................................................................ 74 4.23. Restricted Payments.......................................................... 74 4.24. Obligations with Respect of Gift Certificates................................ 75 ARTICLE V FINANCIAL COVENANTS.................................................. 75 5.1. Fixed Charge Coverage Ratio.................................................. 75 5.2. Total Indebtedness........................................................... 75 5.3. Interest Coverage Ratio...................................................... 75 5.4. Capital Expenditures......................................................... 76 ARTICLE VI AFFIRMATIVE COVENANTS................................................ 76 6.1. Compliance with Laws, Etc.................................................... 76 6.2. Conduct of Business.......................................................... 76 6.3. Payment of Taxes, Etc........................................................ 77 6.4. Maintenance of Insurance..................................................... 77 6.5. Preservation of Corporate Existence, Etc..................................... 77 6.6. Access....................................................................... 78 6.7. Keeping of Books............................................................. 78 6.8. Maintenance of Properties, Etc............................................... 78 6.9. Application of Proceeds...................................................... 78 6.10. Financial Statements......................................................... 79 6.11. Reporting Requirements....................................................... 81
ii 4
SECTION PAGE 6.12. Employee Plans............................................................... 84 6.13. Fiscal Year.................................................................. 84 6.14. Borrowing Base Determination................................................. 84 6.15. Certain Covenants Regarding the Receivables Securitization............................................................ 85 6.16. Environmental Matters........................................................ 86 6.17. Termination of Receivables Securitization.................................... 86 6.18. Reduction of Subordinated Note............................................... 87 6.19. Collection Account Letters................................................... 87 ARTICLE VII NEGATIVE COVENANTS................................................... 87 7.1. Liens, Etc................................................................... 87 7.2. Indebtedness................................................................. 89 7.3. Restricted Payments.......................................................... 90 7.4. Mergers, Stock Issuances, Sale of Assets, Etc................................ 91 7.5. Investments in Other Persons................................................. 92 7.6. Change in Nature of Business................................................. 93 7.7. Modification of Securitization Documents, Etc................................ 93 7.8. Modification of Material Agreements.......................................... 94 7.9. Compliance with ERISA........................................................ 94 7.10. Accounting Changes........................................................... 95 7.11. Transactions with Affiliates................................................. 95 7.12. Adverse Transactions......................................................... 96 7.13. Cancellation of Indebtedness Owed to It...................................... 96 7.14. No Negative Pledge........................................................... 96 7.15. Capital Structure............................................................ 96 7.16. No Speculative Transactions.................................................. 96 7.17. Environmental Matters........................................................ 96 7.18. Change in Ownership Under Section 382 of the Code............................ 97 7.19. Contingent Obligations....................................................... 97 ARTICLE VIII EVENTS OF DEFAULT.................................................... 97 8.1. Events of Default............................................................ 97 8.2. Remedies.....................................................................100 8.3 Actions in Respect of Letters of Credit......................................101 ARTICLE IX THE AGENT............................................................102 9.1. Authorization and Action.....................................................102 9.2. Agent's Reliance, Etc........................................................103 9.3. CUSA and Affiliates..........................................................103 9.4. Lender Credit Decision.......................................................104 9.5. Indemnification..............................................................104 9.6. Successor Agent..............................................................105
iii 5
SECTION PAGE ARTICLE X MISCELLANEOUS........................................................105 10.1. Amendments, Etc...................................................................105 10.2. Notices, Etc......................................................................106 10.3. No Waiver; Remedies...............................................................107 10.4. Costs; Expenses; Indemnities......................................................107 10.5. Right of Set-off..................................................................110 10.6. Binding Effect....................................................................111 10.7. Assignments and Participations....................................................111 10.8. Governing Law.....................................................................115 10.9. Submission to Jurisdiction; Service of Process....................................115 10.10. Section Titles....................................................................115 10.11. Execution in Counterparts.........................................................116 10.12. Entire Agreement..................................................................116 10.13. Confidentiality...................................................................116 10.14. Acknowledgments...................................................................116 10.15. Waiver of Trial by Jury...........................................................117 10.16. Surrender of Original Notes.......................................................117
iv 6 SCHEDULES Schedule I - Commitment Schedule II - Applicable Lending Offices and Addresses for Notices Schedule III - Addresses for Notices to the Issuers Schedule IV - Advance Rates Schedule V - Securitization Documents Schedule 1.1 - Disposable Real Property Schedule 2.16(b) - Letters of Credit Outstanding Schedule 3.2(a) - Other Secured Lenders Schedule 4.3(b) - Tax Returns Schedule 4.3(d) - Open Tax Matters Schedule 4.6 - Disclosed Litigation Schedule 4.8(b) - Contribution Failures Schedule 4.8(d) - ERISA Actions Schedule 4.11 - Other Ventures Schedule 4.12(b) - Swap Agreements Schedule 4.18 - Environmental Protection Schedule 4.20 - Leased Property Schedule 4.21 - Certain Indebtedness Schedule 4.22 - Real Property Schedule 6.11(p) - Ownership of Stock Schedule 6.19 - Collection Account Banks Schedule 7.1(j) - EBWVA Liens Schedule 7.5 - Existing Investments Schedule 7.19 - EBWVA Contingent Liabilities v 7 EXHIBITS -------- Exhibit A - Form of Revolving Credit Note Exhibit B - Form of Notice of Borrowing Exhibit C - Form of Notice of Conversion or Continuation Exhibit D - Form of Letter of Credit Request Exhibit E - Form of Borrowing Base Certificate Exhibit F - Form of Bee-Gee Guaranty Exhibit G - Form of Chargit Guaranty Exhibit H - Form of EBWVA Guaranty Exhibit I - Form of Amended and Restated Security Agreement Exhibit J - Form of Opinion of Counsel for the Loan Parties Exhibit K - Form of Assignment and Acceptance Exhibit L - Form of Store Account Letter Exhibit M - Letter of Credit Reimbursement Agreement Exhibit N - Form of Borrower Pledge Agreement Exhibit O - Form of Chargit Pledge Agreement Exhibit P - Form of Local Bank Blocked Account Letter vi 8 AMENDED AND RESTATED CREDIT AGREEMENT, dated as of July 27, 1998, among THE ELDER-BEERMAN STORES CORP., an Ohio corporation (the "BORROWER"), the financial institutions listed on the signature pages hereof as lenders hereunder (each individually a "LENDER" and collectively the "LENDERS"), Citibank, N.A., as issuer ("CITIBANK"), and CITICORP USA, INC. ("CUSA"), as agent for the Lenders, the Issuer (as defined herein) and the Swing Loan Bank (in such capacity, the "AGENT") and as Swing Loan Bank (as defined herein). W I T N E S S E T H: ------------------- WHEREAS, the Borrower is currently party to a Credit Agreement, dated as of December 30, 1997, with certain of the Lenders, Citibank and CUSA, as amended to the date hereof (the "Old Credit Agreement"); and WHEREAS, the parties to the Old Credit Agreement wish to amend and restate in its entirety the Old Credit Agreement, including for the purpose of increasing the Commitments of the Lenders to $150,000,000; and WHEREAS, the Lenders are willing to make funds available for such purposes upon the terms and subject to the conditions set forth herein; and WHEREAS, the Borrower has also requested that Citibank provide the Borrower with letters of credit and Citibank is willing to issue letters of credit upon the terms and subject to the conditions contained herein; NOW, THEREFORE, in consideration of the premises and the mutual covenants hereinafter contained, the parties hereto agree as follows: ARTICLE I DEFINITIONS AND ACCOUNTING TERMS 1.1. DEFINED TERMS. As used in this Agreement, the following terms have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): 1 9 "ACCOUNT" means any "account," as such term is defined in Section 9-106 of the UCC, now owned or hereafter acquired by any Loan Party. "ACCOUNT DEBTOR" means any "account debtor," as such term is defined in Section 9-105(1)(a) of the UCC. "ACQUISITION SUB" means The Elder-Beerman Acquisition Corp., a West Virginia corporation and wholly- owned subsidiary of the Borrower. "ADVANCE RATE" means, at any time, the rates set forth on Schedule IV as such rates may be increased or decreased from time to time by the Agent in its sole discretion, exercised reasonably; PROVIDED, HOWEVER, that the Agent shall not increase such rates above the rates set forth on Schedule IV as of the Effective Date without the consent of all of the Lenders. "AFFILIATE" means, as to any Person, any other Person which, directly or indirectly, controls, is controlled by or is under common control with such Person and includes each officer or director or general partner of such Person, and each Person who is the beneficial owner of 10% or more of any class of voting Stock of such Person. For the purposes of this definition, "control" means the possession of the power to direct or cause the direction of management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise. "AGREEMENT" means this Amended and Restated Credit Agreement, together with all Exhibits and Schedules hereto, as the same may be amended, supplemented or otherwise modified from time to time. "AMENDED AND RESTATED SECURITY AGREEMENT" means an agreement, substantially in the form of EXHIBIT I, executed by the Borrower and the Guarantors, as such agreement may be amended, supplemented or modified from time to time. "APPLICABLE BASE RATE MARGIN" means, means, (i) for the period from the Effective Date through July 31, 1998, 75.0 bps per annum; (ii) for the period from August 1, 1998 through January 31, 1999, except as provided below, the Applicable Base Rate Margin set forth below; PROVIDED that such Applicable Base Rate Margin shall not be less than 37.5 bps per annum, EXCEPT that if the Borrower has consummated a Qualified Public Offering prior to August 15, 1998 and, after giving pro forma effect to the application of the proceeds of such Qualified Public Offering pursuant to the 2 10 terms of the Facility as if such proceeds had been applied on or before August 1, 1998 (solely for the purpose of determining the Applicable Base Rate Margin as of the date of the consummation of such Qualified Public Offering), the ratio of Debt, after such application, to EBITDA for the four full fiscal quarters ended prior to the date such Qualified Public Offering is consummated is less than 4.00, the Applicable Base Rate Margin from the date of the consummation of such Qualified Public Offering through October 31, 1998 shall be 37.5 bps; and (iii) for each subsequent year, except as provided below and subject to Section 2.9(d), the Applicable Base Rate Margin will be as set forth in the following table:
Average Total Debt/EBITDA (previous Applicable Base Rate 12 Mos.) Margin (Bps) ------------------------ -------------------- greater than or equal to 4.00 75.0 greater than or equal to 3.50 less than 4.00 37.5 greater than or equal to 3.00 less than 3.50 12.5 greater than or equal to 2.50 less than 3.00 0 greater than or equal to 2.00 less than 2.50 0 greater than or equal to 1.75 less than 2.00 0
PROVIDED, HOWEVER, that as long as the Over-Advance Amount shall be greater than zero, the Applicable Base Rate Margin shall be no less than 37.5 bps. "APPLICABLE EURODOLLAR RATE MARGIN" means, (i) for the period from the Effective Date through July 31, 1998, 175.0 bps per annum; (ii) for the period from August 1, 1998 through January 31, 1999, except as provided below, the Applicable Eurodollar Rate Margin set forth below; PROVIDED that such Applicable Eurodollar Rate Margin shall not be less than 137.5 bps per annum, EXCEPT that if the Borrower has consummated a Qualified Public Offering prior to August 15, 1998 and, after giving pro forma effect to the application of the proceeds of such Qualified Public Offering pursuant to the terms of the Facility as if such proceeds had been applied on or before August 1, 1998 (solely for the purpose of determining the Applicable Eurodollar Rate Margin as of the date of the consummation of such Qualified Public Offering), the ratio of Debt, after such application, to EBITDA for the four full fiscal quarters ended prior to the date such Qualified Public Offering is consummated is less than 4.00, the Applicable Eurodollar Rate Margin from the date of the consummation of such Qualified Public Offering through October 31, 1998 shall be 137.5 bps; and (iii) for each subsequent year, 3 11 except as provided below and subject to Section 2.9(d), the Applicable Eurodollar Margin will be as set forth in the following table:
Average Total Debt/EBITDA (previous Applicable Eurodollar 12 Mos.) Margin (Bps) ----------------------------- ---------------------- greater than or equal to 4.00 175.0 greater than or equal to 3.50 less than 4.00 137.5 greater than or equal to 3.00 less than 3.50 112.5 greater than or equal to 2.50 less than 3.00 87.5 greater than or equal to 2.00 less than 2.50 75.0 greater than or equal to 1.75 less than 2.00 62.5
PROVIDED, HOWEVER, that as long as the Over-Advance Amount shall be greater than zero, the Applicable Eurodollar Rate Margin shall be no less than 137.5 bps. "APPLICABLE LENDING OFFICE" means, with respect to each Lender, its Domestic Lending Office in the case of a Base Rate Loan and its Eurodollar Lending Office in the case of a Eurodollar Rate Loan. "APPLICABLE MARGIN" means the Applicable Base Rate Margin and the Applicable Eurodollar Rate Margin. "ASSET SALE" means any sale or other disposition, or series of sales or other dispositions (including, without limitation, by merger or consolidation, and whether by operation of law or otherwise) made on or after the Effective Date by the Borrower or any of its Subsidiaries to any Person, except: (i) sales by the Borrower to Chargit and sales by Chargit to El-Bee of Chargit Receivables, (ii) sales by EBWVA to El-Bee of the EBWVA Receivables, (iii) sales by the Borrower and its Subsidiaries of Inventory or obsolete or used Equipment in the ordinary course of business, and (iv) sales by EBWVA of Inventory, Equipment and Real Property in connection with disposition of not more than ten stores owned by EBWVA and other owned Real Property of EBWVA as set forth on Schedule 1.1, which Inventory, Equipment and Real Property is located at or on the site of such disposed stores. "ASSET SALE PROCEEDS" means, with respect to any Asset Sale, the aggregate amount of cash received from time to time by or on behalf of such Person in connection therewith after deducting therefrom only (a) reasonable expenses incurred directly in connection with such transaction, including, without limitation, reasonable and 4 12 customary brokerage commissions, underwriting fees and discounts, legal and accounting fees and expenses, finder's fees and other similar fees and commissions, (b) the amount of taxes payable in connection with or as a result of such transaction, (c) the amount of any Indebtedness secured by a Lien on such asset that, by the terms of such Indebtedness, is required to be repaid upon such disposition and (d) amounts received with respect to the sublease of any asset to the extent such amounts received are paid to the lessor of such asset, in each case to the extent, but only to the extent, that the amounts so deducted are, at the time of receipt of such cash, actually paid to a Person that is not an Affiliate of the Borrower and are properly attributable to such transaction or to the asset that is the subject thereof; PROVIDED, HOWEVER, that Asset Sale Proceeds shall not include any proceeds received from a Sale/Leaseback Transaction where the property was owned by the Borrower or a Subsidiary of the Borrower for less than one year. "ASSIGNMENT AND ACCEPTANCE" means an assignment and acceptance entered into by a Lender and an Eligible Assignee, and accepted by the Agent, in substantially the form of EXHIBIT K. "ATTRIBUTED VALUE" means, at any time, the value of all Eligible Inventory computed at the lower of market or cost on a first in first out basis. Unless disputed by the Agent, the most recent Borrowing Base Certificate delivered to the Agent pursuant to Section 6.10(e) shall be prima facie evidence of such value. "AVAILABLE CREDIT" means, at any time, an amount equal to (a) the lower of (i) the then effective Commitments of the Lenders and (ii) the sum of (x) the Borrowing Base at such time and (y) the Over-Advance Amount, MINUS (b) the sum of (i) the principal amount of the Loans outstanding at such time, and (ii) the Letter of Credit Obligations outstanding at such time. "AVERAGE TOTAL DEBT" means, for any period of four consecutive Fiscal Quarters, the average of the month-end balances of Debt of the Borrower outstanding during such four Fiscal Quarters. "BANKRUPTCY CODE" means title 11, United States Code, as amended from time to time. 5 13 "BANKRUPTCY COURT" means the United States Bankruptcy Court for the Southern District of Ohio, Western Division. "BASE RATE" means, for any period, a fluctuating interest rate per annum as shall be in effect from time to time, which rate per annum shall be equal at all times to the highest of: (a) the rate of interest announced publicly by Citibank in New York, New York, from time to time, as Citibank's base rate; and (b) the sum (adjusted to the nearest 1/4 of one percent or, if there is no nearest 1/4 of one percent, to the next higher 1/4 of one percent) of (i) 1/2 of one percent per annum, PLUS (ii) the rate per annum obtained by dividing (A) the latest three-week moving average of secondary market morning offering rates in the United States for three-month certificates of deposit of major United States money market banks, such three-week moving average being determined weekly on each Monday (or, if any such day is not a Business Day, on the next succeeding Business Day) for the three-week period ending on the previous Friday by Citibank on the basis of such rates reported by certificate of deposit dealers to and published by the Federal Reserve Bank of New York or, if such publication shall be suspended or terminated, on the basis of quotations for such rates received by Citibank from three New York certificate of deposit dealers of recognized standing selected by Citibank, by (B) a percentage equal to 100% MINUS the average of the daily percentages specified during such three-week period by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including, without limitation, any emergency, supplemental or other marginal reserve requirement) for Citibank in respect of liabilities consisting of or including (among other liabilities) three-month U.S. dollar non-personal time deposits in the United States, PLUS (iii) the average during such three-week period of the maximum annual assessment rates payable to the Federal Deposit Insurance Corporation (or any successor) by banks which are members of the Bank Insurance Fund for insuring U.S. dollar deposits in the United States; and (c) the sum (adjusted to the nearest 1/4 of one percent or, if there is no nearest 1/4 of one percent, to the next higher 1/4 of one percent) of (i) 1/2 of one percent per annum PLUS (ii) the Federal Funds Rate. 6 14 "BASE RATE LOAN" means any outstanding principal amount of the Loans of any Lender that bears interest with reference to the Base Rate. "BEE-GEE" means The Bee-Gee Shoe Corp., an Ohio corporation and wholly-owned Subsidiary of the Borrower. "BLOCKED ACCOUNT LETTER" means a letter agreement, in substantially the form of EXHIBIT P (with such changes as may be agreed to by the Agent), executed by the Borrower and/or any Subsidiary and acknowledged and agreed to by a depository bank. "BORROWER PLEDGE AGREEMENT" means an agreement substantially in the form of EXHIBIT N, executed by the Borrower, as such agreement may be amended, supplemented or modified from time to time. "BORROWING" means, collectively, a Revolving Credit Borrowing and a Swing Loan Borrowing. "BORROWING BASE" means, at any time, (a) the sum of (i) 95% of the cash on deposit at such time in the Cash Collateral Account and (ii) the product of the applicable Advance Rate at such time multiplied by the Attributed Value of Eligible Inventory at such time LESS (b) such reserves as the Agent, in its sole discretion in accordance with its customary practice, exercised reasonably, deems appropriate. "BORROWING BASE CERTIFICATE" means a certificate of the Borrower substantially in the form of EXHIBIT E. "BORROWING BASE DEFICIENCY" means, at any time, the failure of the Borrowing Base to exceed the sum of (i) the then outstanding Loans PLUS (ii) the then outstanding Letter of Credit Obligations. "BPS" means basis points, i.e., one-hundredth of one percent (.01%). "BUSINESS DAY" means a day of the year on which banks are not required or authorized to close in New York City and, if the applicable Business Day relates to a Eurodollar Rate Loan, a day on which dealings are also carried on in the London interbank market. "CAPITAL EXPENDITURES" means, for any Person for any period, without duplication, the aggregate of (i) all expenditures by such Person and its consolidated Subsidiaries, except interest capitalized during 7 15 construction, during such period for property, plant or equipment, including, without limitation, renewals, improvements, replacements and capitalized repairs, that would be reflected as additions to property, plant or equipment on a consolidated balance sheet of such Person and its Subsidiaries prepared in conformity with GAAP and (ii) the principal amount of all Indebtedness incurred or assumed in connection with any such additions to property, plant and equipment. For the purpose of this definition, the purchase price of equipment which is acquired simultaneously with the trade-in of existing equipment owned by such Person or any of its Subsidiaries or with insurance proceeds shall be included in Capital Expenditures only to the extent of the gross amount of such purchase price less the credit granted by the seller of such equipment being traded in at such time or the amount of such proceeds, as the case may be. "CAPITALIZED LEASE" means, as to any Person, any lease of property by such Person as lessee which would be capitalized on a balance sheet of such Person prepared in conformity with GAAP. "CAPITALIZED LEASE OBLIGATIONS" means, as to any Person, the capitalized amount of all obligations of such Person or any of its Subsidiaries under Capitalized Leases, as determined on a consolidated basis in conformity with GAAP. "CASH COLLATERAL ACCOUNT" has the meaning specified in Section 2.18. "CASH EQUIVALENTS" means any of the following, to the extent owned by any Loan Party free and clear of all Liens and having a maturity of not greater than 90 days from the date of acquisition thereof: (a) readily marketable direct obligations of the Government of the United States or any agency or instrumentality thereof or obligations unconditionally guaranteed by the full faith and credit of the Government of the United States, (b) insured certificates of deposit of or time deposits with any commercial bank that is a Lender or a member of the Federal Reserve System, issues (or the parent of which issues) commercial paper rated as described in clause (c), is organized under the laws of the United States or any State thereof and has combined capital and surplus of at least $250,000,000, or (c) commercial paper in an aggregate amount of no more than $5,000,000 per issuer outstanding at any time, issued by any corporation organized under the laws of any State of the United States and rated at least "Prime-1" 8 16 (or the then equivalent grade) by Moody's Investors Service, Inc. or "A-1" (or the then equivalent grade) by Standard & Poor's Ratings Group. "CHANGE OF CONTROL" means any one of the following events: (i) the merger or consolidation of the Borrower with or into another Person or the merger of another Person with or into the Borrower, or the sale of all or substantially all the assets of the Borrower to another Person, and, in the case of any such merger or consolidation, the securities of the Borrower that are outstanding immediately prior to such transaction and which represent 100% of the aggregate voting power of the Borrower are changed into or exchanged for cash, securities or property, unless pursuant to such transaction such securities are changed into or exchanged for, in addition to any other consideration, securities of the surviving corporation that represent immediately after such transaction, at least a majority of the aggregate voting power of the surviving corporation; (ii) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934) is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934) directly or indirectly, of securities representing more than 40% of the total voting power of the Company, except that such person shall be deemed to have "beneficial ownership" of all shares that such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time; (iii) individuals who, on the Effective Date, constitute the Board of Directors of the Borrower (the "Incumbent Directors") cease for any reason to constitute at least a majority of the Board of Directors of the Borrower, provided that any person becoming a director subsequent to the Effective Date whose election or nomination for election was approved by a vote of at least two-thirds of the Incumbent Directors then in office (either by a specific vote or by approval of the proxy statement of the Borrower in which such individual is named as a nominee for director, without objection to such nomination) shall be an Incumbent Director; PROVIDED, HOWEVER, that no individual elected or nominated as a director of the Borrower initially as a result of an actual or threatened election contest with respect to directors or any other actual or threatened solicitation of proxies or consents by or on behalf of any 9 17 person other than the Board of Directors of the Borrower shall be deemed to be an Incumbent Director. "CHARGIT" means The El-Bee Chargit Corp., an Ohio corporation and a wholly-owned Subsidiary of the Borrower. "CHARGIT PLEDGE AGREEMENT" means an agreement substantially in the form of EXHIBIT O, executed by Chargit, as such agreement may be amended, supplemented or modified from time to time. "CHARGIT RECEIVABLES" means the private-label credit card Receivables sold or otherwise conveyed by the Borrower to Chargit and by Chargit to El-Bee pursuant to the Securitization Documents. "CHATTEL PAPER" means any "chattel paper," as such term is defined in Section 9-105(1)(b) of the UCC, now owned or hereafter acquired by any Loan Party. "CITIBANK" has the meaning specified in the preamble hereto. "CODE" means the Internal Revenue Code of 1986 (or any successor legislation thereto), as amended from time to time. "COLLATERAL" means all property and interests in property and proceeds thereof now owned or hereafter acquired by any Loan Party in or upon which a Lien is granted under any of the Collateral Documents. "COLLATERAL DOCUMENTS" means the Amended and Restated Security Agreement, the Borrower Pledge Agreement, the Chargit Pledge Agreement and any other document executed and delivered by a Loan Party granting a Lien on any of its property to secure payment of the Obligations. "COMMITMENT" means, as to each Lender, the commitment of such Lender to make Revolving Credit Loans to the Borrower pursuant to Section 2.1 in the aggregate principal amount outstanding not to exceed the amount set forth opposite such Lender's name on Schedule I hereto under the caption "Commitment," as such amount may be reduced or modified pursuant to this Agreement. "COMMITMENT FEE" has the meaning specified in Section 2.3(a). 10 18 "CONTINGENT OBLIGATION" means, as applied to any Person, any direct or indirect liability, contingent or otherwise, of such Person with respect to any Indebtedness or Contractual Obligation of another Person, if the purpose or intent of such Person in incurring the Contingent Obligation is to provide assurance to the obligee of such Indebtedness or Contractual Obligation that such Indebtedness or Contractual Obligation will be paid or discharged, or that any agreement relating thereto will be complied with, or that any holder of such Indebtedness or Contractual Obligation will be protected (in whole or in part) against loss in respect thereof. Contingent Obligations of a Person include, without limitation, (a) the direct or indirect guarantee, endorsement (other than for collection or deposit in the ordinary course of business), co-making, discounting with recourse or sale with recourse by such Person of an obligation of another Person, and (b) any liability of such Person for an obligation of another Person through any agreement (contingent or otherwise) (i) to purchase, repurchase or otherwise acquire such obligation or any security therefor, or to provide funds for the payment or discharge of such obligation (whether in the form of a loan, advance, stock purchase, capital contribution or otherwise), (ii) to maintain the solvency or any balance sheet item, level of income or financial condition of another Person, (iii) to make take-or-pay or similar payments, if required, regardless of non-performance by any other party or parties to an agreement, (iv) to purchase, sell or lease (as lessor or lessee) property, or to purchase or sell services, primarily for the purpose of enabling the debtor to make payment of such obligation or to assure the holder of such obligation against loss, or (v) to supply funds to or in any other manner invest in such other Person (including, without limitation, to pay for property or services irrespective of whether such property is received or such services are rendered), if in the case of any agreement described under subclause (i), (ii), (iii), (iv) or (v) of this sentence the primary purpose or intent thereof is as described in the preceding sentence. The amount of any Contingent Obligation shall be equal to the amount of the obligation so guaranteed or otherwise supported. "CONTRACTUAL OBLIGATION" of any Person means any obligation, agreement, undertaking or similar provision of any security issued by such Person or of any agreement, undertaking, contract, lease, indenture, mortgage, deed of trust or other instrument (excluding a Loan Document) to which such Person is a party or by which it or any of its 11 19 property is bound or to which any of its properties is subject. "CSFB LEASE AGREEMENTS" means (1) a lease by and between Credit Suisse First Boston or its designee ("First Boston") and the Borrower setting forth the terms and conditions pursuant to which First Boston will lease to the Borrower, and the Borrower will lease from First Boston, the Montgomery Sale/Leaseback Property (as defined in the definition of "CSFB Sale/Leaseback Properties" below), and (2) a lease by and between First Boston and the Borrower setting forth the terms and conditions pursuant to which First Boston will lease to the Borrower, and the Borrower will lease from First Boston, the Erie Sale/Leaseback Property (as defined in the definition of "CSFB Sale/Leaseback Properties" below). "CSFB SALE/LEASEBACK" means the transactions pursuant to which First Boston acquires the CSFB Sale/Leaseback Properties and leases the CSFB Sale/Leaseback Properties to the Borrower on terms and conditions set forth in the CSFB Lease Agreements. "CSFB SALE/LEASEBACK PROPERTIES" means (1) that certain Dayton Mall property consisting of an approximately 212,000 square foot retail store and approximately 15.619 acres located in Montgomery County, Ohio (the "MONTGOMERY SALE/LEASEBACK PROPERTY") and (2) that certain Millcreek Mall property consisting of an approximately 119,814 square foot store and approximately 8.4 acres located in Erie County, Pennsylvania (the "ERIE SALE/LEASEBACK PROPERTY"), each as more specifically described in (1) that certain Purchase and Sale Agreement, dated as of February 27, 1998, by and among Mercantile Properties, Inc., Mercantile Stores Company, Inc., the Borrower and Chicago Title Insurance Company and (2) that certain Purchase and Sale Agreement, dated as of March 3, 1998, by and between Lazarus PA, Inc. and the Borrower. "CUSA" shall have the meaning provided in the preamble hereto. "DEBT" means the sum of all (A) obligations of the type set forth in clauses (i) through (vii) of the definition of Indebtedness, including, without limitation, the principal amount of all outstanding Loans and the amount of all outstanding Letter of Credit Obligations, but in no event shall Debt include obligations of the type permitted by Section 7.2(ii) and (B) Receivables Securitization Attributed Indebtedness. 12 20 "DEFAULT" means any event which with the passing of time or the giving of notice or both would become an Event of Default. "DOL" means the United States Department of Labor, or any successor thereto. "DOLLARS" and the sign "$" each mean the lawful money of the United States of America. "DOMESTIC LENDING OFFICE" means, with respect to any Lender, the office of such Lender specified as its "Domestic Lending Office" opposite its name on Schedule II or such other office of such Lender as such Lender may from time to time specify to the Borrower and the Agent. "EBITDA" means, for any Person for any period, the Net Income (Loss) of such Person for such period taken as a single accounting period, PLUS (a) the sum of the following amounts of such Person and its Subsidiaries for such period determined on a consolidated basis in conformity with GAAP to the extent included in the determination of such Net Income (Loss): (i) depreciation expense, (ii) amortization expense, (iii) Net Interest Expense, (iv) Reorganization Expenses, (v) income tax expense, (vi) losses that are extraordinary items under GAAP (and other losses on Asset Sales not otherwise included in extraordinary losses determined on a consolidated basis in conformity with GAAP), (vii) non-recurring and non-cash writeoffs of deferred and unamortized assets and (ix) non-cash and recurring charges related to changes in the market value of any interest rate contract (to the extent not included in Net Interest Expense) and (x) non-recurring charges relating to the Stone & Thomas Acquisition; LESS (b) the sum of the following amounts of such Person and its Subsidiaries determined on a consolidated basis in conformity with GAAP to the extent included in the determination of such Net Income (Loss): (i) gains that are extraordinary items under GAAP (and in the case of the Borrower and its Subsidiaries, other gains on Asset Sales not otherwise included in extraordinary gains determined on a consolidated basis in conformity with GAAP), (ii) the Net Income (Loss) of any other Person that is accounted for by the equity method of accounting except to the extent of the amount of dividends or distributions paid to such Person, (iii) the Net Income (Loss) of any other Person acquired by such Person or a Subsidiary of such Person in a transaction accounted for as a pooling of interests for any period prior to the date of such acquisition and (iv) income tax benefit. 13 21 "EBWVA" means Elder-Beerman West Virginia, Inc., a West Virginia corporation, formerly known as Stone & Thomas, successor by merger to Acquisition Sub, and any successor thereto. "EBWVA RECEIVABLES" means the private-label credit card receivables sold or otherwise conveyed by EBWVA to Chargit pursuant to the Securitization Documents. "EBWVA SALE PROCEEDS" means, with respect to the sale of not more than ten stores and related Real Property and the other owned Real Property listed on Schedule 1.1 owned by EBWVA, the aggregate amount of cash received from time to time by or on behalf of any Loan Party in connection therewith after deducting therefrom only (a) reasonable expenses incurred directly in connection with such transaction, including, without limitation, reasonable and customary brokerage commissions, legal and accounting fees and expenses, finder's fees and other similar fees and commissions, (b) the amount of taxes payable in connection with or as a result of such transaction and (c) the amount of any Indebtedness secured by a Lien on such store or Real Property that, by the terms of such Indebtedness, is required to be repaid upon such disposition. "EFFECTIVE DATE" means July 27, 1998 or such later date on which the conditions set forth in Sections 3.1 and 3.2 hereto have been satisfied or waived. "EL-BEE" means The El-Bee Receivables Corporation, a Delaware corporation and wholly-owned Subsidiary of Chargit. "ELIGIBLE ASSIGNEE" means (i) a commercial bank organized under the laws of the United States, or any State thereof, and having total assets in excess of $5,000,000,000; (ii) a commercial bank organized under the laws of any other country which is a member of the OECD, or a political subdivision of any such country, and having total assets in excess of $5,000,000,000, provided that such bank is acting through a branch or agency located in the country in which it is organized or another country which is also a member of the OECD or the Cayman Islands; (iii) the central bank of any country which is a member of the OECD; (iv) a corporation organized under the laws of the United States, or any State thereof, and having total assets in excess of $3,000,000,000; (v) an insurance company organized under the laws of the United States, or any State thereof, and having total assets in excess of $5,000,000,000; (vi) a finance company, insurance company or other financial 14 22 institution or fund (whether a corporation, partnership, trust or other entity) that is engaged in making, purchasing or otherwise investing in commercial loans in the ordinary course of its business and having total assets in excess of $3,000,000,000; (vii) any Lender; (viii) any Affiliate of any Lender; and (ix) if an Event of Default has occurred and is continuing, "ELIGIBLE ASSIGNEE" shall also mean any Person other than a Person a substantial portion of whose business competes with the Borrower or any Subsidiary or Affiliate of such Person. "ELIGIBLE INVENTORY" means such of the Inventory of the Borrower, EBWVA and Bee-Gee as constitutes Collateral in which the Agent has a fully perfected first priority security interest and, as the Agent, in its sole discretion exercised reasonably, deems eligible. "ENVIRONMENTAL LAWS" means all federal, state and local laws (including common law), statutes, ordinances, rules, regulations and other legally binding requirements, now or hereafter in effect, and in each case as amended or supplemented from time to time, and any judicial or administrative interpretation thereof, including, without limitation, any judicial or administrative order, consent decree or judgment relating to the regulation and protection of human health, safety, the environment or natural resources (including, without limitation, ambient air, surface water, groundwater, wetlands, land surface or subsurface strata, wildlife, aquatic species and vegetation). Environmental Laws include but are not limited to the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended (42 U.S.C. ss. 9601 ET SEQ.) ("CERCLA"); the Hazardous Material Transportation Act, as amended (49 U.S.C. ss. 180 ET SEQ.); the Federal Insecticide, Fungicide, and Rodenticide Act, as amended (7 U.S.C. ss. 136 ET SEQ.); the Resource Conservation and Recovery Act, as amended (42 U.S.C. ss. 6901 ET SEQ.) ("RCRA"); the Toxic Substance Control Act, as amended (42 U.S.C. ss. 7401 ET SEQ.); the Clean Air Act, as amended (42 U.S.C. ss. 740 ET SEQ.); the Federal Water Pollution Control Act, as amended (33 U.S.C. ss. 1251 ET SEQ.); the Occupational Safety and Health Act, as amended (29 U.S.C. ss. 651 ET SEQ.); and the Safe Drinking Water Act, as amended (42 U.S.C. ss. 300f ET SEQ.), and their state and local counterparts or equivalents and any transfer of ownership notification or approval statute, including, without limitation, the New Jersey Industrial Site Recovery Act (N.J. Stat. Ann. ss. 13:1K-6 ET SEQ.) ("ISRA"). 15 23 "ENVIRONMENTAL LIABILITIES AND COSTS" means, as to any Person, all liabilities, obligations, responsibilities, Remedial Actions, losses, damages, punitive damages, consequential damages, treble damages, costs and expenses (including, without limitation, all fees, disbursements and expenses of counsel, experts and consultants and costs of investigation and feasibility studies), fines, penalties, sanctions and interest incurred as a result of any claim or demand by any other Person, whether based in contract, tort, implied or express warranty, strict liability, criminal or civil statute, including, without limitation, any thereof arising under any Environmental Law, Permit, order or agreement with any Governmental Authority or other Person, and which relate to any environmental, health or safety condition, or a Release or threatened Release, and result from the past, present or future operations of, or ownership of property by, such Person or any of its Subsidiaries. "ENVIRONMENTAL LIEN" means any Lien in favor of any Governmental Authority for Environmental Liabilities and Costs. "EQUIPMENT" means any "equipment," as such term is defined in Section 9-109(2) of the UCC, now owned or hereafter acquired by any Loan Party and, in any event, includes, without limitation, all machinery, equipment, furnishings, fixtures, vehicles, computers and other electronic data-processing and office equipment now owned or hereafter acquired by any Loan Party and any and all additions, substitutions and replacements of any of the foregoing, wherever located, together with all attachments, components, parts, equipment and accessories installed thereon or affixed thereto. "ERISA" means the Employee Retirement Income Security Act of 1974 (or any successor legislation thereto), as amended from time to time. "ERISA AFFILIATE" means any trade or business (whether or not incorporated) under common control with any Loan Party or any of its Subsidiaries within the meaning of Section 414 (b), (c), (m) or (o) of the Code. "ERISA EVENT" means (i) a Reportable Event with respect to a Title IV Plan or a Multiemployer Plan; (ii) the withdrawal of any Loan Party, any of its Subsidiaries or any ERISA Affiliate from a Title IV Plan subject to Section 4063 of ERISA during a plan year in which it was a substantial employer, as defined in Section 4001(a)(2) of ERISA; (iii) the complete or partial withdrawal of any Loan Party, 16 24 any of its Subsidiaries or any ERISA Affiliate from any Multiemployer Plan; (iv) the filing of a notice of intent to terminate a Title IV Plan having any Unfunded Pension Liability or the treatment of a plan amendment as a termination under Section 4041 of ERISA; (v) the institution of proceedings to terminate a Title IV Plan or Multiemployer Plan by the PBGC; (vi) the failure to make any required contribution to a Qualified Plan; or (vii) any other event or condition which might reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Title IV Plan or Multiemployer Plan or the imposition of any liability under Title IV of ERISA, other than for PBGC premiums due but not delinquent under Section 4007 of ERISA. "EUROCURRENCY LIABILITIES" has the meaning assigned to that term in Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time. "EURODOLLAR LENDING OFFICE" means, with respect to any Lender, the office of such Lender specified as its "Eurodollar Lending Office" below its name on Schedule II (or, if no such office is specified, its Domestic Lending Office) or such other office of such Lender as such Lender may from time to time specify to the Borrower and the Agent. "EURODOLLAR RATE" means, for any Interest Period, an interest rate per annum equal to the rate per annum obtained by dividing (a) the rate of interest determined by the Agent to be the average (rounded upward to the nearest whole multiple of 1/16 of 1% per annum, if such average is not such a multiple) of the rate per annum at which deposits in U.S. dollars are offered by the principal office of Citibank in London, England to prime banks in the London interbank market at 11:00 A.M. (London time) two Business Days before the first day of such Interest Period in an amount substantially equal to the Eurodollar Rate Loan of Citibank during such Interest Period and for a period equal to such Interest Period by (b) a percentage equal to 100% MINUS the Eurodollar Rate Reserve Percentage for such Interest Period. "EURODOLLAR RATE LOAN" means any outstanding principal amount of the Loans of any Lender that, for an Interest Period, bears interest at a rate determined with reference to the Eurodollar Rate. 17 25 "EURODOLLAR RATE RESERVE PERCENTAGE" for any Interest Period means the reserve percentage applicable two Business Days before the first day of such Interest Period under regulations issued from time to time by the Board of Governors of the Federal Reserve System for determining the maximum reserve requirement (including, without limitation, any emergency, supplemental or other marginal reserve requirement) for a member bank of the Federal Reserve System in New York City with respect to liabilities or assets consisting of or including Eurocurrency Liabilities (or with respect to any other category of liabilities which includes deposits by reference to which the Eurodollar Rate is determined) having a term equal to such Interest Period. "EVENT OF DEFAULT" has the meaning specified in Section 8.1. "FACILITY" means the aggregate of all of the Commitments. "FEDERAL FUNDS RATE" means, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Agent from three Federal funds brokers of recognized standing selected by it. "FISCAL QUARTER" means a fiscal quarter of the Borrower and its consolidated Subsidiaries for financial accounting purposes. "FISCAL YEAR" means the period of 52 or 53 weeks, as the case may be, ending on the Saturday nearest to January 31 of each calendar year. "FIXED CHARGES" means, for any Person for any period, the sum of (i) the Net Interest Expense of such Person for such period, (ii) all principal amounts of Debt having a scheduled due date during such period payable by such Person and each of its Subsidiaries, (iii) all cash dividends payable by such Person on preferred stock in respect of such period or payable by any Subsidiaries of such Person other than to such Person or any of its Subsidiaries, and (iv) the total federal income tax 18 26 liability actually currently payable by such Person in respect of such period. "GAAP" means generally accepted accounting principles in the United States of America as in effect from time to time set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and the statements and pronouncements of the Financial Accounting Standards Board, or in such other statements by such other entity as may be in general use by significant segments of the accounting profession, which are applicable to the circumstances as of the date of determination except that, for purposes of Article V, GAAP shall be determined on the basis of such principles in effect on the date hereof and consistent with those used in the preparation of the audited financial statements referred to in Section 4.5. "GENERAL INTANGIBLES" means any "general intangibles," as such term is defined in Section 9-106 of the UCC, now owned or hereafter acquired by any Loan Party and, in any event, includes, without limitation, all customer lists, trademarks, patents, rights in intellectual property, licenses, permits, copyrights, trade secrets, proprietary or confidential information, inventions (whether patented or patentable or not) and technical information, procedures, designs, knowledge, know-how, software, data bases, data, skill, expertise, experience, processes, models, drawings, materials and records, goodwill, rights of indemnification and all right, title and interest which any Loan Party may now or hereafter have in or under any Contract (as defined in the UCC), now owned or hereafter acquired by any Loan Party. "GOVERNMENTAL AUTHORITY" means any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "GUARANTORS" means Bee-Gee, Chargit and EBWVA. "HAZARDOUS MATERIALS" means any substance, material or waste regulated or forming the basis of liability under any Environmental Law, including, without limitation, any waste, pollutant, hazardous substance, toxic substance, hazardous waste, special waste, petroleum or petroleum-derived substance or waste, asbestos, asbestos containing materials, polychlorinated biphenyls, radon or any constituent or byproduct of any such substance or waste. 19 27 "INDEBTEDNESS" of any Person means, without duplication, (i) all indebtedness of such Person for borrowed money (including, without limitation, reimbursement and all other obligations with respect to surety bonds, letters of credit and bankers' acceptances, whether or not matured) or for the deferred purchase price of property or services, (ii) all obligations of such Person evidenced by notes, bonds, debentures or similar instruments, (iii) all indebtedness of such Person created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), (iv) Capitalized Lease Obligations, (v) all obligations of such Person to purchase, redeem, retire, defease or otherwise acquire for value any Stock of such Person, valued, in the case of redeemable preferred stock, at the greater of its voluntary or involuntary liquidation preference plus related accrued and unpaid dividends, (vi) all obligations of such Person under Interest Rate Contracts, and (vii) all Indebtedness referred to in clause (i), (ii), (iii), (iv), (v) or (vi) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien upon or in property (including, without limitation, and general intangibles) owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness provided that the amount of any such Indebtedness shall not exceed the value of any property so secured, (viii) in the case of the Borrower, the Obligations, (ix) all liabilities of such Person for the return of deposits or payments on account, (x) all liabilities of such Person under Title IV of ERISA, and (xi) all liabilities of such Person that would be shown on a balance sheet of such Person prepared in conformity with GAAP including, without limitation, in the case of the Borrower, the Receivables Securitization Attributable Indebtedness. "INDEMNITEE" has the meaning specified in Section 10.4(b). "INSTRUMENT" means any "instrument," as such term is defined in Section 9-105(1)(i) of the UCC, now owned or hereafter acquired by any Loan Party other than instruments that constitute, or are a part of a group of writings that constitute, Chattel Paper. "INTEREST PERIOD" means in the case of any Eurodollar Rate Loan, (i) initially, the period commencing 20 28 on the date such Eurodollar Rate Loan is made or on the date of conversion of a Base Rate Loan to a Eurodollar Rate Loan and ending one, two or three months thereafter, as selected by the Borrower in its Notice of Borrowing or Notice of Conversion or Continuation given to the Agent pursuant to Section 2.2 or 2.7, and (ii) thereafter, if such Loan is continued, in whole or in part, as a Eurodollar Rate Loan pursuant to Section 2.7, a period commencing on the last day of the immediately preceding Interest Period therefor and ending one, two or three months thereafter, as selected by the Borrower in its Notice of Conversion or Continuation given to the Agent pursuant to Section 2.7; PROVIDED, HOWEVER, that all of the foregoing provisions relating to Interest Periods in respect of Eurodollar Rate Loans are subject to the following: (A) if any Interest Period would otherwise end on a day that is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day, unless, in the case of Eurodollar Rate Loans only, the result of such extension would be to extend such Interest Period into another calendar month, in which event such Interest Period shall end on the immediately preceding Business Day; (B) any Interest Period of one month or more that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of a calendar month; (C) the Borrower may not select any Interest Period which ends after the Termination Date; (D) the Borrower may not select any Interest Period in respect of Loans having an aggregate principal amount of less than $5,000,000; and (E) there shall be outstanding at any one time no more than six Interest Periods in the aggregate. "INTEREST RATE CONTRACTS" means interest rate swap agreements, interest rate cap agreements, interest rate collar agreements, interest rate insurance, and other 21 29 agreements or arrangements designed to provide protection against fluctuations in interest rates. "INVENTORY" means any "inventory," as such term is defined in Section 9-109(4) of the UCC, now owned or hereafter acquired by the Borrower or any of its Subsidiaries, and wherever located, and, in any event, includes, without limitation, all inventory, merchandise, goods and other personal property now owned or hereafter acquired by the Borrower or any of its Subsidiaries which are held for sale or lease or are furnished or are to be furnished under a contract of service or which constitute raw materials, work in process or materials used or consumed or to be used or consumed in the business of the Borrower or any of its Subsidiaries, or the processing, packaging, delivery or shipping of the same, and all finished goods. "INVESTMENT" has the meaning specified in Section 7.5. "IRS" means the Internal Revenue Service, or any successor thereto. "ISSUER" means Citibank or any successor thereto and any other Lender approved by the Majority Lenders who agrees to issue one or more Letters of Credit. "LETTER OF CREDIT" means any letter of credit issued for the account of the Borrower by an Issuer pursuant to Article II. "LETTER OF CREDIT OBLIGATIONS" means, at any time, all liabilities at such time of the Borrower to all Issuers with respect to Letters of Credit, whether or not any such liability is contingent, and includes the sum of (i) the Reimbursement Obligations at such time and (ii) the Letter of Credit Undrawn Amounts at such time. "LETTER OF CREDIT REIMBURSEMENT AGREEMENT" has the meaning specified in Section 2.16(d). "LETTER OF CREDIT REQUEST" has the meaning specified in Section 2.16(e). "LETTER OF CREDIT UNDRAWN AMOUNTS" means, at any time, the aggregate undrawn face amount of all Letters of Credit outstanding at such time. "LIEN" means any mortgage, deed of trust, pledge, hypothecation, assignment, deposit arrangement, encumbrance, 22 30 lien (statutory or other), security interest or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever intended to assure payment of any Indebtedness or other obligation, including, without limitation, any conditional sale or other title retention agreement, the interest of a lessor under a Capitalized Lease Obligation, any financing lease having substantially the same economic effect as any of the foregoing, and the filing, under the UCC or comparable law of any jurisdiction, of any financing statement naming the owner of the asset to which such Lien relates as debtor. "LOAN" means a Revolving Credit Loan or Swing Loan. "LOAN DOCUMENTS" means, collectively, this Agreement, the Notes, the Subsidiary Guarantees, the Collateral Documents, each Letter of Credit Reimbursement Agreement and each certificate, agreement or document executed by a Loan Party and delivered to the Agent or any Lender in connection with or pursuant to any of the foregoing. "LOAN PARTY" means the Borrower or any of its Subsidiaries which executes and delivers a Loan Document and "LOAN PARTIES" means all of them. "MAJORITY LENDERS" means, at any time, Lenders holding at least 51% of the then aggregate unpaid principal amount of the Loans and Letter of Credit Obligations or, if no Loans or Letter of Credit Obligations are then outstanding, Lenders having at least 51% of the Commitments. "MATERIAL ADVERSE CHANGE" means a material adverse change in any of (i) the condition (financial or otherwise), business, performance, prospects, operations or properties of the Borrower and its Subsidiaries taken as a whole, (ii) the legality, validity or enforceability of any Loan Document, (iii) the perfection or priority of the Liens granted or purported to be granted by or pursuant to the Loan Documents, (iv) the ability of the Borrower to repay the Obligations or of any Loan Party to perform its obligations under any Loan Document or (v) the rights and remedies of the Lenders or the Agent under the Loan Documents. "MATERIAL ADVERSE EFFECT" means an effect that results in or causes, or has a reasonable likelihood of resulting in or causing, a Material Adverse Change. 23 31 "MIDDLETOWN BONDS" means the Industrial Development First Mortgage Revenue Bonds in the original aggregate principal amount of $4 million, issued by the County of Warren, Ohio on May 1, 1976, the proceeds of which were used to finance the acquisition and construction of the Borrower's Towne Mall Store located in Franklin, Ohio. "MIDDLETOWN LEASE PAYMENTS" means the lease payments required to made by the Borrower to the trustee for holders of the Middletown Bonds pursuant to that certain Lease, dated May 1, 1976 between the Borrower, as lessee and the County of Warren, Ohio, as lessor, which lease payments are used by the trustee of the holders of the Middletown Bonds to pay the scheduled principal and interest on the Middletown Bonds. "MORAINE MORTGAGE" means that certain mortgage dated March 26, 1990 by and between the Borrower as mortgagor and Principal Mutual Life Insurance Company as mortgagee. "MULTIEMPLOYER PLAN" means a multiemployer plan, as defined in Section 4001(a)(3) of ERISA, and to which any Loan Party, any of its Subsidiaries or any ERISA Affiliate is making, is obligated to make, has made or been obligated to make, contributions on behalf of participants who are or were employed by any of them. "NET INCOME (LOSS)" means, for any Person for any period, the aggregate net income (or loss) from continuing operations of such Person and its Subsidiaries for such period, determined on a consolidated basis in conformity with GAAP. "NET INTEREST EXPENSE" means, for any Person for any period, gross interest expense of such Person and its Subsidiaries for such period determined on a consolidated basis in conformity with GAAP LESS the following for such Person and its Subsidiaries determined on a consolidated basis in conformity with GAAP: (a) the sum of (i) interest capitalized during construction for such period, (ii) interest income (other than in respect of Chargit Receivables and EBWVA Receivables) for such period and (iii) gains for such period on Interest Rate Contracts (to the extent not included in interest income above and to the extent not deducted in the calculation of such gross interest expense) PLUS the following for such Person and its Subsidiaries determined on a consolidated basis in conformity with GAAP: (b) the sum of (i) losses for such period on Interest Rate Contracts (to the extent not 24 32 included in such gross interest expense) and (ii) the amortization of upfront costs or fees for such period associated with any interest rate contract (to the extent not otherwise included in gross interest expense). "NON-FUNDING LENDER" has the meaning specified in Section 2.13(f). "NOTES" means the Revolving Credit Notes. "NOTICE OF BORROWING" has the meaning specified in Section 2.2(a). "NOTICE OF CONVERSION OR CONTINUATION" means a notice in the form of EXHIBIT C hereto. "OBLIGATIONS" means the Loans, the Letter of Credit Obligations and all other advances, debts, liabilities, obligations, covenants and duties owing by the Borrower to the Agent, any Lender, any Issuer, the Swing Loan Bank, any Affiliate of any of them or any Indemnitee, of every type and description, present or future, whether or not evidenced by any note, guaranty or other instrument, arising under this Agreement or under any other Loan Document, whether or not for the payment of money, whether arising by reason of an extension of credit, opening or amendment of a Letter of Credit or payment of any draft drawn thereunder, loan, guaranty, indemnification, foreign exchange transaction or in any other manner, whether direct or indirect (including, without limitation, those acquired by assignment), absolute or contingent, due or to become due, now existing or hereafter arising and however acquired and all obligations of the Borrower to Citibank under Interest Rate Contracts. The term "OBLIGATIONS" includes, without limitation, "Obligations," as defined under the Old Credit Agreement and modified by this Agreement, in existence on the Effective Date, and all interest, charges, expenses, fees, attorneys' fees and disbursements and any other sum chargeable to the Borrower under this Agreement or any other Loan Document and all obligations of the Borrower to cash collateralize Letter of Credit Obligations. "OTHER TAXES" has the meaning specified in Section 2.14(b). "OVER-ADVANCE AMOUNT" means $40,000,000; PROVIDED, HOWEVER, that (i) upon the consummation of a Qualified Public Offering within eighteen months after the Effective Date, the Over-Advance Amount shall be reduced dollar for dollar by the amount of net proceeds to the Borrower from 25 EX-10.B.IV 3 EXHIBIT 10(B)IV 1 Exhibit 10(b)(iv) EXHIBIT I FORM OF AMENDED AND RESTATED SECURITY AGREEMENT AMENDED AND RESTATED SECURITY AGREEMENT, dated July 27, 1998, made by THE ELDER-BEERMAN STORES CORP., an Ohio corporation (the "Borrower"), ELDER-BEERMAN WEST VIRGINIA, INC. a West Virginia corporation ("EBWVA"), THE EL-BEE CHARGIT CORP., an Ohio corporation ("Chargit"), and THE BEE-GEE SHOE CORP., an Ohio corporation ("Bee-Gee" and, together with the Borrower, EBWVA and Chargit, each, a "Grantor" and collectively, the "Grantors") in favor of CITICORP USA, INC., as agent for the financial institutions party to the Amended and Restated Credit Agreement referred to below (in such capacity, the "Agent"). W I T N E S S E T H : - - - - - - - - - - WHEREAS, the Borrower has entered into an Amended and Restated Credit Agreement, dated as of July 27, 1998, with the financial institutions party thereto (the "Lenders"), Citibank, N.A., as issuer (the "Issuer"), and Citicorp USA, Inc. ("CUSA"), as Agent for the Lenders, the Issuer and the Swing Loan Bank (in such capacity, the "Agent") (said Agreement, as it may be amended or otherwise modified from time to time, being the "Amended and Restated Credit Agreement" and capitalized terms not defined herein but defined therein being used herein as therein defined); and WHEREAS, the Borrower owns beneficially and of record 100% of the capital stock of each of EBWVA, Chargit and Bee-Gee and the Borrower and each of EBWVA, Chargit and Bee-Gee are members of the same consolidated group of companies and are engaged in related businesses, and each of EBWVA, Chargit and Bee-Gee will derive direct and indirect economic benefit from the Loans and Letters of Credit; and WHEREAS, each of EBWVA, Chargit and Bee-Gee has entered into a Guaranty, dated December 30, 1997 in the case of Chargit and Bee-Gee, and dated July 27, 1998 in the case of EBWVA, in favor of the Agent for the ratable benefit of the Guarantied Parties (as defined in each Guaranty) (as each may be amended, supplemented or otherwise modified from time to time, being a "Guaranty"); and 1 2 WHEREAS, it is a condition precedent to the making of the Loans and the issuance of the Letters of Credit pursuant to the Amended and Restated Credit Agreement that the Grantors shall have entered into this Agreement; NOW, THEREFORE, in consideration of the premises and in order to induce the Lenders to make the Loans and the Issuer to issue the Letters of Credit each Grantor hereby agrees with the Agent on behalf and for the ratable benefit of the Secured Parties as follows: 1. DEFINED TERMS. As used in this Agreement, the following terms have the meanings specified below (such meanings being equally applicable to both the singular and plural forms of the terms defined): "ACCOUNT" means any "account," as such term is defined in Section 9-106 of the UCC, now owned or hereafter acquired by a Grantor and, in any event, includes, without limitation, (i) all accounts receivable, book debts and other forms of obligations (other than forms of obligations evidenced by Chattel Paper, Documents or Instruments) now owned or hereafter received or acquired by or belonging or owing to such Grantor (including, without limitation, under any trade name, style or division thereof) whether arising out of goods sold or services rendered by such Grantor or from any other transaction, whether or not the same involves the sale of goods or services by such Grantor (including, without limitation, any such obligation which might be characterized as an account or contract right under the UCC), (ii) all of such Grantor's rights in, to and under all purchase orders or receipts now owned or hereafter acquired by it for goods or services, and all of such Grantor's rights to any goods represented by any of the foregoing (including, without limitation, unpaid seller's rights of rescission, replevin, reclamation and stoppage in transit and rights to returned, reclaimed or repossessed goods), (iii) all moneys due or to become due to such Grantor under all contracts for the sale of goods or the performance of services or both by such Grantor (whether or not yet earned by performance on the part of such Grantor or in connection with any other transaction), now in existence or hereafter 2 3 occurring, including, without limitation, the right to receive the proceeds of said purchase orders and contracts, and (iv) all collateral security and guarantees of any kind given by any Person with respect to any of the foregoing. "ACCOUNT DEBTOR" means any "account debtor," as such term is defined in Section 9-105(1)(a) of the UCC. "BROKER" means any "broker," as such term is defined in Chapter 8 (or Article 8) of the UCC, and in any event shall include, but not be limited to, any Person defined as a broker or dealer under the federal securities laws, but without excluding a bank acting in that capacity. "CHATTEL PAPER" means any "chattel paper," as such term is defined in Section 9-105(1)(b) of the UCC, now owned or hereafter acquired by a Grantor. "CLEARING CORPORATION" means any "clearing corporation," as such term is defined in Chapter 8 (or Article 8) of the UCC, and in any event shall include, but not be limited to, any (i) Person that is registered as a "clearing agency" under the federal securities laws, (ii) federal reserve bank, or (iii) other Person that provides clearance or settlement services with respect to Financial Assets that would require it to register as a clearing agency under the federal securities laws but for an exclusion or exemption from the registration requirement, if its activities as a clearing corporation, including promulgation of rules, are subject to regulation by a federal or state Governmental Authority. "COLLATERAL" has the meaning assigned to such term in Section 2 of this Agreement. "CONTRACTS" means all contracts, undertakings or other agreements (other than Chattel Paper, Documents or Instruments) in or under which a Grantor may now or hereafter have any right, title or interest, including, without limitation, with respect to an Account, any agreement relating to the terms of payment or the terms of performance thereof. 3 4 "DOCUMENTS" means any "document," as such term is defined in Section 9-105(1)(f) of the UCC, now owned or hereafter acquired by a Grantor. "ENTITLEMENT HOLDER" means any Person identified in the records of a Securities Intermediary as the Person having a Security Entitlement against the Securities Intermediary. "EQUIPMENT" means any "equipment," as such term is defined in Section 9-109(2) of the UCC, now owned or hereafter acquired by a Grantor and, in any event, includes, without limitation, all machinery, equipment, furnishings, fixtures, vehicles, computers and other electronic data-processing and office equipment now owned or hereafter acquired by such Grantor and any and all additions, substitutions and replacements of any of the foregoing, wherever located, together with all attachments, components, parts, equipment and accessories installed thereon or affixed thereto. "FINANCIAL ASSET" means any financial asset, and in any event shall include, but not be limited to, any (i) Security, (ii) obligation of a Person or a share, participation or other interest in a Person or in property or an enterprise of a Person, which is, or is of a type, dealt in or traded on financial markets, or which is recognized in any area in which it is issued or dealt in as a medium for investment and (iii) any property that is held by a Securities Intermediary for another Person in a Securities Account if the Securities Intermediary has expressly agreed with the other Person that the property is to be treated as a Financial Asset under Chapter 8 (or Article 8) of the UCC. "GENERAL INTANGIBLES" means any "general intangibles," as such term is defined in Section 9-106 of the UCC, now owned or hereafter acquired by a Grantor and, in any event, includes, without limitation, all customer lists, trademarks, patents, rights in intellectual property, licenses, permits, copyrights, trade secrets, proprietary or confidential information, inventions (whether patented or patentable or not) and technical information, procedures, designs, knowledge, 4 5 know-how, software, data bases, data, skill, expertise, experience, processes, models, drawings, materials and records, goodwill, rights of indemnification and all right, title and interest which such Grantor may now or hereafter have in or under any Contract, now owned or hereafter acquired by such Grantor. "GOVERNMENTAL AUTHORITY" means any nation or government, any federal, state, county, municipal, parish, provincial or other political subdivision thereof and any department, commission, board, court, agency or other instrumentality or entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "INSTRUMENT" means any "instrument," as such term is defined in Section 9-105(1)(i) of the UCC, now owned or hereafter acquired by a Grantor, other than instruments that constitute, or are a part of a group of writings that constitute, Chattel Paper. "INVENTORY" means any "inventory," as such term is defined in Section 9-109(4) of the UCC, now owned or hereafter acquired by a Grantor, and wherever located, and, in any event, includes, without limitation, all inventory, merchandise, goods and other personal property now owned or hereafter acquired by such Grantor which are held for sale or lease or are furnished or are to be furnished under a contract of service or which constitute raw materials, work in process or materials used or consumed or to be used or consumed in such Grantor's business, or the processing, packaging, delivery or shipping of the same, and all finished goods. "INVESTMENT PROPERTY" means any investment property, now owned or hereafter acquired, and, in any event, shall include, without limitation, each of the following: (a) any Security, whether certificated or uncertificated, (b) any Security Entitlement, (c) any Securities Account, (d) any Commodity Contract, (e) any Commodity Account, and (f) all proceeds of any of the foregoing. 5 6 "ISSUER" means any "issuer," as such term is defined in Chapter 8 (or Article 8) of the UCC, and in any event shall include, but not be limited to, any Person that, with respect to an obligation on or a defense to a Security, (i) places or authorizes the placing of its name on a Security Certificate, other than as authenticating trustee, registrar, transfer agent or the like, to evidence a share, participation or other interest in its property or in an enterprise, or to evidence its duty to perform an obligation represented by the certificate, (ii) creates a share, participation or other interest in its property or in an enterprise, or undertakes an obligation, that is an Uncertificated Security, (iii) directly or indirectly creates a fractional interest in its rights or property, if the fractional interest is represented by a Security Certificate, or (iv) becomes responsible for, or in the place of, another Issuer. "OBLIGATIONS" means, (a) with respect to the Borrower, the Obligations as defined in the Amended and Restated Credit Agreement and all obligations, now existing or hereafter arising, of the Borrower under this Agreement and (b) with respect to EBWVA, Bee-Gee and Chargit, all the obligations, now existing or hereafter arising, of such Grantor under its Guaranty and all obligations, now existing or hereafter arising, of EBWVA, Bee-Gee and Chargit under this Agreement. "PERMITTED LIENS" means Liens permitted by Section 7.1 of the Amended and Restated Credit Agreement existing as of the date hereof or to be created hereafter. "PERSON" means any individual, corporation, limited liability company, joint venture, general or limited partnership, association, trust, unincorporated organization or Governmental Authority, or other similar entity. "PROCEEDS" means "proceeds," as such term is defined in Section 9-306(1) of the UCC, and, in any event, shall include, without limitation, (i) any and all proceeds of any insurance, indemnity, warranty or guaranty payable to a Grantor from 6 7 time to time with respect to any of the Collateral, (ii) any and all payments (in any form whatsoever) made or due and payable to a Grantor from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of all or any part of the Collateral by any Governmental Authority (or any Person acting under color of Governmental Authority), and (iii) any and all other amounts from time to time paid or payable under or in connection with any of the Collateral. "SECURITIES ACCOUNT" means any account to which a Financial Asset is or may be credited in accordance with an agreement under which the Person maintaining the account undertakes to treat the Person for whom the account is maintained as entitled to exercise the rights that comprise the Financial Asset. "SECURITIES INTERMEDIARY" means any (i) Clearing Corporation, or (ii) Person, including a bank or Broker, that in the ordinary course of its business maintains Securities Accounts for others and is acting in that capacity. "SECURITY" means any "security," as such term is defined in Chapter 8 (or Article 8) of the UCC and, in any event, shall include, but not be limited to, any obligation of an Issuer or a share, participation or other interest in an Issuer or in property or an enterprise of an Issuer: (i) which is represented by a Security Certificate in bearer or registered form, or the transfer of which may be registered upon books maintained for that purpose by or on behalf of the Issuer; (ii) which is one of a class or series or but its terms is divisible into a class or series of shares, participations, interests or obligations; and (iii) which (a) is, or is of a type, dealt in or traded on securities exchanges or securities markets or (b) is a medium for investment and by its terms expressly provides that it is a security governed by Chapter 8 (or Article 8) of the UCC. "SECURITY CERTIFICATE" means any certificate representing a Security. 7 8 "SECURITY ENTITLEMENT" means any of the rights and property interests of an Entitlement Holder with respect to a Financial Asset. "UCC" means the Uniform Commercial Code as the same may, from time to time, be in effect in the State of New York; PROVIDED, HOWEVER, in the event that, by reason of mandatory provisions of law, any or all of the attachment, perfection or priority of the Agent's and the Secured Parties' security interest in any Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than the State of New York, the term "UCC" shall mean the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such attachment, perfection or priority and for purposes of definitions related to such provisions. "UNCERTIFICATED SECURITY" means any "uncertificated security," as such term is defined in Chapter 8 (or Article 8) of the UCC, and in any event shall include, but not be limited to, any Security that is not represented by a certificate. 2. GRANT OF SECURITY INTEREST. (a) As collateral security for the full and prompt payment when due (whether at stated maturity, by acceleration or otherwise) of, and the performance of, all of the Obligations for which it is responsible and to induce the Lenders to make the Loans and the Issuer to issue the Letters of Credit pursuant to the Amended and Restated Credit Agreement, each Grantor hereby assigns, conveys, mortgages, pledges, hypothecates and transfers to the Agent, on behalf and for the ratable benefit of the Secured Parties, and hereby grants to the Agent, on behalf and for the ratable benefit of the Secured Parties, a security interest in, all of such Grantor's right, title and interest in, to and under the following (all of which being hereinafter collectively called the "Collateral"): (i) all Accounts; (ii) all Inventory; 8 9 (iii) all General Intangibles that relate to Inventory; (iv) all of the rights (but none of the obligations) of each of the Borrower and Chargit under (x) the Purchase Agreement between the Borrower and Chargit, (y) the Purchase Agreement between Chargit and The El-Bee Receivables Corporation, each dated as of December 30, 1997, and (z) each of the other Securitization Documents, as each such Purchase Agreement or other Securitization Document may be amended, supplemented or otherwise modified from time to time, and including any and all extensions, renewals, replacements and substitutions of either such Purchase Agreement or other Securitization Document; (v) all Chattel Paper, all Contracts and any and all claims of a Grantor for damages arising out of or for breach of or a default under any Contract and the right of a Grantor to perform or to compel performance under any Contract and to exercise all remedies thereunder, all Documents, all Equipment, all General Intangibles (in addition to all General Intangibles in subsection (iii) above), all Instruments, all other goods and personal property of a Grantor whether tangible or intangible or whether now owned or hereafter acquired by a Grantor and wherever located, excluding, however, any Accounts and related property sold pursuant to the Securitization Documents (as defined in the Amended and Restated Credit Agreement); and (vi) to the extent not otherwise included, all Proceeds of each of the foregoing and all accessions to, substitutions and replacements for, and rents, profits and products of, each of the foregoing, including, without limitation, Proceeds in the form of Accounts, Chattel Paper, Contracts, Documents, Equipment, General Intangibles, Instruments and Investment Property. PROVIDED, HOWEVER, that the property described in clause (v) above shall constitute Collateral only as long as the Over-Advance Amount is greater than zero, and upon the reduction of the Over-Advance 9 10 Amount to zero, the security interest granted to the Agent pursuant to such clause (v) shall automatically be terminated and released without any action by any party. Upon such termination and release, the Agent, at the expense of the Borrower, will execute and deliver to the Borrower such documents as the Borrower may reasonably request to evidence such termination and release. (b) In addition, as collateral security for the prompt and complete payment when due of the Obligations, each Secured Party is hereby granted a lien and security interest in all property of a Grantor held by such Secured Party or any Affiliate of such Secured Party, including, without limitation, all property of every description, now or hereafter in the possession or custody of or in transit to such Secured Party for any purpose, including safekeeping, collection or pledge, for the account of the Grantor, or as to which a Grantor may have any right or power. 3. RIGHTS OF THE SECURED PARTIES; LIMITATIONS ON SECURED PARTIES' OBLIGATIONS. With respect to Accounts, Contracts, Chattel Paper and Instruments Constituting Collateral: (a) It is expressly agreed by each Grantor that, anything herein to the contrary notwithstanding, such Grantor shall remain liable under each of the Contracts to observe and perform all the conditions and obligations to be observed and performed by it thereunder and such Grantor shall perform all of its duties and obligations thereunder, all in accordance with and pursuant to the terms and provisions of each such Contract. Neither the Agent nor any Lender shall have any obligation or liability under any Contract by reason of or arising out of this Agreement or the granting of a security interest in any contract to the Agent on behalf and for the ratable benefit of and the Secured Parties of a security interest therein or the receipt by the Agent or any Lender of any payment relating to any Contract pursuant hereto, nor shall the Agent or any Lender be required or obligated in any manner to perform or fulfill any of the obligations of such Grantor under or pursuant to any Contract, or to make any payment, or to make any inquiry as to the nature or the sufficiency of any payment received by it or the sufficiency of any performance by any party 10 11 under any Contract, or to present or file any claim, or to take any action to collect or enforce any performance or the payment of any amounts which may have been assigned to it or to which it may be entitled at any time or times. (b) The Agent authorizes each Grantor to collect its Accounts, Chattel Paper and Instruments that are Collateral, provided that such collection is performed in a prudent and businesslike manner, and the Agent may, upon the occurrence and during the continuance of any Event of Default and without notice, limit or terminate said authority at any time. If required by the Agent at any time during the continuance of any Event of Default, any Proceeds, when first collected by such Grantor, received in payment of any such Account or in payment for any of its Inventory or on account of any of its Contracts, shall be promptly deposited by such Grantor in precisely the form received (with all necessary indorsements) in a special bank account maintained by the Agent and subject to withdrawal only by the Agent, as hereinafter provided, and until so turned over shall be deemed to be held in trust by such Grantor for and as the Agent's property and shall not be commingled with such Grantor's other funds or properties. Such Proceeds, when deposited, shall continue to be collateral security for all of the Obligations and shall not constitute payment thereof until applied as hereinafter provided. The Agent shall upon the request of the Majority Lenders apply all or a part of the funds on deposit in said special account to the principal of or interest on or both in respect of any of the Obligations in accordance with the provisions of Section 8(d) hereof and any part of such funds which the Majority Lenders elect not so to apply and deem not required as collateral security for the Obligations shall be paid over from time to time by the Agent to such Grantor. If an Event of Default has occurred and is continuing, at the request of the Agent such Grantor shall deliver to the Agent all original and other documents evidencing, and relating to, the sale and delivery of such Inventory or the performance of labor or service which created such Accounts, including, without limitation, all original orders, invoices and shipping receipts. (c) The Agent may at any time, upon the occurrence and during the continuance of any Default or 11 12 Event of Default, after first notifying the relevant Grantor of its intention to do so, notify Account Debtors of such Grantor, parties to Contracts of such Grantor, obligors of Instruments of such Grantor and obligors in respect of Chattel Paper of such Grantor that the Accounts and the right, title and interest of such Grantor in and under such Contracts, such Instruments and such Chattel Paper have been assigned to the Agent and that payments shall be made directly to the Agent. Upon the request of the Agent, such Grantor will so notify such Account Debtors, parties to such Contracts, obligors of such Instruments and obligors in respect of such Chattel Paper. Upon the occurrence and during the continuance of an Event of Default, the Agent may in its own name or in the name of others communicate with such Account Debtors, parties to such Contracts, obligors of such Instruments and obligors in respect of such Chattel Paper to verify with such Persons to the Agent's satisfaction the existence, amount and terms of any such Accounts, Contracts, Instruments or Chattel Paper. (d) Upon reasonable prior notice to the relevant Grantor (unless an Event of Default has occurred and is continuing, in which case no notice is necessary), the Agent shall have the right to make test verifications of the Accounts and physical verifications of the Inventory of such Grantor in any manner and through any medium that it considers advisable, and each Grantor agrees to furnish all such assistance and information as the Agent may require in connection therewith. 4. REPRESENTATIONS AND WARRANTIES. Each Grantor hereby represents and warrants to the Secured Parties as follows: (a) Each Grantor is a corporation duly incorporated, validly existing and in good standing under the laws of the state of its organization. (b) The execution, delivery and performance by each Grantor of this Agreement are within such Grantor's corporate powers, have been duly authorized by all necessary corporate action, do not contravene such Grantor's certificate of incorporation or by-laws, any Requirement of Law or any order or decree of any court, or any Contractual Obligation of such Grantor, and do not result in or require the creation of any 12 13 Lien (other than pursuant to the Amended and Restated Credit Agreement) upon or with respect to any of its properties. (c) No consent, authorization, approval or other action by, and no notice to or filing with, any Governmental Authority is required for the due execution, delivery and performance by each Grantor of this Agreement. (d) This Agreement has been duly executed and delivered by each Grantor and is the legal, valid and binding obligation of such Grantor, enforceable against such Grantor in accordance with its terms. (e) There are no pending or threatened actions, investigations or proceeding affecting any Grantor or any of its Subsidiaries before any court, Governmental Authority or arbitrator other than those that in the aggregate could not reasonably be expected to have a Material Adverse Effect. (f) Each Grantor is the sole owner of each item of the Collateral in which it purports to grant a security interest hereunder, having good title thereto, free and clear of any and all Liens, except for the security interest granted pursuant to this Agreement and other Permitted Liens. No material amounts payable under or in connection with any of its Accounts or Contracts (to the extent constituting Collateral) are evidenced by Instruments which have not been delivered to the Agent. (g) No effective security agreement, financing statement, equivalent security or lien instrument or continuation statement covering all or any part of the Collateral is on file or of record in any public office, except such as may have been filed by any Grantor in favor of the Agent pursuant to this Agreement or such as relate to other Permitted Liens. (h) Appropriate financing statements having been filed in the jurisdictions listed on Schedule I hereto, this Agreement is effective to create a valid and continuing first priority Lien on and prior to all other Liens except Permitted Liens. All action necessary or desirable to protect and perfect such 13 14 security interest in each item of the Collateral has been duly taken. (i) Each Grantor's principal place of business and the place where its records concerning the Collateral are kept and the location of its Inventory and Equipment are set forth on Schedule II hereto. (j) The amount represented by each Grantor to the Agent from time to time as owing by each Account Debtor or by all Account Debtors in respect of the Accounts of such Grantor will at such time be the correct amount actually and unconditionally owing by such Account Debtors thereunder. 5. COVENANTS. Each Grantor covenants and agrees with the Agent and the Lenders that from and after the date of this Agreement and until the Obligations are fully satisfied: (a) FURTHER DOCUMENTATION; PLEDGE OF INSTRUMENTS. At any time and from time to time, upon the written request of the Agent, and at the sole expense of each Grantor, such Grantor will promptly and duly execute and deliver any and all such further instruments and documents and take such further action as the Agent may reasonably deem desirable to obtain the full benefits of this Agreement and of the rights and powers herein granted, including, without limitation, using its best efforts to secure all consents and approvals necessary or appropriate for the assignment to the Agent of any Contract (to the extent constituting part of the Collateral) held by such Grantor or in which such Grantor has any rights not heretofore assigned, the filing of any financing or continuation statements under the UCC with respect to the Liens and security interests granted hereby, transferring Collateral to the Agent's possession (if a security interest in such Collateral can be perfected by possession) and placing the interest of the Agent as lienholder on the certificate of title of any vehicle. Each Grantor also hereby authorizes the Agent to file any such financing or continuation statement without the signature of such Grantor to the extent permitted by applicable law. If any of the Collateral shall be or become evidenced by any Instrument, each Grantor agrees to pledge such Instrument to the Agent and shall duly endorse such 14 15 Instrument in a manner satisfactory to the Agent and deliver the same to the Agent. (b) MAINTENANCE OF RECORDS. Each Grantor will keep and maintain at its own cost and expense satisfactory and complete records of the Collateral, including, without limitation, a record of all payments received and all credits granted with respect to the Collateral and all other dealings with the Collateral. Each Grantor will mark its books and records pertaining to the Collateral to evidence this Agreement and the Lien and security interests granted hereby. If requested by the Agent, all Chattel Paper that is Collateral will be marked with the following legend: "This writing and the obligations evidenced or secured hereby are subject to the security interest of Citicorp USA, Inc., as the Agent". If requested by the Agent, the security interest of the Agent shall be noted on the certificate of title of each vehicle that is Collateral. For the Agent's and the Lenders' further security, each Grantor agrees that, upon the occurrence and during the continuance of any Event of Default, each Grantor shall deliver and turn over all of such Grantor's books and records pertaining to the Collateral to the Agent or to its representatives at any time on demand of the Agent. Prior to the occurrence of an Event of Default and upon reasonable notice from the Agent, each Grantor shall permit any representative of the Agent to inspect such books and records and will provide photocopies thereof to the Agent all in accordance with the provisions of the Amended and Restated Credit Agreement. (c) INDEMNIFICATION. In any suit, proceeding or action brought by the Agent or any Lender relating to any Account, Chattel Paper, Contract, General Intangible or Instrument constituting Collateral for any sum owing thereunder, or to enforce any provision of any such Account, Chattel Paper, Contract, General Intangible or Instrument, each Grantor will save, indemnify and keep each of the Agent and the Lenders harmless from and against all expense, loss or damage suffered by reason of any defense, set-off, counterclaim, recoupment or reduction of liability whatsoever of the obligor thereunder, arising out of a breach by such Grantor of any obligation thereunder or arising out of any other agreement, Indebtedness or liability at any time owing to, or in favor of, such obligor or its successors from such Grantor, and all 15 16 such obligations of such Grantor shall be and remain enforceable against and only against such Grantor and shall not be enforceable against the Agent or the Lenders. (d) COMPLIANCE WITH LAWS, ETC. Each Grantor will comply, in all material respects, with all acts, rules, regulations, orders, decrees and directions of any Governmental Authority, applicable to the Collateral or any part thereof or to the operation of such Grantor's business; PROVIDED, HOWEVER, that such Grantor may contest any act, regulation, order, decree or direction in any reasonable manner which shall not, in the sole opinion of the Agent, adversely affect the Agent's rights hereunder or adversely affect the first priority of its Lien on and security interest in the Collateral. (e) PAYMENT OF OBLIGATIONS. Each Grantor will pay promptly when due all taxes, assessments and governmental charges or levies imposed upon the Collateral or in respect of its income or profits therefrom and all claims of any kind (including, without limitation, claims for labor, materials and supplies), except that no such charge need be paid if (i) such non-payment does not involve any danger of the sale, forfeiture or loss of any of the Collateral or any interest therein, and (ii) such charge is adequately reserved against in accordance with and to the extent required by GAAP. (f) COMPLIANCE WITH TERMS OF ACCOUNTS, ETC. In all material respects, each Grantor will comply with and perform with all obligations, covenants, conditions and agreements with respect to any Account, Chattel Paper, Contract, License and all other agreements to which it is a party or by which it is bound (to the extent constituting Collateral). (g) LIMITATION ON LIENS ON COLLATERAL. No Grantor will create, permit or suffer to exist, and each Grantor will defend the Collateral against and take such other action as is necessary to remove, any Lien on the Collateral except Permitted Liens, and will defend the right, title and interest of the Agent and the Lenders in and to any of such Grantor's rights under the Chattel Paper, Contracts, Documents, Equipment, General Intangibles and Instruments (to the extent constituting Collateral) and to the Inventory 16 17 and in and to the Proceeds thereof against the claims and demands of all Persons whomsoever. (h) LIMITATIONS ON MODIFICATIONS OF ACCOUNTS. Upon the occurrence and during the continuance of any Event of Default, no Grantor will, without the Agent's prior written consent, grant any extension of the time of payment of any of the Accounts, Chattel Paper or Instruments that are Collateral or compromise, compound or settle the same for less than the full amount thereof, or release, wholly or partly, any Person liable for the payment thereof, or allow any credit or discount whatsoever thereon. (i) MAINTENANCE OF INSURANCE. Each Grantor will maintain, with financially sound and reputable companies, insurance policies (i) insuring its Inventory and, to the extent constituting Collateral, Equipment against loss by fire, explosion, theft and such other casualties as are usually insured against by companies engaged in the same or similar businesses and (ii) insuring such Grantor and the Agent and the Banks against liability for personal injury and property damage relating to such Inventory and, to the extent constituting Collateral, Equipment, such policies to be in such amounts and against at least such risks as are usually insured against in the same general area by companies engaged in the same or a similar business, naming the Agent as an additional insured with a lender loss payable clause in favor of the Agent on behalf and for the ratable benefit of the Secured Parties. Each Grantor shall, if so requested by the Agent, deliver to the Agent as often as the Agent may reasonably request, a report of a reputable insurance broker satisfactory to the Agent with respect to the insurance on such Inventory and, to the extent constituting Collateral, Equipment. All insurance with respect to such Inventory and, to the extent constituting Collateral, Equipment shall (i) contain a clause which provides that the Secured Parties' interest under the policy will not be invalidated by any act or omission of, or any breach of warranty by, the insured, or by any change in the title, ownership or possession of the insured property, or by the use of the property for purposes more hazardous than is permitted in the policy, and (ii) provide that no cancellation, reduction in amount or change in coverage thereof shall 17 18 be effective until at least ten days after receipt by the Agent of written notice thereof. (j) LIMITATIONS ON DISPOSITION. No Grantor will sell, lease, transfer or otherwise dispose of any of the Collateral, or attempt or contract to do so, except as permitted by the Amended and Restated Credit Agreement. (k) FURTHER IDENTIFICATION OF COLLATERAL. Each Grantor will, if so requested by the Agent, furnish to the Agent, as often as the Agent reasonably requests, statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Agent may reasonably request, all in reasonable detail. (l) NOTICES. Each Grantor will advise the Agent promptly, in reasonable detail, (i) of any material Lien or claim made or asserted against any of the Collateral, (ii) of any material change in the composition of the Collateral, and (iii) of the occurrence of any other event which would have a material adverse effect on the aggregate value of the Collateral or in the security interests created hereunder. (m) RIGHT OF INSPECTION. Upon reasonable notice to the relevant Grantor (unless an Event of Default has occurred and is continuing, in which case no notice is necessary), the Agent shall at all times have full and free access during normal business hours to all the books and records and correspondence of such Grantor, and the Agent or its representatives may examine the same, take extracts therefrom and make photocopies thereof, and such Grantor agrees to render to the Agent, at such Grantor's cost and expense after an Event of Default has occurred and is continuing, such clerical and other assistance as may be reasonably requested with regard thereto. Upon reasonable notice to the relevant Grantor (unless an Event of Default has occurred and is continuing, in which case no notice is necessary), the Agent and its representatives shall also have the right to enter into and upon any premises where any of the Inventory or Equipment is located for the purpose of inspecting the same, observing its use or otherwise protecting its interests therein. 18 19 (n) MAINTENANCE OF EQUIPMENT. Each Grantor will keep and maintain its Equipment, to the extent constituting Collateral, in good operating condition sufficient for the continuation of the business conducted by such Grantor on a basis consistent with past practices, and such Grantor will provide all maintenance and service and all repairs necessary for such purpose. (o) CONTINUOUS PERFECTION. No Grantor will change its name, identity or corporate structure in any manner which might make any financing or continuation statement filed in connection herewith seriously misleading within the meaning of Section 9-402(7) of the UCC (or any other then applicable provision of the UCC) unless such Grantor shall have given the Agent at least 30 days' prior written notice thereof and shall have taken all action (or made arrangements to take such action substantially simultaneously with such change if it is impossible to take such action in advance) necessary or reasonably requested by the Agent to amend such financing statement or continuation statement so that it is not seriously misleading. No Grantor will change its principal place of business or remove its records or change the location of its Inventory and, to the extent constituting Collateral, Equipment, each as set forth on Schedule II hereto, unless it gives the Agent at least 30 days' prior written notice thereof and has taken such action as is necessary to cause the security interest of the Agent in the Collateral to continue to be perfected. 6. THE AGENT'S APPOINTMENT AS ATTORNEY-IN-FACT. (a) Each Grantor hereby irrevocably constitutes and appoints the Agent and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of such Grantor and in the name of such Grantor or in its own name, from time to time in the Agent's discretion, for the purpose of carrying out the terms of this Agreement, to take any and all appropriate action and to execute and deliver any and all documents and instruments which the Agent may deem necessary or desirable to accomplish the purposes of this Agreement and, without limiting the generality of the foregoing, hereby gives the Agent the power and right, on behalf of such Grantor, without 19 20 notice to or assent by such Grantor to do the following: (i) to ask, demand, collect, receive and give acquittances and receipts for any and all moneys due and to become due under any Collateral and, in the name of such Grantor or in its own name or otherwise, to take possession of and endorse and collect any checks, drafts, notes, acceptances or other Instruments for the payment of moneys due under any Collateral and to file any claim or to take any other action or proceeding in any court of law or equity or otherwise deemed appropriate by the Agent for the purpose of collecting any and all such moneys due under any Collateral whenever payable and to file any claim or to take any other action or proceeding in any court of law or equity or otherwise deemed appropriate by the Agent for the purpose of collecting any and all such moneys due under any Collateral whenever payable; (ii) to pay or discharge taxes, Liens, security interests or other encumbrances levied or placed on or threatened against the Collateral, to effect any repairs or any insurance called for by the terms of this Agreement and to pay all or any part of the premiums therefor and the costs thereof; and (iii) (A) to direct any party liable for any payment under any of the Collateral to make payment of any and all moneys due, and to become due thereunder, directly to the Agent or as the Agent shall direct; (B) to receive payment of and receipt for any and all moneys, claims and other amounts due, and to become due at any time, in respect of or arising out of any Collateral; (C) to sign and indorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications and notices in connection with Accounts and other Documents constituting or relating to the Collateral; (D) to commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect the Collateral or any part thereof and to enforce any other right 20 21 in respect of any Collateral; (E) to defend any suit, action or proceeding brought against such Grantor with respect to any Collateral; (F) to settle, compromise or adjust any suit, action or proceeding described above and, in connection therewith, to give such discharges or releases as the Agent may deem appropriate; (G) to license or, to the extent permitted by an applicable license, sublicense, whether general, special or otherwise, and whether on an exclusive or non-exclusive basis, any patent or trademark, throughout the world for such term or terms, on such conditions, and in such manner, as the Agent shall in its sole discretion determine; and (H) generally to sell, transfer, pledge, make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though the Agent were the absolute owner thereof for all purposes, and to do, at the Agent's option and such Grantor's expense, at any time, or from time to time, all acts and things which the Agent reasonably deems necessary to protect, preserve or realize upon the Collateral and the Agent's and the Lenders' Lien therein, in order to effect the intent of this Agreement, all as fully and effectively as such Grantor might do. (b) The Agent agrees that, except upon the occurrence and during the continuance of an Event of Default, it will forbear from exercising the power of attorney or any rights granted to the Agent pursuant to this Section 6. Each Grantor hereby ratifies, to the extent permitted by law, all that any said attorney shall lawfully do or cause to be done by virtue hereof. The power of attorney granted pursuant to this Section 6, being coupled with an interest, shall be irrevocable until the Obligations are indefeasibly paid in full. (c) The powers conferred on the Agent hereunder are solely to protect the Agent's and the Lenders' interests in the Collateral and shall not impose any duty upon it to exercise any such powers. The Agent shall be accountable only for amounts that it actually receives as a result of the exercise of such powers and neither it nor any of its officers, directors, employees or agents shall be responsible to any Grantor 21 22 for any act or failure to act, except for its own gross negligence or willful misconduct. (d) Each Grantor also authorizes the Agent, at any time and from time to time upon the occurrence and during the continuance of an Event of Default, (i) to communicate in its own name with any party to any Contract with regard to the assignment of the right, title and interest of such Grantor in and under the Contracts hereunder and other matters relating thereto and (ii) to execute, in connection with the sale provided for in Section 8 hereof, any indorsements, assignments or other instruments of conveyance or transfer with respect to the Collateral. 7. PERFORMANCE BY THE AGENT OF EACH GRANTOR'S OBLIGATIONS. If any Grantor fails to perform or comply with any of its agreements contained herein and the Agent, as provided for by the terms of this Agreement, shall itself perform or comply, or otherwise cause performance or compliance, with such agreement, the reasonable expenses of the Agent incurred in connection with such performance or compliance, together with interest thereon at the highest rate then in effect in respect of the Loans, shall be payable by such Grantor to the Agent on demand and shall constitute Obligations secured hereby. 8. REMEDIES, RIGHTS UPON AN EVENT OF DEFAULT. (a) If an Event of Default shall occur and be continuing, the Agent shall, at the request of the Majority Lenders, or may with the consent of the Majority Lenders, exercise in addition to all other rights and remedies granted to it in this Agreement and in any other instrument or agreement securing, evidencing or relating to the Obligations, all rights and remedies of a secured party under the UCC. Without limiting the generality of the foregoing, each Grantor expressly agrees that in any such event the Agent, without demand of performance or other demand, advertisement or notice of any kind (except the notice specified below of time and place of public or private sale) to or upon such Grantor or any other Person (all and each of which demands, advertisements and/or notices are hereby expressly waived to the maximum extent permitted by the UCC and other applicable law), may forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may 22 23 forthwith sell, lease, assign, give an option or options to purchase, or sell or otherwise dispose of and deliver said Collateral (or contract to do so), or any part thereof, in one or more parcels at public or private sale or sales, at any exchange or broker's board or any of the Agent's offices or elsewhere at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. The Agent or any Lender shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of said Collateral so sold, free of any right or equity of redemption, which equity of redemption such Grantor hereby releases to the fullest extent permitted by law. Each Grantor further agrees, at the Agent's request to assemble the Collateral and make it available to the Agent at places which the Agent shall reasonably select, whether at such Grantor's premises or elsewhere. The Agent shall apply the net proceeds of any such collection, recovery receipt, appropriation, realization or sale, as provided in Section 8(d) hereof, each Grantor remaining liable for any deficiency remaining unpaid after such application, and only after so paying over such net proceeds and after the payment by the Agent of any other amount required by any provision of law, including Section 9-504(1)(c) of the UCC, need the Agent account for the surplus, if any, to such Grantor. To the maximum extent permitted by applicable law, each Grantor waives all claims, damages, and demands against the Secured Parties arising out of the repossession, retention or sale of the Collateral. Each Grantor agrees that the Agent need not give more that ten days' notice of the time and place of any public sale or of the time after which a private sale may take place and that such notice is reasonable notification of such matters. Each Grantor shall remain liable for any deficiency if the proceeds of any sale or disposition of the Collateral are insufficient to pay all amounts to which the Secured Parties are entitled, such Grantor also being liable for the fees and expenses of any attorneys employed by the Agent and the Lenders to collect such deficiency. (b) Each Grantor also agrees to pay all costs of the Agent and the Lenders, including, without limitation, attorneys' fees, incurred in connection 23 24 with the enforcement of any of its rights and remedies hereunder. (c) Each Grantor hereby waives presentment, demand, protest or any notice (to the maximum extent permitted by applicable law) of any kind in connection with this Agreement or any Collateral. (d) The Proceeds of any sale, disposition or other realization upon all or any part of the Collateral shall be distributed by the Agent in the following order of priorities: First, to the payment of the costs and expenses of such sale, including, without limitation, all expenses of the Agent and its agents including the fees and expenses of its counsel, and all expenses, liabilities and advances made or incurred by the Agent and the Lenders in connection therewith or pursuant to Section 7 hereof; Next, to the Lenders and the Agent, pro rata, for the payment in full of the Obligations; and Finally, after payment in full of all the Obligations, to the payment to the Grantor of such Collateral, or its successors or assigns, or to whomsoever may be lawfully entitled to receive the same as a court of competent jurisdiction may direct. 9. LIMITATION ON THE SECURED PARTIES' DUTY IN RESPECT OF COLLATERAL. No Secured Party shall have any duty as to any Collateral in its possession or control or in the possession or control of any agent or nominee of it or any income thereon or as to the preservation of rights against prior parties or any other rights pertaining thereto, except that each Secured Party shall use reasonable care with respect to the Collateral in its possession or under its control. Upon request of the relevant Grantor, the Agent shall account for any moneys received by it in respect of any foreclosure on or disposition of the Collateral. 10. NOTICES. All notices and other communications provided for hereunder shall be in writing (including telegraphic, telex, telecopy, or cable communication) and mailed, telegraphed, telexed, telecopied, cabled or delivered by hand, if to any Grantor, addressed to it at the address indicated on the signature pages hereto, and if to 24 25 any Secured Party, addressed to it at the address of such Secured Party specified in the Amended and Restated Credit Agreement, or, as to each party, at such other address as shall be designated by such party in a written notice to each other party complying as to delivery with the terms of this Section. All such notices and other communications shall, when mailed, telegraphed, telexed, telecopied, cabled or delivered, be effective when deposited in the mails, delivered to the telegraph company, confirmed by telex answerback, telecopied with confirmation or receipt, delivered to the cable company, or delivered by hand to the addressee or its agent, respectively. 11. AMENDMENTS, ETC. No amendment or waiver of any provision of this Agreement nor consent to any departure by any Grantor therefrom shall in any event be effective unless the same shall be in writing, approved by the Majority Lenders (except where under Section 10.1 of the Amended and Restated Credit Agreement, the approval of each Lender is required) and signed by the Agent, and then any such waiver or consent shall only be effective in the specific instance and for the specific purpose for which given. 12. NO WAIVER; REMEDIES. (a) No failure on the part of any Secured Party to exercise, and no delay in exercising any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative, may be exercised singly or concurrently, and are not exclusive of any remedies provided by law or any of the other Loan Documents. (b) Failure by any of the Secured Parties at any time or times hereafter to require strict performance by any Grantor or any other Person of any of the provisions, warranties, terms or conditions contained in any of the Loan Documents now or at any time or times hereafter executed by such Grantor or any such other Person and delivered to any of the Secured Parties shall not waive, affect or diminish any right of any of the Secured Parties at any time or times hereafter to demand strict performance thereof, and such right shall not be deemed to have been modified or waived by any course of conduct or knowledge of any of the Secured Parties, or any agent, officer or employee of any Secured Party. 25 26 13. SUCCESSORS AND ASSIGNS. This Agreement and all obligations of each Grantor hereunder shall be binding upon the successors and assigns of such Grantor, and shall, together with the rights and remedies of the Agent hereunder, inure to the benefit of the Agent, the Lenders, and their respective successors and assigns. 14. GOVERNING LAW. This Agreement shall be governed by, and be construed and interpreted in accordance with, the law of the State of New York. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity and without invalidating the remaining provisions of this Agreement. 15. WAIVER OF JURY TRIAL. Each Grantor waives any right it may have to trial by jury in any action or proceeding to enforce or defend any rights or remedies hereunder, under the Amended and Restated Credit Agreement or under any of the other Loan Documents or any other document relating to any of the foregoing. 16. FURTHER INDEMNIFICATION. Each Grantor agrees to pay, and to save the Agent and each Lender harmless from, any and all liabilities with respect to, or resulting from any delay in paying, any and all excise, sales or other similar taxes which may be payable or determined to be payable with respect to any of the Collateral or in connection with any of the transactions contemplated by this Agreement. 17. SECTION TITLES. The Section titles contained in this Agreement are and shall be without substantive meaning or content of any kind whatsoever and are not a part of this Agreement. 26 27 IN WITNESS WHEREOF, each Grantor has caused this Agreement to be executed and delivered by its duly authorized officer on the date first above written. Address: THE ELDER-BEERMAN STORES CORP. By:_________________________ Name: Title: Address: ELDER-BEERMAN WEST VIRGINIA By:_________________________ Name: Title: Address: THE BEE-GEE SHOE CORP. By:_________________________ Name: Title: Address: THE EL-BEE CHARGIT CORP. By:_________________________ Name: Title: Accepted and acknowledged by: CITICORP USA, INC., as Agent By:______________________________ Name: Title: 27 28 SCHEDULE I TO SECURITY AGREEMENT FILINGS ------- JURISDICTION FILING OFFICE ------------ ------------- 29 SCHEDULE II TO SECURITY AGREEMENT LOCATION OF RECORDS AND CERTAIN COLLATERAL ------------------------------------------ Principal Place of Business and Location of Records - --------------------- Location of Inventory and Equipment - -------------- EX-10.B.VII 4 EXHIBIT 10(B)VII 1 Exhibit 10(b)(vii) EXHIBIT H FORM OF ELDER-BEERMAN WEST VIRGINIA, INC. GUARANTY GUARANTY, dated July 27, 1998, made by ELDER-BEERMAN WEST VIRGINIA, INC. a West Virginia corporation (the "Guarantor"), in favor of the Guarantied Parties referred to below. W I T N E S S E T H: - - - - - - - - - - WHEREAS, THE ELDER-BEERMAN STORES CORP, an Ohio corporation (the "Borrower"), has entered into an Amended and Restated Credit Agreement, dated as of July 27, 1998, with the financial institutions party thereto (the "Lenders"), Citibank, N.A., as issuer (the "Issuer"), and CITICORP USA, INC. ("CUSA"), as Agent for the Lenders, the Issuer and the Swing Loan Bank (in such capacity, the "Agent") (said Agreement, as it may be amended or otherwise modified from time to time, being the "Amended and Restated Credit Agreement", and capitalized terms not defined herein but defined therein being used herein as therein defined); and WHEREAS, the Borrower owns beneficially and of record 100% of the capital stock of the Guarantor, and the Borrower and the Guarantor are members of the same consolidated group of companies and are engaged in related businesses, and the Guarantor will derive direct and indirect economic benefit from the Loans and Letters of Credit; and WHEREAS, it is a condition precedent under the Amended and Restated Credit Agreement to the making of the Loans and the issuance of the Letters of Credit that the Guarantor shall have executed and delivered this Guaranty; and WHEREAS, the Lenders, the Issuer, the Agent and Citibank, as obligee of the Borrower on Interest Rate Contracts, are herein referred to collectively as the "Guarantied Parties"; H-1 2 NOW, THEREFORE, in consideration of the premises and to induce the Lenders to make Loans and the Issuer to issue Letters of Credit, the Guarantor hereby agrees as follows: SECTION 1. GUARANTY. The Guarantor hereby unconditionally and irrevocably guarantees the full and prompt payment when due, whether at stated maturity, by acceleration or otherwise, of, and the performance of, the Obligations, whether now or hereafter existing and whether for principal, interest, fees, expenses or otherwise, and any and all expenses (including, without limitation, counsel fees and expenses) incurred by any of the Guarantied Parties in enforcing any rights under this Guaranty. This Guaranty is an absolute guaranty of payment and performance and not a guaranty of collection. SECTION 2. GUARANTY ABSOLUTE. The Guarantor guaranties that the Obligations will be paid strictly in accordance with the terms of the Amended and Restated Credit Agreement, the Notes and the other Loan Documents, regardless of any law, regulation or order now or hereafter in effect in any jurisdiction affecting any of such terms or the rights of the Guarantied Parties with respect thereto. The liability of the Guarantor under this Guaranty shall be absolute and unconditional irrespective of: (i) any lack of validity or enforceability of any provision of any other Loan Document or any other agreement or instrument relating to any Loan Document, or avoidance or subordination of any of the Obligations; (ii) any change in the time, manner or place of payment of, or in any other term of, or any increase in the amount of, all or any of the Obligations, or any other amendment or waiver of any term of, or any consent to departure from any requirement of, the Amended and Restated Credit Agreement, the Notes or any of the other Loan Documents; (iii) any exchange, release or non-perfection of any Lien on any collateral for, or any release or amendment or waiver of any term of any other guaranty of, or any consent to departure from any requirement of any other guaranty of, all or any of the Obligations; (iv) the absence of any attempt to collect any of the Obligations from the Borrower or for any other guarantor H-2 3 or any other action to enforce the same or the election of any remedy by any of the Guarantied Parties; (v) any waiver, consent, extension, forbearance or granting of any indulgence by any of the Guarantied Parties with respect to any provision of any other Loan Document; (vi) the election by any of the Guarantied Parties in any proceeding under chapter 11 of the Bankruptcy Code of the application of section 1111(b)(2) of the Bankruptcy Code; (vii) any borrowing or grant of a security interest by the Borrower, as debtor-in-possession, under section 364 of the Bankruptcy Code; (viii) the disallowance, under section 502 of the Bankruptcy Code, of all or any portion of the claims of any of the Guarantied Parties for payment of any of the Obligations; or (ix) any other circumstance which might otherwise constitute a legal or equitable discharge or defense of a borrower or a guarantor. SECTION 3. WAIVER. (a) The Guarantor hereby (i) waives (A) promptness, diligence, notice of acceptance and any and all other notices with respect to any of the Obligations or this Guaranty, (B) any requirement that any of the Guarantied Parties protect, secure, perfect or insure any security interest in or other Lien on any property subject thereto or exhaust any right or take any action against the Borrower or any other Person or any Collateral, (C) the filing of any claim with a court in the event of receivership or bankruptcy of the Borrower, (D) protest or notice with respect to nonpayment of all or any of the Obligations, (E) the benefit of any statute of limitation, (F) all demands whatsoever (and any requirement that the same be made on the Borrower as a condition precedent to the Guarantor's obligations hereunder); and (ii) covenants and agrees that this Guaranty will not be discharged except by complete performance of the Obligations and any other obligations of the Guarantor contained herein. (b) If, in the exercise of any of its rights and remedies, any of the Guarantied Parties shall forfeit any of its rights or remedies, including, without limitation, its H-3 4 right to enter a deficiency judgment against the Borrower or any other Person, whether because of any applicable law pertaining to "election of remedies" or the like, the Guarantor hereby consents to such action by such Guarantied Party and waives any claim based upon such action. Any election of remedies which results in the denial or impairment of the right of such Guarantied Party to seek a deficiency judgment against the Borrower shall not impair the obligation of the Guarantor to pay the full amount of the Obligations or any other obligation of the Guarantor contained herein. (c) The Guarantor agrees that notwithstanding the foregoing and without limiting the generality of the foregoing if, after the occurrence and during the continuance of an Event of Default, the Guarantied Parties are prevented by applicable law from exercising their respective rights to accelerate the maturity of the Obligations, to collect interest on the Obligations, or to enforce or exercise any other right or remedy with respect to the Obligations, or the Agent is prevented from taking any action to realize on the Collateral, the Guarantor agrees to pay to the Agent for the account of the Guarantied Parties, upon demand therefor, the amount that would otherwise have been due and payable had such rights and remedies been permitted to be exercised by the Guarantied Parties. (d) The Guarantor hereby assumes responsibility for keeping itself informed of the financial condition of the Borrower and of each other guarantor of all or any part of the Obligations, and of all other circumstances bearing upon the risk of nonpayment of the Obligations or any part thereof, that diligent inquiry would reveal. The Guarantor hereby agrees that the Guarantied Parties shall have no duty to advise the Guarantor of information known to any of the Guarantied Parties regarding such condition or any such circumstance. In the event that any Guarantied Party in its sole discretion undertakes at any time or from time to time to provide any such information to the Guarantor, such Guarantied Party shall be under no obligation (i) to undertake any investigation not a part of its regular business routine, (ii) to disclose any information which, pursuant to accepted or reasonable banking or commercial finance practices, such Guarantied Party wishes to maintain confidential or (iii) to make any other or future disclosures of such information or any other information to the Guarantor. H-4 5 (e) The Guarantor consents and agrees that the Guarantied Parties shall be under no obligation to marshall any assets in favor of the Guarantor or otherwise in connection with obtaining payment of any or all of the Obligations from any Person or source. SECTION 4. DELAY OF SUBROGATION, ETC. The Guarantor agrees that it will not exercise any rights which it may acquire by way of subrogation, contribution or reimbursement by reason of this Guaranty or by any payment made hereunder until the Obligations have been paid in full. SECTION 5. REPRESENTATIONS AND WARRANTIES. The Guarantor hereby represents and warrants to the Guarantied Parties as follows: (a) The Guarantor (i) is a corporation duly organized, validly existing and in good standing under the laws of the State of West Virginia, (ii) is duly qualified as a foreign corporation and in good standing under the laws of each jurisdiction, except for failures which in the aggregate would have no Material Adverse Effect, (iii) has all requisite corporate power and authority and the legal right to own, pledge, mortgage and operate its properties, to lease the property it operates under lease and to conduct its business as now or currently proposed to be conducted, (iv) is in compliance with its certificate of incorporation and by-laws, (v) is in compliance with all other applicable Requirements of Law except for such noncompliances as in the aggregate would have no Material Adverse Effect, and (vi) has all necessary licenses, permits, consents or approvals from or by, has made all necessary filings with, and has given all necessary notices to, each Governmental Authority having jurisdiction, to the extent required for such ownership, operation and conduct, except for licenses, permits, consents or approvals which can be obtained by the taking of ministerial action to secure the grant or transfer thereof or failures which in the aggregate would have no Material Adverse Effect. (b) The execution, delivery and performance by the Guarantor of this Guaranty and the other Loan Documents to which it is a party: (i) are within its corporate powers; H-5 6 (ii) have been duly authorized by all necessary corporate action, including, without limitation, the consent of stockholders where required; and (iii) do not and will not (A) contravene its certificate of incorporation or by-laws or other comparable governing documents, (B) violate any other applicable Requirement of Law (including, without limitation, Regulations G, T, U and X of the Board of Governors of the Federal Reserve System), or any order or decree of any Governmental Authority or arbitrator, (C) conflict with or result in the breach of, or constitute a default under, or result in or permit the termination or acceleration of, any of its Contractual Obligations, (D) result in the creation or imposition of any Lien upon any of its property other than those in favor of the Agent on behalf of and for the ratable benefit of the Secured Parties, or (E) require the consent, authorization by, or approval of, or notice to, or filing or registration with, any Governmental Authority or any other Person, other than those which have been obtained and copies of which have been delivered to the Agent pursuant to Section 3.1 of the Amended and Restated Credit Agreement, each of which is in full force and effect. (c) This Guaranty has been duly executed and delivered by the Guarantor and is the legal, valid and binding obligation of the Guarantor enforceable against it in accordance with its terms. (d) There are no pending or, to the knowledge of the Guarantor, threatened actions, investigations or proceedings affecting the Guarantor or any of its subsidiaries before any Governmental Authority or arbitrator other than those that in the aggregate could not reasonably be expected to have a Material Adverse Effect. The performance by the Guarantor under this Guaranty and under each of the other Loan Documents to which it is a party is not restrained or enjoined (either temporarily, preliminarily or permanently) and no conditions have been imposed by any Governmental Authority or arbitrator that in the aggregate could reasonably be expected to have a Material Adverse Effect. SECTION 6. AMENDMENTS, ETC. No amendment or waiver of any provision of this Guaranty nor consent to any departure by the Guarantor herefrom shall in any event be H-6 7 effective unless the same shall be in writing, approved by the Majority Lenders and signed by the Agent, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; PROVIDED, HOWEVER, that no amendment, waiver or consent shall, unless in writing and signed by all the Guarantied Parties, limit the liability of the Guarantor (other than as expressly provided herein) or postpone any date fixed for payment hereunder. SECTION 7. ADDRESSES FOR NOTICES. All notices and other communications provided for hereunder shall be in writing (including telegraphic, telex, telecopy or cable communication) and mailed, telegraphed, telexed, telecopied, cabled or delivered by hand, if to the Guarantor, addressed to it at the address of such Guarantor specified on the signature pages hereof, if to any Guarantied Party, addressed to it at the address of such Guarantied Party specified in the Amended and Restated Credit Agreement, or, as to each party, at such other address as shall be designated by such party in a written notice to each other party complying as to delivery with the terms of this Section. All such notices and other communications shall, when mailed, telegraphed, telexed, telecopied, cabled or delivered, be effective when deposited in the mails, delivered to the telegraph company, confirmed by telex answerback, telecopied with confirmation of receipt, delivered to the cable company or delivered by hand to the addressee or its agent, respectively. SECTION 8. NO WAIVER; REMEDIES. (a) No failure on the part of any Guarantied Party to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law or any of the other Loan Documents. (b) Failure by any of the Guarantied Parties at any time or times hereafter to require strict performance by the Borrower, the Guarantor or any other Person of any of the provisions, warranties, terms or conditions contained in any of the Loan Documents now or at any time or times hereafter executed by the Borrower, the Guarantor or such other Person and delivered to any of the Guarantied Parties shall not waive, affect or diminish any right of any of the Guarantied Parties at any time or times hereafter to demand H-7 8 strict performance thereof, and such right shall not be deemed to have been modified or waived by any course of conduct or knowledge of any of the Guarantied Parties or any agent, officer, employee of any of the Guarantied Parties. (c) No waiver by the Guarantied Parties of any default shall operate as a waiver of any other default or the same default on a future occasion, and no action by any of the Guarantied Parties permitted hereunder shall in any way affect or impair any of the rights of the Guarantied Parties or the obligations of the Guarantor under this Guaranty or under any of the other Loan Documents. Any determination by a court of competent jurisdiction of the amount of any principal and/or interest or other amount constituting any of the Obligations shall be conclusive and binding on the Guarantor irrespective of whether the Guarantor was a party to the suit or action in which such determination was made. SECTION 9. RIGHT OF SET-OFF. Upon the occurrence and during the continuance of any Event of Default, each of the Guarantied Parties is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Guarantied Party to or for the credit or the account of the Guarantor against any and all of the obligations of the Guarantor now or hereafter existing under this Guaranty, irrespective of whether or not such Guarantied Party shall have made any demand under this Guaranty and although such obligations may be contingent and unmatured. Each of the Guarantied Parties agrees promptly to notify the Guarantor after any such set-off and application made by such Guarantied Party; PROVIDED, HOWEVER, that the failure to give such notice shall not affect the validity of such set-off and application. The rights of each Guarantied Party under this Section are in addition to other rights and remedies (including, without limitation, other rights of set-off) which such Guarantied Party may have. SECTION 10. CONTINUING GUARANTY; TRANSFER OF NOTES. This Guaranty is a continuing guaranty and shall (i) remain in full force and effect until indefeasible payment in full of the Obligations and all other amounts payable under this Guaranty, (ii) be binding upon the Guarantor, its successors and assigns, and (iii) inure to the benefit of and be enforceable by the Guarantied Parties and their H-8 9 respective successors, transferees, and assigns. Without limiting the generality of the foregoing clause (iii), any of the Guarantied Parties may assign or otherwise transfer any Note held by it or Obligation owing to it to any other Person, and such other Person shall thereupon become vested with all the rights in respect thereof granted to such Guarantied Party herein or otherwise with respect to such of the Notes and Obligations so transferred or assigned, subject, however, to compliance with the provisions of Section 10.7 of the Amended and Restated Credit Agreement in respect of assignments; provided, however, that in the event of a sale by the Borrower of all of the stock of the Guarantor approved by the Majority Lenders, the Guarantor's obligations hereunder shall terminate upon the consummation of such sale and the application of the proceeds in accordance with the terms of the Amended and Restated Credit Agreement. SECTION 11. LIMITATION OF GUARANTY. Any term or provision of this Guaranty or any other Loan Document to the contrary notwithstanding, the maximum aggregate amount of the Obligations for which the Guarantor shall be liable shall not exceed the maximum amount for which such Guaranty can be liable without rendering this Guaranty or any other Loan Document, as it relates to such Guarantor, voidable under applicable law relating to fraudulent conveyance or fraudulent transfer. SECTION 12. CONTRIBUTION. To the extent that any Guarantor shall be required hereunder to pay a portion of the Obligations which shall exceed the greater of (i) the amount of the economic benefit actually received by such Guarantor from the Obligations and (ii) the amount which such Guarantor would otherwise have paid if such Guarantor had paid the aggregate amount of the Obligations (excluding the amount thereof repaid by the Borrower and the other Guarantor) in the same proportion as such Guarantor's net worth at the date enforcement hereunder is sought bears to the aggregate net worth of all the Guarantors at the date enforcement hereunder is sought, then such Guarantor shall be reimbursed by the other Guarantors for the amount of such excess, pro rata based on the respective net worths of the other Guarantors at the date enforcement hereunder is sought. SECTION 13. REINSTATEMENT. This Guaranty shall remain in full force and effect and continue to be effective should any petition be filed by or against any Loan Party H-9 10 for liquidation or reorganization, should any Loan Party become insolvent or make an assignment for the benefit of creditors or should a receiver or trustee be appointed for all or any significant part of any Loan Party's assets, and shall, to the fullest extent permitted by law, continue to be effective or be reinstated, as the case may be, if at any time payment and performance of the Obligations, or any part thereof, is, pursuant to applicable law, rescinded or reduced in amount, or must otherwise be restored or returned by any obligee of the Obligations or such part thereof, whether as a "voidable preference," "fraudulent transfer," or otherwise, all as though such payment or performance had not been made. In the event that any payment, or any part thereof, is rescinded, reduced, restored or returned, the Obligations shall, to the fullest extent permitted by law, be reinstated and deemed reduced only by such amount paid and not so rescinded, reduced, restored or returned. SECTION 14. GOVERNING LAW. This Guaranty shall be governed by, and be construed and interpreted in accordance with, the law of the State of New York. Wherever possible, each provision of this Guaranty shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Guaranty shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity and without invalidating the remaining provisions of this Guaranty. SECTION 15. SUBMISSION TO JURISDICTION; JURY TRIAL. (a) Any legal action or proceeding with respect to this Guaranty or any document related thereto may be brought in the courts of the State of New York or the United States of America for the Southern District of New York, and, by execution and delivery of this Guaranty, the Guarantor hereby accepts for itself and in respect of its property, generally and unconditionally, the jurisdiction of the aforesaid courts. The Guarantor hereby irrevocably waives any objection, including, without limitation, any objection to the laying of venue or based on the grounds of FORUM NON CONVENIENS, which it may now or hereafter have to the bringing of any such action or proceeding in such respective jurisdictions and consents to the granting of such legal or equitable relief as is deemed appropriate by the court. (b) The Guarantor irrevocably consents to the service of process of any of the aforesaid courts in any such action or proceeding by the mailing of copies thereof H-10 11 by registered or certified mail, postage prepaid, to the Guarantor at its address provided herein, such service to become effective 30 days after such mailing. (c) Nothing contained in this Section 15 shall affect the right of any Guarantied Party to serve process in any other manner permitted by law or commence legal proceedings or otherwise proceed against the Guarantor or any of the Guarantor's property in any other jurisdiction. (d) The guarantor waives any right it may have to trial by jury in respect of any litigation based on, arising out of, under or in connection with this Guaranty or any other loan document, or any course of conduct, course of dealing, verbal or written statement or other action of any Loan Party or any Guarantied Party. SECTION 16. SECTION TITLES. The Section titles contained in this Guaranty are and shall be without substantive meaning or content of any kind whatsoever and are not a part of this Guaranty. SECTION 17. EXECUTION IN COUNTERPARTS. This Guaranty may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same Guaranty. SECTION 18. MISCELLANEOUS. All references herein to the Borrower or to the Guarantor shall include their respective successors and assigns, including, without limitation, a receiver, trustee or debtor-in-possession of or for the Borrower or the Guarantor. All references to the singular shall be deemed to include the plural where the context so requires. H-11 12 IN WITNESS WHEREOF, the Guarantor has caused this Guaranty to be duly executed and delivered by its duly authorized officer on the date first above written. ELDER-BEERMAN WEST VIRGINIA By:________________________________ Name: Title: Address for Notices: Elder-Beerman West Virginia, Inc. 3155 El-Bee Road Dayton, Ohio 45439 Attention: Perry Schiller H-12 EX-21 5 EXHIBIT 21 1 Exhibit 21 SUBSIDIARIES OF THE ELDER-BEERMAN STORES CORP. ---------------------------------------------- The Bee-Gee Shoe Corp., an Ohio Corporation The El-Bee Chargit Corp., an Ohio Corporation The El-Bee Receivables Corporation, an Ohio Corporation Elder-Beerman West Virginia, Inc., a West Virginia Corporation S&T Securities Corp., a Delaware Corporation S&T Financial Corp., a Delaware Corporation EX-23.B 6 EXHIBIT 23(B) 1 EXHIBIT 23(b) INDEPENDENT AUDITORS' CONSENT We consent to the use in this Amendment No. 3 to the Registration Statement of The Elder-Beerman Stores Corp. on Form S-1 of our report dated April 10, 1998, (which expresses an unqualified opinion and includes an explanatory paragraph concerning the Company's plan of reorganization), appearing in the Prospectus, which is part of this Registration Statement. We also consent to the references to us under the headings "Selected Consolidated Financial Information" and "Experts" in such Prospectus. DELOITTE & TOUCHE LLP July 28, 1998 Dayton, Ohio EX-23.C 7 EXHIBIT 23(C) 1 Exhibit 23(c) INDEPENDENT AUDITORS' CONSENT We consent to the use in this Amendment No. 3 to the Registration Statement of The Elder-Beerman Stores Corp. on Form S-1 of our report dated May 21, 1998 (June 18, 1998 as to Notes 3, 9, and 10) (which expresses an unqualified opinion and includes an explanatory paragraph that expresses substantial doubt as to Stone & Thomas' ability to continue as a going concern and an explanatory paragraph relating to a letter of intent for the sale of Stone & Thomas' outstanding stock), relating to the consolidated financial statements of Stone & Thomas and subsidiaries, appearing in the Prospectus, which is part of this Registration Statement, and to the reference to us under the heading "Experts" in such Prospectus. DELOITTE & TOUCHE LLP Pittsburgh, Pennsylvania July 30, 1998 -----END PRIVACY-ENHANCED MESSAGE-----