SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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SCHEDULE 14D-9
(RULE 14D-101)
SOLICITATION/RECOMMENDATION STATEMENT
UNDER SECTION 14(d)(4) OF THE
SECURITIES EXCHANGE ACT OF 1934
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THE ELDER-BEERMAN STORES CORP.
(Name of Subject Company)
THE ELDER-BEERMAN STORES CORP.
(Name of Person Filing Statement)
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COMMON SHARES, NO PAR VALUE
(Title of Class of Securities)
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284470101
(CUSIP Number of Class of Securities)
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STEVEN C. MASON
THE ELDER-BEERMAN STORES CORP.
3155 EL-BEE ROAD
DAYTON, OHIO 45439
(937) 296-2700
(Name, Address and Telephone Number of Person Authorized to Receive
Notices and Communications on Behalf of the Person Filing Statement)
with copies to:
JOSEPH M. RIGOT
THOMPSON HINE LLP
2000 COURTHOUSE PLAZA N.E.
DAYTON, OHIO 45401
(937) 443-6586
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[ ] Check the box if the filing relates solely to preliminary communications
made before the commencement of a tender offer.
ITEM 1. SUBJECT COMPANY INFORMATION.
The name of the subject company is The Elder-Beerman Stores Corp., an Ohio
corporation (the "Company"). The address of the principal executive offices of
the Company is 3155 El-Bee Road, Dayton, Ohio 45439. The telephone number of the
Company at its principal executive offices is (937) 296-2700.
The title of the class of equity securities to which this
Solicitation/Recommendation Statement on Schedule 14D-9 (together with the
exhibits and annexes hereto, this "Statement") relates is the Common Shares, no
par value, of the Company (the "Shares"). As of September 15, 2003, there were
11,585,457 Shares issued and outstanding.
ITEM 2. IDENTITY AND BACKGROUND OF FILING PERSON.
The filing person is the subject company. The Company's name, business
address and business telephone number are set forth in Item 1 above.
This Statement relates to the tender offer by Elder Acquisition Corp., an
Ohio corporation ("Purchaser") and an indirect wholly owned subsidiary of The
Bon-Ton Stores, Inc., a Pennsylvania corporation ("Parent"), to purchase all of
the issued and outstanding Shares (including the associated preferred stock
purchase rights) at a purchase price of $8.00 per Share, net to the seller in
cash, without interest thereon (the "Offer Price"), upon the terms and subject
to the conditions set forth in the Offer to Purchase, dated September 23, 2003
(the "Offer to Purchase"), and in the related Letter of Transmittal (the "Letter
of Transmittal"). The Offer to Purchase and the Letter of Transmittal, together
with any amendments or supplements thereto, collectively constitute the "Offer."
The Offer was commenced by the Purchaser on September 23, 2003 and expires at
12:00 Midnight, New York City time, on Tuesday, October 21, 2003, unless
extended in accordance with its terms (the "Expiration Date").
The Offer is described in a Tender Offer Statement on Schedule TO (as
amended or supplemented from time to time, together with the exhibits and
annexes thereto, the "Schedule TO"), filed by Purchaser and Parent with the
Securities and Exchange Commission (the "SEC") on September 23, 2003. The Offer
to Purchase and the related Letter of Transmittal have been filed as Exhibit
(a)(1) and Exhibit (a)(2) hereto, respectively, and each is hereby incorporated
herein by reference.
The Offer is being made pursuant to the Agreement and Plan of Merger, dated
as of September 15, 2003, by and among Parent, Purchaser and the Company (as
such agreement may from time to time be amended or supplemented, the "Merger
Agreement"). The Merger Agreement provides that following the completion of the
Offer, Purchaser will merge with and into the Company (the "Merger"), and the
Company will be the surviving corporation in the Merger (the "Surviving
Corporation"). In the Merger, each outstanding Share (other than Shares owned by
(i) Parent, Purchaser or the Company, and (ii) shareholders who are entitled to
demand and have properly demanded their appraisal rights under Section 1701.85
of the Ohio General Corporation Law (the "OGCL")) will be converted into the
right to receive in cash the same price per Share paid pursuant to the Offer,
without interest thereon (the "Merger Price").
The Schedule TO states that the principal executive offices of Parent and
Purchaser are located at 2801 East Market Street, York, Pennsylvania 17402 and
that the telephone number at such principal executive offices is (717) 757-7660.
ITEM 3. PAST CONTACTS, TRANSACTIONS, NEGOTIATIONS AND AGREEMENTS.
Certain contracts, agreements, arrangements and understandings between the
Company and certain of its directors and executive officers are described in the
Information Statement pursuant to Rule 14f-1 (the "Information Statement") under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), attached
hereto as Annex A and hereby incorporated herein by reference. Except as
described in this Statement or incorporated herein by reference, to the
knowledge of the Company, as of the date of this Statement there exists no
material agreement, arrangement or understanding or any actual or potential
conflict of interest between the Company or its affiliates and (i) the Company's
executive officers, directors or affiliates or (ii) Parent, Purchaser or their
respective executive officers, directors or affiliates.
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THE MERGER AGREEMENT. The following summary of the material terms of the
Merger Agreement is qualified in its entirety by reference to the complete text
of the Merger Agreement, which has been filed as an exhibit to this Statement
and is hereby incorporated herein by reference.
THE OFFER. The Merger Agreement provides for the commencement of the Offer
as promptly as practicable (but in no event later than the fifth business day)
after the initial public announcement of the execution of the Merger Agreement.
The obligation of Purchaser to accept for payment Shares tendered pursuant to
the Offer is subject to the satisfaction of the Minimum Tender Condition, the
Financing Condition, the Control Bid Condition, the HSR Condition (each as
defined below) and certain other conditions that are described in the Merger
Agreement. Purchaser and Parent have agreed that, without the prior written
consent of the Company, no change in the Offer may be made that decreases the
price per Share payable in the Offer, decreases the maximum number of Shares to
be purchased in the Offer, changes the form of the consideration payable in the
Offer, adds to or changes the conditions to the Offer, waives the Minimum Tender
Condition or modifies or amends any other condition to the Offer in any manner
that is materially adverse to the holders of Shares.
The Offer is conditioned upon, among other things, the following:
- there being validly tendered and not withdrawn before the Expiration Date
a number of Shares that, together with the Shares then owned by Parent
and its subsidiaries, represents at least two-thirds of the total number
of Shares outstanding on a fully diluted basis (the "Minimum Tender
Condition");
- Parent having available to it proceeds under new financings sufficient,
together with cash on hand, to consummate the Offer and the Merger and to
refinance all debt of the Company and Parent that is or could be required
to be repurchased or becomes, or could be declared, due and payable as a
result of the Offer or the Merger or the financing thereof and to pay all
related fees and expenses (the "Financing Condition");
- the expiration of the period during which the Ohio Division of Securities
may suspend the Offer pursuant to Sections 1707.01, 1707.041 and 1707.042
of the Ohio Revised Code (the "Ohio Control Bid Law"), without the
occurrence of any such suspension (or if a suspension shall have
occurred, it shall no longer be continuing), or Parent being satisfied,
in its reasonable discretion, that the Ohio Control Bid Law is invalid or
inapplicable to the acquisition of the Shares as described herein (the
"Control Bid Condition"); and
- the expiration or termination of any applicable waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"), as
amended (the "HSR Condition").
The Merger Agreement provides that Purchaser may, without the consent of
the Company, (i) extend the Offer beyond the Expiration Date in increments of
not more than 10 business days each, if at the then scheduled Expiration Date
any of the conditions to Purchaser's obligation to purchase Shares are not
satisfied, (ii) extend the Offer for any period required by any rule,
regulation, interpretation or position of the SEC, or the staff thereof,
applicable to the Offer, or (iii) make available a subsequent offering period of
between three and 20 business days to permit additional tenders of Shares (a
"Subsequent Offering Period") as set forth in the Offer to Purchase. In
addition, the Merger Agreement provides that if the conditions to the Offer are
not satisfied or, to the extent permitted by the Merger Agreement, waived by
Parent or Purchaser as of the date that the Offer would otherwise have expired,
then, except to the extent that such conditions are incapable of being
satisfied, at the request of the Company, Purchaser will extend the Offer from
time to time until the earlier of October 31, 2003 or the consummation of the
Offer. During any such extension of the Offer, all Shares previously tendered
and not withdrawn will remain subject to the Offer and, except if a Subsequent
Offering Period is commenced, subject to the right of a tendering shareholder to
withdraw such shareholder's Shares. Under no circumstances will interest be paid
on the purchase price for tendered Shares, whether or not the Offer is extended.
The Merger Agreement provides that promptly upon the date that Shares are
first accepted for payment by Purchaser pursuant to the Offer, and from time to
time thereafter, Purchaser will be entitled to designate up to such number of
directors, rounded up to the next whole number, on the Company's Board of
Directors as shall give Purchaser representation on the Company's Board of
Directors equal to the product of the total number of directors on the Company's
Board of Directors (giving effect to the directors elected pursuant to the
Merger Agreement) multiplied by the percentage that the aggregate number of
Shares then beneficially owned by
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Purchaser and Parent following such purchase bears to the total number of Shares
then outstanding. The Company has agreed, at such time, to use its reasonable
best efforts to cause Purchaser's designees to be elected as directors of the
Company. Notwithstanding the foregoing, at all times following the purchase of
Shares pursuant to the Offer and prior to the Merger, the Merger Agreement
provides that the Company shall be entitled to have four directors on the
Company's Board of Directors who are current directors on the Company's Board of
Directors, including the current Chief Executive Officer of the Company and
three members of the Company's Board of Directors who are not employed by the
Company and who are not affiliates, associates or employees of Parent or
Purchaser. All Purchaser nominees will promptly resign from the Company's Board
of Directors if the Offer Price for any of the Shares accepted for payment
pursuant to the Offer is not promptly paid in accordance with the terms of the
Offer.
The Merger Agreement provides that, as soon as practicable after the date
the Schedule TO, including the Offer to Purchase, is filed with the SEC, the
Company shall file with the SEC this Statement and shall mail this Statement to
the holders of the Shares.
THE MERGER. The Merger Agreement provides for Purchaser to merge with and
into the Company. The Company will be the surviving corporation in the Merger
and will become an indirect wholly owned subsidiary of Parent. All of the
Shares, other than Shares held by Parent or Purchaser or in the Company's
treasury, or held by shareholders who properly exercise dissenters' rights under
the OGCL, will be converted into the right to receive $8.00 net per Share in
cash, without interest and less any applicable withholding taxes. All of the
Shares converted in the Merger will be automatically cancelled. The holders of
the Shares will cease to have any rights in the Shares other than the right to
receive the merger consideration upon surrender of the applicable share
certificates.
SHAREHOLDERS' MEETING. Pursuant to the Merger Agreement, the Company,
acting through its Board of Directors, shall, if required by the OGCL in order
to consummate the Merger, duly call, give notice of, convene and hold a special
meeting of its shareholders (the "Shareholders' Meeting") as soon as reasonably
practicable following the date that Purchaser accepts Shares for purchase at
which meeting the Merger Agreement shall be submitted to the Company's
shareholders for the purpose of voting on the adopting of the Merger Agreement
and obtaining approval of the adoption of the Merger Agreement by holders of at
least two-thirds of the Shares. If the Minimum Tender Condition is satisfied and
Purchaser acquires in the Offer at least two-thirds of the outstanding Shares,
Purchaser shall have sufficient voting power to approve the Merger, even if no
other shareholder votes in favor of the Merger.
PROXY STATEMENT. The Merger Agreement provides that the Company shall, if
approval of the Company's shareholders is required by the OGCL to consummate the
Merger, as soon as reasonably practicable after Purchaser accepts Shares for
purchase pursuant to the Offer, prepare and file with the SEC under the Exchange
Act a proxy statement and related proxy materials (the "Proxy Statement") with
respect to the Shareholders' Meeting and shall use its reasonable best efforts
to have the Proxy Statement cleared by the SEC. In addition, the Company has
agreed to cause the Proxy Statement and all required amendments and supplements
thereto to be mailed to the holders of Shares at the earliest practicable time.
The Company has agreed to include in the Proxy Statement the recommendation of
the Board that the shareholders of the Company approve and adopt the Merger
Agreement. The Merger Agreement provides that, in the event that Purchaser shall
acquire at least 90% of the then outstanding Shares, Parent, Purchaser and the
Company will take all necessary and appropriate action to cause the Merger to
become effective, in accordance with the OGCL, as promptly as practicable after
the expiration of the Offer, without a meeting of the Company's shareholders.
ARTICLES OF INCORPORATION; CODE OF REGULATIONS; DIRECTORS AND OFFICERS.
After the Merger, the articles of incorporation and code of regulations of
Purchaser will become the articles of incorporation and code of regulations of
the Company, as the surviving corporation in the Merger. The articles of
incorporation of Purchaser will be amended at the effective time of the Merger
(the "Effective Time") to reflect that the name of the surviving corporation in
the Merger is "The Elder-Beerman Stores Corp." The directors and officers of
Purchaser at the Effective Time of the Merger will become the directors and
officers of the Company, as the surviving corporation in the Merger.
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CONSIDERATION TO BE RECEIVED BY THE COMPANY'S SHAREHOLDERS. At the
Effective Time of the Merger, each of the outstanding Shares, other than Shares
held by Parent or Purchaser or in the Company's treasury, or held by
shareholders who properly exercise dissenters' rights under the OGCL, will be
converted into the right to receive $8.00 per Share in cash, without interest
and less any applicable withholding taxes.
Each share of the common stock of Purchaser outstanding at the Effective
Time of the Merger will become one fully paid and non-assessable common share of
the Company, as the surviving corporation in the Merger.
STOCK OPTIONS AND DEFERRED SHARES. The Merger Agreement provides that all
of the outstanding options to acquire Shares and all deferred shares granted
under the Company's Equity and Performance Incentive Plan will be cancelled at
the Effective Time of the Merger, whether or not the options are then
exercisable and whether or not the deferred shares are subject to the deferral
limitations under such plan. In exchange for such cancellation, (i) option
holders will receive with respect to each option a payment equal to the amount
by which the merger consideration per Share exceeds the exercise price
applicable to the option, multiplied by the number of Shares subject to the
option and (ii) holders of deferred shares will receive the merger consideration
per deferred share. After the Effective Time of the Merger, option holders and
holders of deferred shares will have no further rights in the options or
deferred shares that were cancelled and the surviving corporation will have no
options to purchase common shares or deferred shares outstanding.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company has made
customary representations and warranties to Parent and Purchaser in the Merger
Agreement. These representations and warranties relate to:
- the organization, qualification and capital structure of the Company and
its subsidiaries;
- the Company's power and authority to enter into the Merger Agreement and
complete the Merger, and the validity, binding effect and enforceability
of the Merger Agreement against the Company;
- the absence of any conflict between the Company's entering into the
Merger Agreement or completing the Merger and the Company's governing
documents, agreements or other obligations;
- the consents and approvals of governmental authorities and other parties
that are required in connection with the Merger Agreement and the Merger;
- the Company's compliance with its obligation to make periodic filings
with the SEC and the compliance of such filings with applicable law;
- the absence of any material changes or developments with respect to the
Company;
- the absence of any material liabilities that should have been disclosed
in the Company's financial statements;
- the absence of any litigation or outstanding judgments against the
Company that could have a material adverse effect on the Company or on
its ability to complete the Merger;
- the accuracy of the information the Company supplied for use in the Offer
to Purchase and the information in this Statement;
- the Company's compliance with all governmental permits and licenses that
it is required to have;
- the absence of any breaches or violations under any of the Company's
governing documents or its contracts with third parties, the validity and
enforceability of such contracts, and the termination of the merger
agreement with Wright Holdings, Inc. and Wright Sub, Inc.;
- the Company's compliance with applicable tax laws and the Company's
filing of all required tax returns;
- the Company's compliance with the terms of its employee benefit plans and
applicable law in the operation of the employee benefit plans;
- the Company's compliance with all applicable labor laws, and the absence
of any material litigation against the Company by its current or former
employees;
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- the Company's compliance with all applicable environmental laws;
- the Company's valid ownership of the real property that it owns, and the
existence of valid leases with respect to the real property that it
leases;
- the Company's valid ownership of the intellectual property rights that it
uses in its business;
- the validity of the Company's insurance policies;
- the absence of any transactions with affiliates;
- the vote of the Company's shareholders that is required to adopt the
Merger Agreement;
- the receipt by the Company of an opinion from RBC Dain Rauscher Inc., as
our financial advisor, regarding the fairness to the Company's
shareholders, from a financial point of view, of the consideration to be
paid to the Company's shareholders in the Offer and the Merger;
- the Company's taking all necessary actions to prevent the Company's
shareholder rights agreement from applying to the Merger Agreement, the
Offer or the Merger (the Company amended its shareholder rights agreement
on September 15, 2003 so that it does not apply to the Merger Agreement,
the Offer or the Merger); and
- the inapplicability of various Ohio anti-takeover statutes to the Merger
Agreement, the Offer and the Merger.
REPRESENTATIONS AND WARRANTIES OF PARENT AND PURCHASER. Parent and
Purchaser have made customary representations and warranties to the Company in
the Merger Agreement. These representations and warranties relate to:
- the organization and qualification of Parent and Purchaser;
- the power and authority of Parent and Purchaser to enter into the Merger
Agreement and complete the Offer and the Merger, and the validity,
binding effect and enforceability of the Merger Agreement against them;
- the absence of any conflict between Parent and Purchaser entering into
the Merger Agreement or completing the Offer and the Merger and their
governing documents, agreements or other obligations;
- the consents and approvals of governmental authorities and other parties
that are required in connection with the Merger Agreement, the Offer and
the Merger;
- the accuracy of the information contained in the Offer to Purchase and
supplied by Parent and Purchaser for inclusion in this Statement;
- the absence of any litigation or outstanding judgments against Parent or
Purchaser that could have a material adverse effect on them or on their
ability to complete the Offer and the Merger;
- the capitalization of Purchaser; and
- the receipt by Parent of binding written commitments from financial
institutions to obtain the funds necessary to complete the Offer and the
Merger and to pay certain other expenses.
COVENANTS OF THE COMPANY. During the period from the date of the Merger
Agreement until the time that Shares are first accepted for payment pursuant to
the Offer or the earlier termination of the Merger Agreement, except as
expressly permitted by the Merger Agreement or to the extent that Parent
otherwise consents in writing, the Company has agreed to:
- conduct its business in the ordinary course consistent with past
practice;
- use commercially reasonably efforts to preserve intact its present
business organization, reputation and relationships, keep available the
services of its key officers and employees, and maintain its assets and
properties; and
- confer on a regular basis with Parent regarding its business and
operations and matters relevant to the Merger.
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The Company has also agreed that during this period, except as expressly
permitted by the Merger Agreement or to the extent that Parent otherwise
consents in writing, the Company will not, nor will it permit its subsidiaries
to, do any of the following:
- amend its articles of incorporation or its code of regulations;
- declare, set aside or pay any dividends on any of its capital shares;
- split, combine or reclassify any of its capital shares or issue any
securities in substitution for any of its capital shares;
- adopt a plan of liquidation, merger, consolidation, restructuring or
reorganization;
- redeem, repurchase or otherwise acquire any capital shares;
- issue, deliver or sell any capital shares or any securities convertible
into capital shares;
- acquire any business or any assets other than inventory or other assets
to be used or sold in the ordinary course of the Company's business;
- sell or lease any assets or properties other than sales of inventory in
the ordinary course of business or sale of assets in the aggregate of
less than $250,000;
- make any tax election or settle or compromise any material income tax
liability other than as required by law;
- incur any indebtedness for borrowed money except pursuant to the existing
credit facility;
- enter into, amend or terminate any of the Company's employee benefit
plans or agreements, pay any benefits not required by existing
compensation arrangements, increase the compensation of any of the
Company's directors or officers, or increase the compensation or benefit
of any non-officer employee except for normal increases in the ordinary
course of business;
- enter into any contract or amend or modify any existing contracts, or
enter into any new transaction with any affiliates outside of the
ordinary course of business or not on an arms length basis;
- make any capital expenditures for the opening of any new stores or the
expansion or remodeling of any existing stores or any other material
capital projects;
- settle or compromise any litigation in excess of $100,000 in the
aggregate, net of insurance coverage;
- make any change in lines of business; or
- enter into any contract, commitment or arrangement to do or engage in any
of the foregoing.
NO SOLICITATION. The Merger Agreement provides that neither the Company
nor its directors, officers, employees, advisors, representatives or
subsidiaries may, directly or indirectly:
- initiate, solicit or encourage any inquiries or the making by any third
party of any proposal (including any proposal or offer to the Company's
shareholders) relating to an alternative acquisition proposal (which
includes any merger, consolidation or other business combination
involving the Company or any of its subsidiaries and any acquisition of a
significant portion of the assets or securities of the Company or any of
its subsidiaries);
- engage in any negotiations or discussions with, or provide any
confidential information to, any third party relating to an alternative
acquisition proposal; or
- grant any waiver or release under any confidentiality, standstill or
similar agreement with respect to the Company's equity securities.
However, the Company's Board of Directors is not prohibited from furnishing
information to (but only pursuant to a confidentiality agreement having terms
and conditions that are no less favorable than the terms and conditions of the
confidentiality agreement between Parent and the Company) or entering into
discussions or negotiations with any third party who makes an unsolicited
alternative acquisition proposal if a majority of the independent directors
determines in good faith (after receiving advice from reputable outside counsel
that there is a reasonable basis to conclude that the failure to take such
action would result in a breach of the Company's
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Board of Directors' fiduciary duties under applicable law) that the alternative
acquisition proposal is or presents a reasonable likelihood of resulting in a
proposal that provides greater value to the Company's shareholders, is
reasonably likely to be completed and is supported by comparable financing.
The Company's Board of Directors is also not prohibited from taking and
disclosing to its shareholders a position required under the federal securities
laws with regard to an alternative acquisition proposal, or making any
disclosure to its shareholders, if in the good faith judgment of a majority of
the Company's disinterested directors (after receiving advice from reputable
outside counsel to that effect) there is a reasonable basis to believe that such
disclosure is required by law.
The Company is required to promptly notify Parent if the Company receives
any alternative acquisition proposal or any request for information relating to
the Company by any third party that has made or is considering making an
alternative acquisition proposal, and is required to keep Parent fully informed
on a current basis of the status and details of any alternative acquisition
proposal. The Company may not enter into any agreement or arrangement or make
any recommendation to its shareholders (other than as required by law) with
respect to any alternative acquisition proposal for one business day after
delivery of notice to Parent of its intention to enter into such an agreement or
arrangement with another party or to make such a recommendation to its
shareholders. During such one-day period, the Company must negotiate exclusively
in good faith with Parent to make such adjustments in the terms and conditions
of the Merger Agreement as would enable the Company to proceed with the
transactions contemplated by the Merger Agreement. Any such adjustments to the
terms and conditions of the Merger Agreement are at the discretion of the
parties.
EXPENSES. Except as provided for in the below section entitled Expense
Reimbursement and Termination Fees, the Merger Agreement provides that, whether
or not the Merger is consummated, all costs and expenses incurred in connection
with the Merger Agreement and the transactions contemplated thereby will be paid
by the party incurring such costs and expenses. Parent agreed to pay the filing
fee in connection with the filings required under the HSR Act. Parent agreed to
pay, and has paid, to the Company $3 million to reimburse the Company for a
portion of the amount paid by the Company to Wright Holdings, Inc. pursuant to
the terminated merger agreement between the Company and Wright Holdings, Inc.
CONDITIONS TO THE MERGER. The obligation of Parent and the Company to
complete the Merger is subject to the satisfaction of the following conditions:
- the adoption of the Merger Agreement by the holders of at least
two-thirds of the Company's outstanding Shares if such vote is required
by applicable law;
- the termination or expiration of any waiting period applicable to the
Merger under the HSR Act;
- the absence of any law or order of any governmental authority that
prohibits the completion of the Merger; and
- the purchase of Shares, validly tendered and not withdrawn, by Purchaser
pursuant to the Offer.
Neither Parent nor the Company are permitted under the terms of the Merger
Agreement to waive any of these conditions.
TERMINATION OF THE MERGER AGREEMENT. The Merger Agreement may be
terminated at any time prior to the completion of the Merger, whether before or
after adoption of the Merger Agreement by the Company's shareholders:
- by mutual written agreement of the Company, Parent and Purchaser duly
authorized by action taken by or on behalf of their respective boards of
directors (with, in the case of the Company following the date Shares are
first accepted for payment by Purchaser pursuant to the Offer, the
concurrence of the post-Offer independent directors);
- by Parent upon written notice to the Company if an occurrence or
circumstance (unless caused by Parent or Purchaser) has rendered the
conditions to the Offer incapable of being satisfied, and (i) Purchaser
shall have failed to commence the Offer in accordance with the terms of
the Merger Agreement or (ii) the Offer shall have been terminated or
shall have expired without Purchaser having purchased any Shares pursuant
to the Offer;
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- by either Parent or the Company upon written notification to other if any
court or other governmental or regulatory authority shall have issued a
law or order making illegal or otherwise restricting, preventing or
prohibiting the Offer or the Merger and any such order shall have become
final and non-appealable;
- by Parent upon written notification to the Company, prior to the purchase
of the Shares pursuant to the Offer, if (i) Parent or Purchaser discover
that there has been a material breach of any representation, warranty,
covenant or agreement on the part of the Company set forth in the Merger
Agreement, which breach is not curable or which has not been cured within
the earlier of 30 days following receipt by the Company of notice of such
breach from Parent or October 31, 2003, (ii) the Company's Board of
Directors withdraws or modifies or qualifies in a manner adverse to
Parent its approval or recommendation of the Merger Agreement, the Offer
or the Merger or has approved, recommended or entered into any agreement
with respect to any alternative proposal or failed to reconfirm its
recommendation of the Merger Agreement, the Offer and the Merger within
10 business days following a reasonable written request for such
reconfirmation by Parent, or (iii) there has not been validly tendered
and not withdrawn prior to the Expiration Date at least two-thirds of the
Shares, on a fully diluted basis, and prior to October 31, 2003 a person
shall have made or modified a written alternative proposal to the Company
and not withdrawn such proposal;
- by the Company upon written notification to Parent if (i) the Company
discovers that there has been a material breach of any representation,
warranty, covenant or agreement on the part of Parent or Purchaser set
forth in the Merger Agreement, which breach is not curable or which has
not been cured within the earlier of 30 days following receipt by Parent
of notice of such breach from the Company or October 31, 2003 or (ii) the
Company's Board of Directors receives an unsolicited bona fide
alternative proposal and the Company's Board of Directors determines in
good faith (after receiving advice from reputable outside legal counsel
on their fiduciary duties) that the alternative proposal is reasonably
likely to result in a superior proposal and was not solicited by it;
provided that the Company must pay to Parent the expense reimbursement
fee and termination fee described below; or
- by the Company if there is no material breach of any representation,
warranty, covenant or agreement on the part of the Company that has not
been cured and (i) Purchaser shall have failed to commence the Offer as
required, (ii) the Offer has been terminated or has expired without
Purchaser having purchased any Shares pursuant to the Offer, or (iii)
Purchaser shall have failed to pay for Shares pursuant to the Offer prior
to October 31, 2003.
If the Merger Agreement is terminated, then the Merger Agreement will
become null and void and none of the Company, Parent or Purchaser will be
obligated to complete the Merger.
EXPENSE REIMBURSEMENT AND TERMINATION FEES. If the Merger Agreement is
terminated under any of the following circumstances, then the Company is
required to pay to Parent an expense reimbursement fee, not to exceed $1.0
million, for all reasonable documented out-of-pocket fees and expenses incurred
by Parent in connection with the Merger Agreement:
- if an alternative proposal is publicly disclosed or proposed and Parent
terminates the Merger Agreement because Purchaser has failed to commence
the Offer or because at least two-thirds of the Shares were not validly
tendered and not withdrawn prior to October 31, 2003;
- if an alternative proposal is publicly disclosed or proposed and the
Company terminates the Merger Agreement because Purchaser has failed to
commence the Offer as required;
- if Parent terminates the Merger Agreement because the Offer has been
terminated or has expired without Purchaser having purchased any Shares
pursuant to the Offer (assuming Parent and Purchaser were not in material
breach of any of their representations, warranties, covenants or
agreements that has not been cured);
- if the Company terminates the Merger Agreement because either the Offer
has been terminated or has expired without Purchaser having purchased any
Shares pursuant to the Offer or Purchaser has failed to pay for the
Shares pursuant to the Offer prior to October 31, 2003 (assuming Parent
and Purchaser were
8
not in material breach of any of their representations, warranties,
covenants or agreements that has not been cured);
- if Parent terminates the Merger Agreement because it discovers that there
has been a material breach of the Merger Agreement by the Company (other
than a breach of the Company's "no solicitation" covenants or the
Company's obligations with respect to approval of the Offer and filing of
this Statement).
Reimbursable fees and expenses include all fees and expenses payable to all
banks, investment banking firms and other financial institutions and their
respective agents and counsel for acting as financial advisor with respect to,
or arranging or providing any financing for, the Merger.
If the Merger Agreement is terminated for any reason other than because of
a breach by Parent or Purchaser or as a consequence of the failure to satisfy
the Financing Condition, then in addition to any other termination fee or
expense reimbursement fee, the Company is required to repay to Parent the $3
million that was paid by Parent to the Company for use by the Company in paying
to Wright Holdings, Inc. a portion of the termination fee and expense
reimbursement fees payable in connection with the termination of the merger
agreement with Wright Holdings, Inc.
The Company is also required to pay Parent a termination fee of $2.0
million if all of the following shall occur:
- an alternative proposal is publicly disclosed or proposed;
- the Merger Agreement is terminated and the Company is obligated to pay to
Parent the expense reimbursement fee under the circumstances described
above; and
- concurrently or within 12 months of termination, the Company enters into
a definitive agreement with respect to an alternative proposal or does
not recommend against an alternative proposal in the case of a tender
offer.
If Parent terminates the Merger Agreement due to the breach by the Company
of the "no solicitation" covenants or the Company's obligations with respect to
approval of the Offer and filing of this Statement as set forth in the Merger
Agreement, the Company is required to pay Parent the expense reimbursement fee
and if, within 12 months of such termination, the Company announces or enters
into an alternative acquisition proposal, the Company must pay Parent the
termination fee.
If the Merger Agreement is terminated (i) by the Company to pursue an
alternative acquisition proposal or (ii) by Parent if the Board of Directors of
the Company withdraws or modifies or qualifies in a manner adverse to Parent its
approval or recommendation of the Merger Agreement, the Offer or the Merger, or
approves, recommends or enters into any agreement with respect to any other
alternative proposal or fails to reconfirm its recommendation of the Merger
Agreement, the Offer and the Merger within 10 business days following a
reasonable written request for such reconfirmation by Parent, then the Company
is required to pay Parent the expense reimbursement fee plus the termination
fee.
AMENDMENTS. The Merger Agreement may be amended, supplemented or modified
by action taken by or on behalf of the respective Boards of Directors of the
Company (with, in the case of the Company following the date Shares are first
accepted for payment by Purchaser pursuant to the Offer, the concurrence of the
post-Offer independent directors), Parent and Purchaser at any time prior to the
Effective Time of the Merger, whether prior to or after the approval of the
Company shareholders of the Merger shall have been obtained, but after such
adoption and approval only to the extent permitted by applicable law.
COMPANY STOCK OPTIONS. The Merger Agreement provides that all of the
outstanding options to acquire Shares granted under the Company's Equity and
Performance Incentive Plan will be cancelled at the Effective Time of the
Merger, whether or not the options are then exercisable. In exchange for such
cancellation, option holders will receive with respect to each option a payment
equal to the amount by which $8.00 per Share exceeds the exercise price
applicable to the option, multiplied by the number of shares subject to the
option. After the Effective Time of the Merger, option holders will have no
further rights in the options that were cancelled in connection with the Merger.
9
The Merger Agreement also provides that each outstanding deferred share
granted under the Company's Equity and Performance Incentive Plan, whether or
not subject to deferral limitations under such plan, will be cancelled at the
Effective Time of the Merger. In exchange for such cancellation, the holders of
deferred shares will receive with respect to each deferred share an amount equal
to $8.00 per share. After the Effective Time of the Merger, holders of deferred
shares will have no further rights in the deferred shares that were cancelled in
connection with the Merger.
COMPANY EMPLOYEE BENEFIT PLANS. In the Merger Agreement, Parent has agreed
that it will, during the period commencing at the date that Purchaser first
accepts Shares tendered in the Offer and ending December 31, 2003: (i) maintain
the Company's current employee benefit plans, except as may be required by
applicable law; or (ii) to the extent that such benefit plans are not so
maintained, cause the Company to maintain benefit plans that are substantially
comparable, in the aggregate, to the Company's current employee benefit plans.
The Merger Agreement provides that this requirement does not apply to the
Company's Equity and Performance Incentive Plan or any other plans providing
equity or equity-based awards.
The Merger Agreement provides that the benefit plans in which the Company's
employees participate following the date that Purchaser first accepts Shares
tendered in the Offer will: (i) credit, for vesting and eligibility purposes
only, all service performed for the Company prior to such date, but not for
benefit accrual (including eligibility for any subsidized early retirement
pension amount); (ii) waive any pre-existing condition exclusions (other than
pre-existing conditions that, as of such date, have not been satisfied under any
of the Company's current employee benefit plans); and (iii) provide that any
covered expenses incurred on or before such date during the plan year of the
applicable benefit plan of the Company will be taken into account for purposes
of satisfying applicable deductible, coinsurance and maximum out-of-pocket
provisions after such date.
The Merger Agreement also provides that, following the date that Purchaser
first accepts Shares tendered in the Offer until January 1, 2005, Parent shall
cause the Company's Employment Termination Pay Plan to be maintained on terms no
less favorable than the terms of such plan on the date of the Merger Agreement.
Parent also agrees to cause the Company to pay to any person employed by the
Company on the date that Purchaser first accepts Shares tendered in the Offer
who becomes eligible to receive a severance payment under the Employment
Termination Pay Plan at any time after the date that Purchaser first accepts
Shares tendered in the Offer and prior to January 1, 2005 an amount equal to the
greater of: (i) the severance amount payable to such employee under the
Employment Termination Pay Plan; and (ii) the severance amount that would be
payable to a comparable employee of Parent under Parent's severance program then
in effect.
In the Merger Agreement, the Company's Board of Directors agreed to amend
the Company's Equity and Performance Incentive Plan to provide that following
the date that Purchaser first accepts Shares tendered in the Offer: (i) no
participant in the plan shall be entitled to defer any portion of an annual
incentive award; and (ii) participants in the plan on the date that Purchaser
first accepts Shares tendered in the Offer will be entitled to receive an annual
incentive award for the 2003 fiscal year of the Company in accordance with the
provisions of the plan, but in no event will a participant's annual incentive
award be less than such participant's annualized award for the fiscal year of
the Company ending February 2, 2003, subject to certain requirements. Parent
agreed to cause the Company to pay all such annual incentive awards earned by
employees of the Company no later than April 15, 2004.
The purchase of Shares by Purchaser pursuant to the Offer will constitute a
"change of control" or "change of ownership" under the Company's employment and
severance agreements with its senior officers. For a description of these
agreements and the benefits that may become payable following the completion of
the Offer, see the Information Statement attached as Annex A.
INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Merger Agreement provides
that, from and after the date that Purchaser first accepts Shares tendered in
the Offer until the sixth anniversary of the Effective Time of the Merger,
Parent shall indemnify, advance expenses to, and hold harmless the present and
former directors and officers of the Company and its subsidiaries, in each case
to the fullest extent permitted by law, in respect of acts or omissions
occurring prior to or after the date that Purchaser first accepts Shares
tendered in the Offer. From and after the Effective Time of the Merger, Parent
shall cause the articles of incorporation and code of regulations of the Company
to contain provisions substantially similar, in terms of the rights granted, to
the provisions with
10
respect to indemnification and insurance set forth in the Company's current
articles of incorporation and code of regulations, which provisions shall not be
amended in any manner prior to the sixth anniversary of the Effective Time of
the Merger that would adversely affect the rights thereunder of the Company's
employees, agents, directors or officers for acts or omissions occurring on or
prior to the Effective Time of the Merger, except if such amendment is required
by applicable law. Any determination required to be made with respect to whether
an officer's or director's conduct complies with the standards set forth in the
Company's articles of incorporation or code of regulations shall be made by
independent counsel selected by Parent and reasonably acceptable to such officer
or director. Parent shall pay such counsel's fees and expenses so long as such
officer or director does not challenge any such determination by such
independent counsel.
DIRECTORS' AND OFFICERS' LIABILITY INSURANCE. The Merger Agreement
provides that, with respect to acts or omissions occurring on or prior to the
date that Purchaser first accepts Shares tendered in the Offer or, with respect
to directors and officers who continue to serve until the Effective Time of the
Merger, on or prior to the Effective Time of the Merger, Parent and the Company
shall, until the sixth anniversary of the Effective Time of the Merger and for
so long thereafter as any claim for insurance coverage asserted on or prior to
such sixth anniversary has not been fully adjudicated, cause to be maintained in
effect, at no cost to the beneficiaries thereof, to the extent available, the
directors' and officers' liability insurance policies maintained by the Company
and its subsidiaries as of the date of the Merger Agreement. Under the terms of
the Merger Agreement, Parent and the Company are required to maintain such
insurance coverage only to the extent that it can be maintained at an annual
cost of not greater than 200% of the annual premium for the Company's current
directors' and officers' liability insurance policies. If such insurance
coverage cannot be purchased or maintained at a cost not greater than that
amount, then Parent and the Company are required to provide as much insurance
coverage as can be purchased or maintained at such amount.
ITEM 4. THE SOLICITATION OR RECOMMENDATION.
As used in this Item 4, unless the context indicates another meaning the
terms "Elder-Beerman," "we," "us" and "our" mean the Company and its
subsidiaries together and the term "board" means the Board of Directors of the
Company.
RECOMMENDATION OF OUR BOARD. At a meeting of the Board of Directors held
on September 15, 2003, the independent directors of the Company (with one
director absent) unanimously (i) determined that the Merger Agreement, the Offer
and the proposed Merger are advisable, fair to and in the best interests of the
Company and its shareholders, (ii) approved the Merger Agreement, the Offer and
the proposed Merger, and (iii) recommended that the Company's shareholders
accept the Offer and tender their Shares pursuant to the Offer. At such meeting,
the Board of Directors also, among other things, approved, for purposes of Rule
16b-3 under the Exchange Act, the disposition by the directors and executive
officers of the Company of securities in the Offer and the Merger.
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS THAT SHAREHOLDERS ACCEPT
THE OFFER AND TENDER THEIR SHARES IN THE OFFER.
A letter to the Company's shareholders communicating the recommendation of
the Board of Directors appears as the cover page to this Statement. The letter
is also filed as Exhibit (a)(3) to this Statement and is hereby incorporated
herein by reference.
BACKGROUND OF THE OFFER; CONTACTS WITH PARENT AND PURCHASER. Our board of
directors has believed since February 2000 that a transaction relating to the
sale of the Company under the right circumstances could be beneficial to our
shareholders.
On February 28, 2000, we publicly announced that we had engaged Wasserstein
Perella & Co., as our financial advisor, to explore strategic alternatives
(including a sale of the Company, a merger with another retailer or a
divestiture of stores). As of February 27, 2000, the closing price of our Shares
was $4.19. Thereafter, we contacted various parties that our then advisor
believed might be interested in acquiring us. At that time, we entered into
confidentiality agreements with eight parties, including four possible strategic
buyers, and shared confidential information with each of them. We received
non-binding indications of interest from two of these parties. One of the
potential buyers did not make a definitive offer because it was not able to
obtain bank
11
financing. The other party made a non-binding offer on July 19, 2000, to acquire
all of our Shares at a price of $5.25 per share. Members of the board and our
then financial advisor discussed the $5.25 per share offer with our two largest
shareholders -- PPM America, Inc. and Snyder Capital Management, Inc., who in
August 2000 owned, respectively, approximately 13% and 20% of our then
outstanding Shares. These shareholders indicated that they would not support any
transaction at a price of $5.25 per share. After taking into account the
position of our largest shareholders and additional discussions with the board's
then financial advisor, the board determined to terminate any further sale
discussions at that time.
On August 11, 2000, we announced that we ceased exploring strategic
alternatives and would focus our efforts on developing and implementing our
strategic business plan. However, to provide our shareholders an opportunity to
sell all or a portion of their Shares at prices in excess of prevailing market
prices, we commenced a "dutch auction" self-tender on September 8, 2000. We
offered to purchase up to 3,333,333 of our Shares (plus an additional 2% of our
then outstanding Shares) at a price between $4.50 and $6.00 per Share in cash.
On October 5, 2000, the tender offer was concluded, and we purchased 3,462,363
of our then outstanding Shares for a price of $5.00 per Share or an aggregate
price of $17.3 million. Immediately after this purchase, we had 11,437,326
shares outstanding.
On October 6, 2000, our Shares closed at a price of $4.50 per Share. During
the period from October 6, 2000 through May 16, 2003, the average closing price
for our stock was $2.96 per Share, and the closing price did not again reach or
exceed $4.50 per share until after an announcement on May 16, 2003 that we
agreed to enter into exclusive discussions with a potential purchaser of the
Company. During this period, while we pursued our strategic business plan, our
board remained receptive to considering a possible sale transaction as a means
of maximizing shareholder value.
On and after August 9, 2002, the Company received a number of expressions
of interest concerning a possible acquisition of the Company, all of which were
described in greater detail in the preliminary proxy statement filed by the
Company with the SEC on August 29, 2003.
On August 19, 2002, our board hired RBC Dain Rauscher Inc. ("RBC"), a
member company of RBC Capital Markets, to act as our financial advisor generally
and to assist us, in particular, in evaluating strategic alternatives and in
considering a preliminary offer letter we had previously received on August 9,
2002. Before selecting RBC, we interviewed six investment banking firms. RBC was
selected primarily for its retail industry expertise and its willingness to make
senior personnel readily available to assist us.
The receipt of these proposals led to a process in which two bidders, one
of which was Wright Holdings, Inc., were instructed on May 12, 2003 by Thompson
Hine, as the Company's counsel, to submit their last and best offers and that a
final decision would be made on the basis of the bids submitted. Both parties
agreed to submit sealed bids by 4:30 p.m. on bid letters that contained
identical terms except for the bid price. Wright Holdings, Inc. submitted the
highest bid of $6.00 per Share in cash. Subject to our board's approval, the
executive committee accepted Wright Holdings, Inc.'s bid on May 13, 2003, which
it agreed to submit to our board for consideration and approval on May 14, 2003.
The bid letter, when approved by our board, would constitute a basis for
exclusive negotiations between Wright Holdings, Inc. and us at the specified
price (the "exclusivity letter") with a view to executing a definitive
acquisition agreement.
Our board met on May 14, 2003 to consider whether to approve the
exclusivity agreement with Wright Holdings, Inc. Our legal and financial
advisors were also present. Mr. Mason reviewed the events that occurred since
the last board meeting on April 11, 2003 that had resulted in the proposed
exclusivity letter with Wright Holdings, Inc. During this approximately
one-month period there had been four meetings of the executive committee at
which the committee reviewed the various steps we took that eventually led to
the proposed exclusivity letter. The committee's objective was to maximize
shareholder value, and accordingly, it allowed the discussions and negotiations
with the various bidders to proceed in a manner that the committee believed was
likely to result in the highest offer price for our Shares from a bidder that
our board would likely consider to be financially capable of completing an
acquisition transaction.
12
RBC then provided background information concerning Goldner Hawn Johnson &
Morrison Incorporated, the sole shareholder of Wright Holdings, Inc., and its
potential access to funding in order to enable Wright Holdings, Inc. to acquire
us.
Thompson Hine reviewed with the directors the following provisions of the
exclusivity agreement:
- Wright Holdings, Inc.'s indication of interest in acquiring us at a price
of $6.00 per Share in cash;
- Our agreement to negotiate exclusively with Wright Holdings, Inc. for a
45-day period;
- Our mutual agreement to negotiate a definitive acquisition agreement
during the exclusivity period; and
- Our agreement, that if we do not enter into a definitive acquisition
agreement with Wright Holdings, Inc. and another party acquired us prior
to May 31, 2004 at a price in excess of $6.00 per Share, to reimburse
Wright Holdings, Inc.'s reasonable documented out-of-pocket expenses up
to $250,000 (subsequently increased by amendment of the exclusivity
letter to $500,000) and a topping fee of $500,000.
Our board, after considering many of the factors discussed at "Reasons for
the Recommendation of Our Board of Directors," approved the exclusivity
agreement.
On May 16, 2003, we publicly announced that we "had recently received
unsolicited expressions of interest relating to the possible acquisition of the
Company. After considering these expressions of interest, the Company entered
into a letter agreement with one of the interested parties. Under this letter
agreement, the Company and the interested party will discuss, on an exclusive
basis for a limited period of time, the possible sale of the Company."
Over the course of the next 40 days there were extensive discussions and
negotiations among Mr. Mason, RBC, our counsel and a representative of, and
counsel for, Wright Holdings, Inc. Messrs. Bergren and Tomechko did not
participate on behalf of Wright Holdings, Inc. or the Company in any discussions
or negotiations relating to the terms of the sale transaction or the definitive
merger agreement.
A regular meeting of our board was scheduled to be held on June 4, 2003
prior to our annual meeting of shareholders on June 5, 2003. Given that ongoing
negotiations with Wright Holdings, Inc. appeared to be progressing towards a
definitive merger agreement, the board meetings held on June 4 and 5, 2003 were
principally devoted to updating our board on such progress and considering the
proposed merger transaction. RBC and Thompson Hine participated in the meetings,
and Mr. Bergren and Mr. Tomechko also attended a portion of the meetings.
At the meeting of our board on June 4, 2003 Thompson Hine reviewed with the
board its fiduciary duties under applicable law, including those duties in
connection with the sale of a company. Our directors discussed our efforts to
sell the Company in 2000 when a number of strategic and other parties were
invited to submit bids for us, which resulted in the receipt of one indication
of interest from a strategic buyer at $5.25 per Share on July 19, 2000. RBC
commented that market valuations for department store chains had, in general,
deteriorated since that time and that we, in particular, had experienced a
significant decline in the trading price of our stock. A discussion ensued
concerning the likelihood of interest by other potential buyers. In this
respect, the directors noted that no strategic buyer had made an offer to
acquire us since July 2000, notwithstanding our depressed stock price, as well
as the fact that our public announcement on May 16, 2003 alerted potential
buyers that we would be considering a sale transaction. It was also noted that
the period from the signing of the merger agreement to the consummation of the
transaction, including the fact that the holders of two-thirds of our shares
would have to approve any merger, would likely provide a period of time of at
least 90 days after the signing and announcement of the merger agreement for
other potential bidders to submit bona fide proposals to acquire all of the
stock of the Company on terms superior to the proposed merger. Our board
considered with its advisors whether the expense reimbursement fee of up to $1.0
million and the termination fee of $2.0 million payable to Wright Holdings, Inc.
if the Company were to terminate the merger agreement and accept another offer
was likely to deter potential bidders. The board considered that these payments
would add approximately $0.23 per Share in additional cost to an alternative
transaction with another bidder. The board believed that this amount would not
deter interested parties from making an offer for the Company. Thompson Hine
then reviewed the merger agreement with the board, focusing on certain key
provisions. These provisions included sections relating
13
to the circumstances that would permit the board to accept a higher offer if a
higher offer emerged, related expense and termination fee payments, the nature
and extent of the Company's representations and warranties, the circumstances
that would permit Wright Holdings, Inc. to terminate the merger agreement in the
event of a material adverse change or the failure of its lenders to fund
financing commitments, provisions relating to payments in lieu of employee
options and incentive shares, and the provisions relating to the board's
recommendation of the merger.
At the meeting of our board on June 5, 2003, RBC indicated that it
understood that in the near future the board would likely request it to render
an opinion as to the fairness, from a financial point of view, of the
consideration to be paid in the proposed merger transaction and that today's
meeting was for informational purposes only. RBC then reviewed generally with
the board the various valuation methodologies and analyses it follows in order
to be able to render a fairness opinion. RBC distributed written materials to
the board and discussed the written materials with the board. These materials
included RBC's review of the $6.00 merger price based on various methods of
valuation. It was noted that these materials would be updated, as appropriate,
and reviewed again with the board at the time RBC was requested to render its
fairness opinion.
A meeting of our board was held on June 19, 2003 to further consider the
proposed merger transaction. Mr. Mason stated that it was expected that the
merger agreement might be presented for approval by the board during the
following week. In advance of the meeting, the directors had been provided with
a copy of a revised draft of the merger agreement. Thompson Hine again reviewed
key provisions of the merger agreement with the directors and reported that
there had been no material changes in the draft merger agreement since the last
draft reviewed by the board.
RBC then described in detail the valuation methodologies that it would use
in connection with arriving at its fairness opinion. After RBC's presentation,
the directors reviewed the Company's book value as reflected in our financial
statements, noting that our reported book value of $17 per Share as of the end
of our fiscal year was not indicative of our value either as a going concern or
on a liquidation basis, given, among other factors, costs we would incur to
terminate contractual obligations, including store lease obligations totaling
approximately $279.0 million. Mr. Mason indicated that prior analyses performed
by the Company had supported this view and that he would review these analyses
with Mr. Tomechko prior to the next board meeting.
The board then engaged in a discussion regarding the proposed merger,
during which the board compared the prospects of remaining a public company to
the prospects of engaging in the proposed merger transaction. In that regard,
the board observed that many of the factors that caused our Shares to trade at
price levels substantially below the merger price are not likely to change in
the foreseeable future. Factors considered included, among others, our
relatively small market capitalization; concerns about the intense competition
that we face as a smaller regional department store operator from larger
national department store chains, discount retailers and big box retailers; our
uneven financial performance as we seek a profitable niche in smaller to mid-
size markets with our concept store format; and the stock markets' lack of
enthusiasm for department store stocks generally over the last three years that
has led to declining valuations in our industry. In contrast, the board noted
that the merger transaction will provide our shareholders with the opportunity
to achieve liquidity and receive a significant premium for their Shares.
A board meeting was held on June 25, 2003 to consider approval of the
merger agreement. Mr. Mason advised the board that Wright Holdings, Inc. had
signed the merger agreement substantially in the same form presented to the
board at its last meeting. He also advised the board that he had reviewed with
our financial personnel the Company's prior liquidation analyses, which
supported the view that a liquidation of the Company was unlikely to provide
value for shareholders in excess of the value that would be delivered to
shareholders upon the completion of the proposed merger. Mr. Mason also advised
the board that he had reviewed with our internal financial personnel the
Company's prior liquidation analyses in relation to the Company's balance sheet
at May 31, 2003. This review consisted of applying liquidation discounts by
asset category that the Company had used in the past when estimating liquidation
values to the assets reflected on the Company's balance sheet at May 31, 2003.
These discounted asset values were then reduced by the Company's minimum lease
payments of approximately $279.0 million and balance sheet liabilities at May
31, 2003, with the result that liabilities substantially exceeded the estimated
liquidation value of the Company's assets. This supported the view that a
14
liquidation of the company was unlikely to provide value for shareholders in
excess of the value that would be delivered to shareholders upon completion of
the proposed merger.
Thompson Hine then reviewed with the board the commitment letters that
Wright Holdings, Inc. had received from its financing sources, to provide the
funds necessary to consummate the merger and to replace our indebtedness that
would come due as a result of the merger. RBC then rendered its oral opinion to
our board that as of the date of the meeting and subject to the assumptions,
qualifications and limitations set forth in its written opinion that was
concurrently delivered to us, the merger price of $6.00 per Share was fair, from
a financial point of view, to our shareholders. (RBC's June 25 opinion was
reproduced in its entirety in our preliminary proxy statement relating to the
Wright Holdings merger together with a summary of RBC's review and analyses
performed in connection with that opinion, but you should note that the RBC
opinion was superseded by its September 15 opinion relating to the transaction
with Parent; RBC's September 15, 2003 opinion is reproduced in its entirety as
Annex B to this Statement and a summary of RBC's review and analyses performed
in connection with that opinion appears later in this Statement under the
caption "Opinion of Financial Advisor," and you should read that material
carefully.) Following further discussion, the board of directors, by the
unanimous vote of the independent directors, approved the merger agreement with
Wright Holdings, Inc. and determined that it was fair to and in the best
interests of the Company and our shareholders, authorized our chairman to
execute the merger agreement and recommended adoption of the merger agreement by
our shareholders.
On June 26, 2003 we issued a press release announcing execution of the
merger agreement with Wright Holdings, Inc. On June 27, 2003, we received a
request from a retailer for an opportunity to conduct due diligence with a view
to offering to acquire us. This retailer subsequently advised us on July 31,
2003 that it had no further interest in considering a possible acquisition of
the Company.
On July 25, 2003, Mr. Mason received a brief telephone call from Tim
Grumbacher, chairman and chief executive officer of Parent, advising him that
Parent was sending him a letter proposing a business combination between Parent
and us. In the letter, dated July 25, 2003, Parent stated that, based upon
publicly available information, Parent was prepared to provide all of our
shareholders with $7.00 in cash for each of our Shares and our shareholders
would receive the $7.00 cash purchase price at approximately the same time at
which they would receive the $6.00 under our existing merger agreement with
Wright Holdings, Inc. Mr. Grumbacher's letter further stated that Parent was
prepared immediately to enter into a confidentiality agreement with the Company
and commence its due diligence.
On July 28, 2003, our board and its legal and financial advisors met to
consider Parent's letter of July 25, 2003. Thompson Hine advised our board that
there were certain requirements in the existing merger agreement with Wright
Holdings, Inc. that had to be satisfied before it could enter into any
confidentiality agreement, or acquisition discussions, with Parent.
Specifically, the following had to occur:
- our board had to determine that Parent's proposal was unsolicited, and
our board did so determine;
- our counsel Thompson Hine had to advise our board that there was a
reasonable basis to conclude that the failure to consider the Parent's
proposal would result in a breach of our board's fiduciary duties under
Ohio law, and Thompson Hine did so advise our board; and
- our board had to determine that there was a reasonable likelihood that
Parent's proposal of July 25, 2003 would result in an alternative
proposal that was a superior proposal to the merger proposal with Wright
Holdings, Inc.
After considering with its advisors Parent's possible strategic rationale
for acquiring us, the possible impact of our acquisition on Parent's earnings
and leverage, the ability of Parent to finance the acquisition, the likelihood
that the proposed combination would satisfy applicable regulatory requirements,
and the fact that Parent was proposing a tender offer followed by a merger, our
board concluded that there was a reasonable likelihood that Parent's proposal of
July 25, 2003 would mature into a superior proposal, that is, a transaction that
provided greater value to our shareholders than the merger provided for under
the existing merger agreement with Wright Holdings, Inc., that was reasonably
likely to be completed and that would have committed financing at least to the
same extent as Wright Holdings, Inc.'s financing was committed on June 25, 2003.
Our board then directed us to
15
enter into a confidentiality agreement with Parent and, at the same time, to
continue to honor our obligations under the merger agreement with Wright
Holding, Inc. and proceed towards the holding of a special meeting of our
shareholders to vote on that merger agreement.
On July 29, 2003, we announced that our board authorized us, subject to the
execution of a confidentiality agreement, to provide Parent with the requested
information and, as appropriate, to engage in discussions and negotiations with
Parent. On July 30, 2003, we entered into a confidentiality agreement with
Parent, pursuant to which the parties agreed to provide, among other things, for
the confidential treatment by Parent of their discussions and the exchanged
information. Also on July 30, 2003, Messrs. Mason and Bergren met with Mr.
Grumbacher and Michael L. Gleim, a director of Parent, to discuss the possible
combination of Parent and us. On July 31, 2003, Parent and Purchaser commenced
their due diligence at the offices of our counsel in Dayton, Ohio. While this
due diligence review proceeded, we negotiated the terms of a merger agreement
with Parent.
On September 3, 2003, Mr. Grumbacher telephoned Mr. Mason to discuss a
definitive proposal for a business combination between Parent and us in which
the offer price per Share would be $7.00. Also on September 3, 2003, Mr.
Grumbacher sent a letter to our board setting forth the terms of the proposed
transaction. The letter proposed that Parent and us enter into a merger
agreement that would provide for Parent to commence promptly a tender offer to
purchase all of our outstanding shares for $7.00 per Share in cash. The
principal conditions to consummation of the tender offer were to be (i) at least
two-thirds of our outstanding shares, on a fully diluted basis, be tendered and
not withdrawn prior to the expiration date of the offer, (ii) the proceeds of
the financings contemplated by Parent's commitment letters from Bank One, NA and
General Electric Capital Corporation are available to Parent, and (iii) the
expiration of the applicable waiting period under the HSR Act. The letter
further proposed that as soon as practicable after consummation of the tender
offer, we would be merged with Purchaser and all our outstanding Shares (other
than Shares held by Parent and its affiliates, Shares in our treasury and Shares
held by shareholders who properly exercise dissenters' rights under Ohio law)
would be converted into the right to receive $7.00 per Share in cash.
On September 4, 2003, our board met, together with its legal and financial
advisors, to consider Parent's offer of September 3, 2003. Our board concluded
that Parent's offer was a superior proposal to the merger provided for in the
merger agreement with Wright Holdings, Inc. and that we should enter into a
merger agreement with Parent. Following the conclusion of our board meeting, we
announced that we had notified Parent and Wright Holdings, Inc. of our intention
to enter into the merger agreement with Parent and Purchaser, subject to
complying with our obligations under our then existing merger agreement with
Wright Holdings, Inc., including a three business-day period during which we
were required to engage in good faith exclusive negotiations with Wright
Holdings, Inc. to see if the terms of the existing merger agreement could be
improved.
On September 9, 2003, we received a revised proposal from Wright Holdings,
Inc. to increase the consideration payable pursuant to its existing merger
agreement with us from $6.00 per share to $7.05. Following our board's
consideration of the revised proposal, we announced that we had entered into an
amendment to our merger agreement with Wright Holdings, Inc. for the sole
purpose of increasing the consideration payable to our shareholders to $7.05 per
Share. The only change effected by the amendment was to increase the price to be
paid in the merger.
On September 10, 2003, Mr. Grumbacher called Mr. Mason to advise him that
Parent was prepared to increase its offering price to $7.25 per Share in cash.
Immediately after the call, Parent sent a letter to our board setting forth its
firm offer and advising the board that Parent was prepared to immediately enter
into a merger agreement with the Company in the form provided with the letter.
The letter further stated that each of Bank One and General Electric Capital
Corporation had confirmed to Parent in writing that its commitment remained
effective to finance the $7.25 offer. In the form of agreement provided, Parent
confirmed its willingness to reimburse the Company for the $3 million in
termination and expense fees that the Company would be required to pay Wright
Holdings, Inc. upon termination of its existing agreement with Wright Holdings,
Inc. Parent also issued a press release announcing that it had increased its
offering price to $7.25 per Share in cash.
At the request of Wright Holdings, Inc., on the morning of September 12,
2003 Mr. Mason, together with our legal and financial advisors, met with Michael
Sweeney, Chairman of Wright Holdings, Inc., and its legal advisor. At this
meeting, the representatives of Wright Holdings, Inc. offered to increase the
consideration
16
payable pursuant to our existing agreement with them from $7.05 per Share to
$7.75, but only if we were willing to increase the amounts payable to Wright
Holdings, Inc. upon termination of the agreement, as a termination fee or for
the reimbursement of expenses, by an aggregate of $1.0 million. Following
negotiations, Wright Holdings, Inc. agreed to increase the price offered to
$7.80 per Share and to relax certain restrictions contained in the merger
agreement relating to our ability to negotiate directly with Parent and to
reduce from three business days to one business day the period during which we
were required to negotiate with Wright Holdings, Inc. before we could accept a
superior proposal from another party. Wright Holdings, Inc. however, was not
willing to remove the requirement that the termination fee and expense
reimbursement provisions be increased.
At a meeting held in the afternoon of September 12, 2003, our board
reviewed, together with its legal and financial advisors, the revised proposal
from Wright Holdings, Inc. In light of the significant increase in price
reflected in the revised proposal and the board's belief that the acceptance of
this proposal was the best way to maximize value for our shareholders, the board
authorized acceptance of the revised proposal and the execution of an amendment
to its merger agreement with Wright Holdings, Inc. The only changes effected by
the amendment were those described in the preceding paragraph.
Late in the afternoon of September 12, 2003, Mr. Mason telephoned Mr.
Grumbacher and advised him that we had amended our existing merger agreement
with Wright Holdings, Inc. to provide that the merger consideration payable in
the transaction would be increased from $7.05 per Share to $7.80 per Share. Mr.
Mason told Mr. Grumbacher that the amendment also provided for an increase by
$500,000 of both the cap on our payment obligations for reimbursement of
expenses and the termination fee payable under certain circumstances, including
a termination of the agreement if we were to enter into the merger agreement
with Parent. Mr. Mason also advised Mr. Grumbacher that the amendment to the
merger agreement had relaxed the restrictions on our ability to communicate with
Parent and had reduced to one business-day the period of time that we were
obligated to engage in exclusive negotiations with Wright Holdings, Inc. prior
to our acceptance of a superior proposal.
Later that same day, Mr. Grumbacher called Mr. Mason to advise him that
Parent was willing to increase its offering price to $8.00 per Share. On
September 13, 2003, Mr. Grumbacher sent a letter to our board confirming
Parent's firm offer to pay $8.00 per Share in a two step transaction, consisting
of a first step cash tender offer, followed by a second step merger of Purchaser
and us.
At a meeting held on September 14, 2003, our board considered the revised
proposal from Parent. In light of the increased consideration that would be
payable to our shareholders under the revised proposal, our board authorized
that notification be given to Wright Holdings, Inc. of our intention to enter
into a merger agreement with Parent providing for consideration per Share of
$8.00.
On September 15, 2003, we announced that we had received a revised proposal
from Parent and that, after reviewing the revised proposal, we had notified
Parent and Wright Holdings, Inc. of our intention to enter into the merger
agreement with Parent and Purchaser, subject to complying with our obligations
under our then existing merger agreement with Wright Holdings, Inc., including a
one business-day period during which we were required to engage in good faith
negotiations with Wright Holdings, Inc. prior to our final approval of the
merger agreement with Parent and Purchaser. Parent also issued a press release
announcing that it had increased its offering price.
In the evening of September 15, 2003, our board, after being notified by
Wright Holdings, Inc. that it would not be increasing the price payable under
its merger agreement, met, together with its legal and financial advisors, to
formally consider termination of our existing agreement with Wright Holdings,
Inc. and the execution of a new merger agreement with Parent and Purchaser. At
the meeting, all directors, other than Mr. Bergren and one of the independent
directors, were present. After reviewing the terms of the proposed agreement and
receiving the opinion of RBC, our financial advisor, as to the fairness, from a
financial point of view, to our shareholders of the consideration offered, the
independent directors, by the unanimous vote of all directors present,
determined that the Merger Agreement with Parent was a superior proposal and,
thereafter, approved termination of the existing agreement with Wright Holdings,
Inc. and execution of the proposed agreement with Parent and Purchaser. (RBC's
opinion is reproduced in its entirety as Annex B and a summary of the review and
analyses RBC
17
performed in connection with its opinion appears later in this Statement under
the caption "Opinion of Financial Advisor.")
Promptly following the conclusion of the board meeting, we gave notice to
Wright Holdings, Inc. of the termination of the then existing merger agreement
and immediately thereafter we, Purchaser and Parent executed and delivered the
Merger Agreement. A press release announcing the execution of the Merger
Agreement and the transactions contemplated thereby, including the Offer and the
Merger, was issued by each of Parent and us on September 16, 2003. On September
23, 2003, Purchaser commenced the Offer to purchase all of our outstanding
Shares at $8.00 per Share in cash.
REASONS FOR THE RECOMMENDATION OF OUR BOARD OF DIRECTORS. In approving the
Merger Agreement with Parent and Purchaser and the transactions contemplated
thereby, including the first step offer to purchase all of our outstanding
Shares at the Offer Price of $8.00 per Share and the second step merger with
Purchaser (the "Merger"), and recommending that all holders of our Shares accept
the Offer and tender their Shares pursuant to the Offer, our board considered a
number of factors, including the following:
- Recent and Historical Trading Activity. Our board considered that the
$8.00 per Share price represents a significant premium over the recent
and historical trading prices of our Shares, including:
- a 182.3% premium over the average closing price of our Shares for the
thirty days prior to May 16, 2003, the date on which we had announced
that we were entering into exclusive negotiations with a third party
relating to our potential sale;
- the following premiums over the per Share prices derived from the
average closing prices for the periods specified below ending on May 12,
2003, the date on which we considered two competing proposals to acquire
us prior to entering into exclusive discussions with one of those
parties:
<Table>
<Caption>
PERIOD PREMIUM
- ------ -------
May 12, 2003.............................................. 159.7%
30-day average............................................ 193.7%
60-day average............................................ 212.3%
90-day average............................................ 220.4%
</Table>
and that such premiums compared favorably with premiums paid in other
comparable transactions; and
- our board recognized that prior to August 1999, our Shares traded at a
price in excess of $8.00, that stocks in general and retail stocks, in
particular, have generally traded at lower levels since that time, and
that if the Offer is consummated, our shareholders will not have the
opportunity to participate in any future stock appreciation that might
occur; however, given that the Offer Price is more than a 100% premium
to any price that our Shares have traded at since October 2001
(excluding prices since May 13, 2003, the date on which the two
competing final proposals for us were considered by our board's
executive committee), our board believed that our shareholders should
have the opportunity to accept the Offer.
- Company Operations and Market Price Appreciation. Our board's judgment,
based on its knowledge of our business, assets, financial condition and
results of operations, our competitive position, the nature of our
business and the retail industry in which we compete and its belief that
many of the factors that may have caused our Shares over the last two
years to trade at price levels substantially below the Offer Price are
not likely to change in the foreseeable future, that the Offer provided
an exceptional opportunity for shareholders to maximize their investment
in us.
- Effect of Sale Process on Our Trading Price. Our board's concern that,
absent our entering into a merger agreement first with Wright Holdings,
Inc. and then Parent, the trading price of our Shares could return to the
levels at which they were trading over the four years prior to our
announcing that we would be considering a possible sale transaction. The
foregoing notwithstanding, our board also took into account that our
business has shown some improvement in the recent past and that, as a
result of the Offer and the proposed Merger, shareholders will no longer
be able to participate in any potential future growth. In this
18
regard, it was observed that, although we have continued to operate at a
loss over the last two and one-half years, there have been a number of
improvements in our financial performance, for example: (i) through a
combination of inventory control, reduction in capital expenditures, and
expenses control, we were able to reduce debt $17.1 million in fiscal
year 2001, $33.4 million in fiscal year 2002, and $12.0 million in the
first six months of fiscal year 2003 ended August 2, 2003; and (ii) at
the same time, we were able to reduce the net loss (before accounting
changes) in each of these periods when compared with the comparable prior
year period.
- Negotiated and Market-Tested Price. The fact that the $8.00 price
represented a negotiated and market tested price, reflecting, in the
board's judgment, the highest price likely to be offered to our
shareholders in a sale transaction. In this regard, our board considered
the efforts taken to maximize shareholder value, including the
solicitation of third-party bids in 2000, the board's willingness since
2000 to consider any and all bona fide expressions of interest, the
bidding process that occurred in connection with our entering into the
exclusivity agreement with Wright Holdings, Inc., our announcement on May
16, 2003 that we had entered into exclusive negotiations for a limited
period of time concerning a possible sale which alerted the marketplace
to the fact that we were considering a possible sale and the bidding
process that developed between Wright Holdings, Inc. and Parent.
- Terms of Merger Agreement. The fact that the Merger Agreement was
substantially similar to the one previously negotiated with Wright
Holdings, Inc. and would permit our board to consider, subject to the
exercise of its fiduciary duties, unsolicited proposals which are, or are
reasonably likely to result in, a superior proposal for us. Our board
also noted that prior to accepting a superior proposal it would be
required to pay Parent up to $3 million in termination fees (plus an
additional $3 million to compensate Parent for funds paid to the Company
upon signing of the Merger Agreement), which could deter an interested
party from making a superior proposal.
- Consideration of Alternatives. Our board's belief, after consideration
of various strategic alternatives, that a sale transaction represented
the best means for maximizing shareholder value. In this regard, the
board considered, as discussed above, whether the market price of our
Shares was likely to exceed the Offer Price in the foreseeable future if
we continued as an independent company and whether our book value could
be converted to cash through selected asset sales or in a liquidation. It
also considered that our current strategic and operating plan was
developed and refined over several years by the board, its committees,
and management with the prime objective of maximizing value from
operations and that a wide range of options were considered in that
process including, among other things, a sale of the credit card
business, major cost reductions, different organizational designs, more
rapid expansion, different merchandising concepts, private label
programs, and the closing of nonperforming stores. Some of these were
adopted by us and are part of our current business plan; while others
were rejected because the board determined that they were not likely to
add value.
- Certainty of Value and Timing. Our board considered the fact that the
Offer Price consideration is all cash, which provides certainty of value
to our shareholders and that the Offer afforded shareholders the
opportunity to obtain cash for all of their Shares at the earliest
possible time.
- Presentation and Opinion of Financial Advisor. The financial
presentation of RBC, including its opinion dated September 15, 2003 to
our board that, as of that date and subject to the assumptions,
qualifications and limitations set forth in its written opinion that was
concurrently delivered to us, the Offer Price was fair, from a financial
point of view, to our shareholders (see "Opinion of Financial Advisor,"
as well as the full text of the RBC opinion contained in Annex B, for the
assumptions, qualifications and limitations set forth in RBC's opinion,
as well as the presentation made by RBC to our board in connection with
its opinion).
The preceding discussion of the material factors considered by our board is not
intended to be exhaustive, but does set forth the principal factors considered
by our board.
OPINION OF FINANCIAL ADVISOR. We retained RBC Dain Rauscher Inc. ("RBC"),
a member company of RBC Capital Markets, under an engagement letter dated August
19, 2002, to act as our financial advisor in
19
connection with a review of our strategic alternatives and, if requested, to
furnish an opinion as to the fairness to us or our shareholders (as applicable),
from a financial point of view, of the consideration to be received by us or our
shareholders in connection with any possible transaction involving the
acquisition of our Shares or assets.
On September 15, 2003, RBC rendered its oral opinion, which was confirmed
by delivery of its written opinion dated September 15, 2003, to our board of
directors that, as of that date and subject to the assumptions, qualifications
and limitations set forth in its opinion, the Transaction Consideration, as
defined below, was fair, from a financial point of view, to our shareholders.
The full text of RBC's written opinion is attached to this Statement as Annex B.
This summary of the opinion is qualified in its entirety by reference to the
full text of the opinion. We urge shareholders to read the RBC opinion carefully
and in its entirety.
RBC's opinion was provided for the information and assistance of our board
of directors in connection with its consideration of the Offer and the Merger
(referred to together in the RBC Opinion and this section as the "Transaction").
RBC did not express any view as to, and its opinion did not address, the merits
of our underlying decision to engage in the Transaction compared to any
alternative business strategy or transaction in which we might engage. RBC was
not authorized by our board of directors to, and did not, solicit other
purchasers of the Company (although RBC conducted discussions in the past with
certain alternative bidders who had made unsolicited proposals to us and RBC had
discussions with both Wright Holdings, Inc. and Parent during the competitive
bidding process that culminated in the execution of the final Merger Agreement
with Parent on September 15, 2003) nor did RBC consider any transactions
alternative to the Transaction (except for certain acquisition proposals made by
the alternative unsolicited bidders and during the competitive bidding process
between Wright Holdings, Inc. and Parent). Otherwise, none of Elder-Beerman, our
board or any of our affiliates imposed any limitations on the scope of, or gave
instructions regarding, RBC's fairness opinion.
RBC's opinion does not constitute a recommendation to our shareholders as
to whether they should tender any of their Shares into the Offer or as to how
they should vote any of their shares on the adoption of the Merger Agreement.
RBC's opinion addressed solely the fairness, from a financial point of
view, of the Transaction Consideration to our shareholders and did not address
in any way any other merger terms or agreements including, without limitation,
the financial or other terms of any voting, employment or financing agreement.
As used in this section and in the opinion of RBC, the term "Transaction
Consideration" refers to the per Share price of $8.00 payable in cash (without
interest) in the Offer and the Merger under the provisions of the Merger
Agreement.
In rendering its opinion, RBC assumed and relied upon the accuracy and
completeness of the financial, legal, tax, operating, and other information
provided to it by us or otherwise made available to it (including, without
limitation, the financial statements and related notes of the Company). RBC did
not assume responsibility for independently verifying, and did not independently
verify, this information.
Included in the information (summarized below) reviewed by RBC in
connection with its review of the Transaction and the preparation of its opinion
were historical financial information (both as reported and as normalized
through adjustments to eliminate extraordinary and non-recurring items) and
financial forecasts prepared by our management. This historical and forecast
information is referred to, in this section and the opinion of RBC, as the
"Company Financials." As noted in RBC's opinion, the Company Financials were
included by us in our amended preliminary proxy statement filed with the SEC on
August 29, 2003 in connection with the then-pending Wright Holdings merger
except for our adjusted historical results as of August 2, 2003 and our
management forecast for 2003, which we provided to RBC subsequent to that
filing. In preparing its opinion, RBC relied, without independent investigation,
on the advice received from us that the Company Financials were prepared by our
management in good faith and in the ordinary course of business for use by us
and were based on both:
- adjustments, consistent with our financial books and records and
summarized in our August 29, 2003 amended preliminary proxy statement, to
eliminate extraordinary and non-recurring items, and
- in the case of the forward-looking Company Financials, the best currently
available estimates of our future financial performance,
20
which, in both cases, management believed reasonable at the time of their
preparation. We advised RBC that RBC's use of the Company Financials in
connection with RBC's fairness analysis and the preparation of RBC's opinion had
been authorized by our board of directors. In addition, RBC assumed that we
would perform substantially in accordance with the forward-looking Company
Financials. In its opinion, RBC acknowledged that we had further advised it that
actual results for the periods covered by the forward-looking Company Financials
might differ materially from the forecasted results and that we had referred RBC
to our Report on Form 10-K for the fiscal year ended February 1, 2003 and our
August 29, 2003 amended preliminary proxy statement for an identification of
certain factors that could materially affect our future operational results. RBC
familiarized itself with the relevant portions of those documents in connection
with the preparation of its opinion.
In rendering its opinion, RBC did not assume any responsibility to perform,
and did not perform, an independent evaluation or appraisal of any of our assets
or liabilities, and RBC was not furnished with any such valuations or
appraisals. In addition, RBC did not assume any obligation to conduct, and did
not conduct, any physical inspection of our property or facilities.
RBC assumed, in all respects material to its analysis, that the
representations and warranties of each party contained in the Merger Agreement
were true and correct, that each party would perform all of its covenants and
agreements required to be performed by it under the Merger Agreement, and that
all conditions to the consummation of the Merger would be satisfied without
waiver.
RBC's opinion spoke only as of the date it was rendered, was based on the
conditions as they existed and information with which it was supplied as of such
date, and was without regard to any market, economic, financial, legal, or other
circumstances or event of any kind or nature which might exist or occur after
such date. Unless otherwise noted, all analyses were performed based on market
information available as of September 12, 2003 (the last trading day following
the end of which its analysis was finalized and its opinion rendered).
In connection with its review of the Transaction and the preparation of its
opinion, RBC undertook the review and inquiries and performed other studies and
analyses it deemed necessary and appropriate under the circumstances, including:
- reviewing the financial terms of the draft dated September 15, 2003 of
the Merger Agreement (RBC assumed in its opinion that the executed
version of the Merger Agreement would not differ, in any respect material
to its opinion, from that draft);
- reviewing and analyzing certain publicly available financial and other
data with respect to us and certain other relevant historical operating
data relating to us made available to RBC from published sources and from
the internal records of the Company;
- conducting discussions with members of our senior management with respect
to the business prospects and financial outlook of the Company;
- reviewing the Company Financials (as defined above); and
- reviewing the reported prices and trading activity for our Shares.
In arriving at its opinion, in addition to reviewing the matters listed
above, RBC performed the following analyses:
- RBC compared the premium implied by the Transaction Consideration with
the premiums paid in certain selected precedent transactions where the
acquired company was publicly traded prior to the transaction;
- RBC prepared a discounted cash flow analysis using the Company
Financials;
- RBC compared selected market valuation metrics of the Company and other
comparable publicly-traded companies with the metrics implied by the
Transaction Consideration; and
- RBC compared the financial metrics, to the extent publicly available, of
certain selected precedent transactions with the financial metrics
implied by the Transaction Consideration.
21
Set forth below is a summary of RBC's analyses, as presented to our board
of directors, including information presented in tabular format. To fully
understand the summary of the analyses used by RBC, the tables must be read
together with the text of each summary. The tables alone do not constitute a
complete description of the analysis. Considering the data set forth in the
tables without considering the full narrative description of the financial
analyses, including the methodologies and assumptions underlying the analyses,
could create a misleading or incomplete view of the financial analyses performed
by RBC.
Premiums Paid Analysis. RBC compared the premiums implied by the
Transaction Consideration to the premiums paid in five acquisitions of broad
line department store retailers and moderate-priced specialty softline companies
that RBC deemed to be similar to us where the acquired company was publicly
traded prior to the acquisition and to which the concept of a premium to the
unaffected market price (inherent in this analytical methodology) was applicable
(these five acquisitions were included within the broader list of ten
acquisitions, collectively referred to in RBC's written materials and in this
summary as the "Selected Precedents," considered in RBC's Precedent Transaction
Analysis and asterisked in the discussion of that analysis later in this section
to indicate use in that analysis). RBC compared the $8.00 per Share Transaction
Consideration, expressed as a percentage of our average per Share closing price
over periods of one, 30, 60 and 90 trading days prior to May 13, 2003 (RBC used
this date because it was the date on which the two then-competing final
proposals for the Company were considered by our executive committee, which
decided to recommend the $6.00 per Share proposal from Wright Holdings, Inc. to
our board), to the premiums paid in the five Selected Precedents used in this
analysis, expressed as a percentage of the acquired company's average per share
closing prices over periods of one, 30, 60 and 90 trading days prior to the
announcement dates of those acquisitions. The following table summarizes this
analysis:
<Table>
<Caption>
IMPLIED SELECTED PRECEDENTS
TRANSACTION ---------------------------------
PREMIUMS MINIMUM MEDIAN MEAN MAXIMUM
----------- ------- ------ ---- -------
Premium to average closing stock price over period:
1 day prior to May 13, 2003........................ 159.7% 2.3% 32.6% 31.6% 69.7%
30 days prior to May 13, 2003...................... 193.7% (6.6)% 38.4% 48.9% 120.4%
60 days prior to May 13, 2003...................... 212.3% (20.7)% 44.1% 53.2% 153.4%
90 days prior to May 13, 2003...................... 220.4% (45.9)% 47.9% 51.2% 168.2%
</Table>
Aggregating the one, 30, 60 and 90 day Selected Precedents data on a
minimum, median, mean and maximum basis, as set forth in the preceding table,
this analysis resulted in an implied valuation range of $1.35 to $6.70 per
Share.
Discounted Cash Flow Analysis. RBC performed a discounted cash flow
analysis in which it analyzed the present (as of August 2, 2003) value of our
projected after-tax cash flows through 2007 at a range of discount rates and
terminal EBITDA (earnings before interest, taxes, depreciation and amortization)
multiples. In performing this analysis, RBC:
- based projected free cash flows on the Company Financials;
- defined free cash flows as EBITDA less cash taxes on EBIT (earnings
before interest and taxes), capital expenditures and increases in working
capital;
- calculated terminal values by applying a terminal EBITDA multiple to our
projected 2007 EBITDA, employing a terminal EBITDA multiple range
consistent with trading multiples of a peer group of publicly-traded
regional department store retailers with business models that RBC deemed
similar to us (this peer group of "Comparable Companies" is listed in the
discussion of RBC's Comparable Company Analysis later in this section);
and
- determined appropriate weighted average costs of capital or discount
rates for both debt and equity capital.
In making these calculations, RBC applied a range of terminal EBITDA
multiples from 4.0x to 7.0x and a range of discount rates from 18.0% to 22.0%.
RBC selected 4.0x to 7.0x as the appropriate range of terminal
22
EBITDA multiples by selecting the mean enterprise value of the last twelve month
EBITDA multiple from the Comparable Company Analysis discussed below -- 5.8x or
5.5x when rounded to the mid-point -- and then selected a range around that
mid-point that it determined appropriate. RBC selected 18.0% to 22.0% as the
appropriate range of discount rates by calculating the weighted average cost of
capital for an optimally capitalized company similar to us -- 20.1% or 20.0%
when rounded to the mid-point -- and then selected a range around that mid-point
that it determined appropriate.
After adjusting for our net debt (total amount of indebtedness for borrowed
money or similar non-trade liabilities or obligations less cash and cash
equivalents) as of August 2, 2003 (our most recent fiscal quarter end), this
analysis yielded the following implied fully diluted per Share equity values:
<Table>
<Caption>
TERMINAL EBITDA MULTIPLES
-------------------------------------------------------
DISCOUNT RATE 4.0X 4.5X 5.0X 5.5X 6.0X 6.5X 7.0X
- ------------- ----- ----- ----- ----- ----- ------ ------
18.0% $5.22 $6.21 $7.20 $8.20 $9.19 $10.17 $11.15
19.0% $4.89 $5.85 $6.81 $7.77 $8.73 $ 9.68 $10.64
20.0% $4.57 $5.50 $6.43 $7.36 $8.28 $ 9.21 $10.13
21.0% $4.26 $5.16 $6.06 $6.96 $7.86 $ 8.76 $ 9.65
22.0% $3.97 $4.84 $5.71 $6.58 $7.45 $ 8.32 $ 9.19
</Table>
Aggregating the 18.0% to 22.0% discount rates and 4.0x to 7.0x terminal
EBITDA multiples, as set forth in the preceding table, this analysis resulted in
an implied valuation range of $3.97 to $11.15 per Share.
Comparable Company Analysis. RBC prepared a comparable company analysis of
our implied transaction multiples relative to the selected peer group of
Comparable Companies listed below. RBC compared, among other things, our
enterprise value implied by the $8.00 per Share Transaction Consideration,
expressed as a multiple of actual last twelve months, or LTM, revenue, EBITDA
and EBIT ended August 2, 2003, to the respective minimum, median, mean and
maximum enterprise value multiples of the Comparable Companies implied by the
public trading prices of their common stock. In addition, RBC compared, among
other things, the $8.00 per Share Transaction Consideration, expressed as a
multiple of our actual LTM earnings per Share ended August 2, 2003 and earnings
per Share as forecasted for fiscal year 2003 and fiscal year 2004, to the
respective minimum, median, mean and maximum price-to-earnings multiples of the
Comparable Companies implied by the public trading prices of their common stock.
For the purposes of RBC's analysis, enterprise value was defined as market
capitalization, or equity value, plus net debt, market value of preferred stock
and minority interest. In making this comparison, RBC used the Company
Financials in determining the relevant data for the Company and publicly
available data as of September 12, 2003 (including published research reports
and Company press releases) for the Comparable Companies.
In performing this analysis, RBC analyzed the following four companies:
- The Bon-Ton Stores, Inc.
- Gottschalks Inc.
- Stein Mart Inc.
- Value City Dept. Stores Inc.
RBC selected these four companies for this analysis because it concluded
that the analysis should be performed relative to regional department store
chains (which have different characteristics from national and specialty chains,
including, among other things, smaller capitalizations, less analyst coverage
and lower trading liquidity) that are generally reasonably similar to us with
regard to, among other things, store characteristics, merchandise mix, brand
offerings, average customer demographic and store productivity. In addition, RBC
further selected on the basis of those companies meeting these criteria the
stocks of which are publicly traded because only those companies that publicly
issue the financial data necessary for this analysis. As noted under "Other
Considerations," however, RBC did not view any single company as directly
comparable to us.
23
The following table summarizes RBC's comparison, made as of September 12,
2003, of the implied transaction multiples for our proposed Transaction with the
corresponding minimum, median, mean and maximum multiples for the Comparable
Companies (no control premium was reflected in the results of the public market
trading multiples of the Comparable Companies):
<Table>
<Caption>
IMPLIED COMPARABLE COMPANY ANALYSIS MULTIPLES
TRANSACTION --------------------------------------
MULTIPLES MINIMUM MEDIAN MEAN MAXIMUM
----------- -------- ------- ------ --------
Enterprise value as a multiple of:
LTM Revenue................................... 0.31x 0.19x 0.21x 0.21x 0.23x
LTM EBITDA.................................... 5.0x 3.4x 5.9x 5.8x 7.9x
LTM EBIT...................................... 9.7x 6.0x 14.4x 15.5x 27.4x
Price as a multiple of:
LTM Earnings Per Share........................ 16.7x 9.0x 17.8x 17.8x 26.5x
FY 2003 Earnings Per Share.................... 14.0x 11.1x 11.1x 11.1x 11.1x
FY 2004 Earnings Per Share.................... 9.2x 14.2x 20.1x 20.1x 26.1x
</Table>
Aggregating the minimum, median, mean and maximum Comparable Company data
for each of the six selected criteria, as set forth in the preceding table, this
analysis resulted in an implied valuation range of $1.76 to $35.37 per Share.
Precedent Transaction Analysis. RBC prepared a precedent transaction
analysis of our implied transaction multiples relative to the Selected
Precedents listed below. RBC compared, among other things, our enterprise value
implied by the $8.00 per Share Transaction Consideration, expressed as a
multiple of actual LTM revenue, EBITDA and EBIT ended August 2, 2003, to the
respective minimum, median, mean and maximum enterprise value multiples of the
Selected Precedents. In addition, RBC compared, among other things, the $8.00
per Share Transaction Consideration, expressed as a multiple of actual LTM
earnings per Share ended August 2, 2003, to the respective minimum, median, mean
and maximum price-to-earnings multiples of the Selected Precedents. In
determining the Selected Precedents, RBC used the same criteria as for its
Premiums Paid Analysis summarized above but included a broader list of selected
precedent transactions because it did not limit its analysis to acquired
companies that were publicly traded prior to the acquisition. Based on these
criteria, the following ten transactions were analyzed:
<Table>
<Caption>
ACQUIROR TARGET
- -------- ------
Charming Shoppes Inc. Lane Bryant Inc.
Federated Department Stores Inc. Liberty House Inc.
American Eagle Outfitters Inc. Thrifty's, Braemar, and NLS
Charming Shoppes Inc. * Catherine's Stores Corp. *
May Department Stores Co. * Zions Cooperative Merc. Inst. *
ShopKo Stores Inc. * Pamida Holdings Corp. *
Men's Warehouse Inc. * K&G Men's Center Inc. *
Men's Warehouse Inc. Moore's Retail Group Inc.
Ames Department Stores Inc. * Hill Stores Co. *
Value City Department Stores Inc. Schonac Corp.
</Table>
- ---------------
* Denotes that this acquisition was also considered in the Premiums Paid
Analysis discussed above.
RBC selected transactions involving broad-line department store chains and
moderately-priced specialty softline retailers because it concluded there were
no relevant precedent transactions involving the acquisition of regional
department store chains. RBC selected these ten transactions because, in its
judgment, in each case the target was generally reasonably similar to us with
regard to, among other things, merchandise mix, brand offerings and average
customer demographic, and because the transactions occurred during a period that
RBC
24
considered relevant for this analysis. As noted under "Other Considerations,"
however, RBC did not view any single company or transaction as directly
comparable to us or the Transaction.
For the purpose of calculating the multiples, revenue, EBITDA, EBIT and
earnings per share were derived from the actual revenue, EBITDA, EBIT and
earnings per share of the target companies in the last twelve months prior to
the announcement of the transaction, or LTM, revenue, EBITDA, EBIT and earnings
per share, respectively. Financial data regarding the Selected Precedents was
derived from filings with the SEC, press releases and institutional investment
research estimates publicly available as of September 12, 2003, and, in our
case, the Company Financials. In this analysis, the premium in our proposed
Transaction was based on the closing price of our Shares on May 13, 2003, for
the reason discussed under "Premiums Paid Analysis" above.
The following table compares the implied transaction multiples for the
Transaction with the corresponding minimum, median, mean and maximum multiples
for the Selected Precedents:
<Table>
<Caption>
IMPLIED PRECEDENT TRANSACTION ANALYSIS
TRANSACTION ----------------------------------
MULTIPLES MINIMUM MEDIAN MEAN MAXIMUM
----------- ------- ------ ----- -------
Enterprise value as a multiple of:
LTM Revenue................................... 0.31x 0.22x 0.50x 0.53x 0.91x
LTM EBITDA.................................... 5.0x 4.6x 6.6x 6.9x 9.3x
LTM EBIT...................................... 9.7x 6.3x 10.0x 10.7x 18.2x
Price as a multiple of:
LTM Earnings Per Share........................ 16.7x 11.9x 23.0x 23.7x 35.6x
</Table>
Aggregating the minimum, median, mean and maximum Precedent Transaction
data for each of the four selected criteria, as set forth in the preceding
table, this analysis resulted in an implied valuation range of $2.71 to $37.04
per Share.
Summary of Analyses. Based on the four analyses described above, RBC noted
that the $8.00 per Share Transaction Consideration was either above the
valuation range (in the case of the Premiums Paid Analysis) or within (in the
case of the three other analyses) the valuation range resulting from the
particular analysis. RBC also noted that, in the case of some of the analyses,
as specifically set forth with respect to each analysis separately above, the
Transaction Consideration was below the mean and median of the range, in the
case of others of the analyses it equaled or exceeded the mean and median of the
range, and in the case of no analysis was it below the range. In reaching its
opinion, RBC did not assign any particular weight to any one analysis, or the
results yielded by that analysis; although RBC noted that none of its analyses,
if viewed on a stand-alone basis, failed to support its opinion. Rather, having
reviewed these results in the aggregate, RBC exercised its professional judgment
in determining that, based on the aggregate of the analyses used and the results
they yielded, the Transaction Consideration was fair, from a financial point of
view, to our shareholders. RBC believed that it was inappropriate to, and
therefore did not, rely solely on the quantitative results of the analyses and,
accordingly, also made qualitative judgments concerning differences between the
characteristics of the Company and the Transaction and the data selected for use
in its analyses, as further discussed under "Other Considerations" below.
Other Considerations. No single company or transaction used in the above
analyses as a comparison is directly comparable to us or the proposed
Transaction, and an evaluation of the results of those analyses is not entirely
mathematical. Rather, the analyses involve complex considerations and judgments
concerning financial and operating characteristics and other factors that could
affect the acquisition, public trading or other values of the companies,
businesses, or transactions analyzed. The analyses were prepared solely for
purposes of RBC providing an opinion as to the fairness, from a financial point
of view, to our shareholders of the Transaction Consideration and do not purport
to be appraisals or necessarily reflect the prices at which businesses or
securities actually may be sold, which are inherently subject to uncertainty.
The opinion of RBC as to the fairness to our shareholders, from a financial
point of view, of the Transaction Consideration was necessarily based upon
market, economic, and other conditions that existed as of the date of its
opinion and on information available to RBC as of that date.
25
The preparation of a fairness opinion is a complex process that involves
the application of subjective business judgment in determining the most
appropriate and relevant methods of financial analysis and the application of
those methods to the particular circumstances. Several analytical methodologies
were used by RBC and no one method of analysis should be regarded as critical to
the overall conclusion reached. Each analytical technique has inherent strengths
and weaknesses, and the nature of the available information may further affect
the value of particular techniques. The overall conclusions of RBC were based on
all the analyses and factors presented above taken as a whole and also on
application of RBC's own experience and judgment. Such conclusions may involve
significant elements of subjective judgment and qualitative analysis, and RBC
did not find it practicable to assign relative weights to the factors considered
in reaching its opinion. RBC therefore believes that its analyses must be
considered as a whole and that selecting portions of the analyses and of the
factors considered, without considering all factors and analyses, could create
an incomplete or misleading view of the processes underlying its opinion.
In connection with its analyses, RBC made, and was provided by our
management with, numerous assumptions with respect to industry performance,
general business and economic conditions and other matters, many of which are
beyond our control. The most important of these assumptions (other than the
assumption that it was appropriate to rely on the advice it had received from us
regarding the Company Financials, described above in this section, the
assumption that there would be no significant change in the forward-looking
Company Financials in the near-term future and the other assumptions contained
in its written opinion and described earlier in this section) were: that there
would be no significant favorable or unfavorable deviation in market conditions
affecting the business of the Company and the regional department store chain
sector generally in the near-term; that the trading multiples of the Comparable
Companies would not experience significant increases or declines in the
near-term; and that there would be no significant change in the Company's
business model in the near-term. RBC has advised us that it considers these
types of assumptions to be implicit in the process of preparing a fairness
opinion of the kind rendered to our board. Analyses based upon forecasts of
future results are not necessarily indicative of actual future results, which
may be significantly more or less favorable than suggested by these analyses.
Because these analyses are inherently subject to uncertainty, being based on
numerous factors beyond our control or RBC's at the time they were performed and
subject to the course of future events after they were performed, we advise our
shareholders that future results or actual values could be materially different
from these forecasts and assumptions.
We selected RBC to act as our financial advisor, and render its opinion,
based on RBC's experience in mergers and acquisitions, in the retail industry,
and in securities valuation generally. RBC is an internationally recognized
investment banking firm and is regularly engaged in the valuation of businesses
and their securities in connection with mergers and acquisitions, corporate
restructurings, underwritings, secondary distributions of listed and unlisted
securities, private placements, and valuations for corporate and other purposes.
In the ordinary course of business, RBC may act as a market maker and broker in
our and Parent's publicly traded securities and receive customary compensation
in connection therewith. RBC also may actively trade our securities and Parent's
for its own account and the accounts of its customers, and, accordingly, may
hold a long or short position in such securities.
Under the terms of the RBC engagement letter, we paid RBC a nonrefundable
retainer of $50,000 when it was hired, a fee of $100,000 in connection with the
rendering of its June 25, 2003 opinion as to the fairness to our shareholders,
from a financial point of view, of the $6.00 per Share merger price then being
offered by Wright Holdings, and a further fee of $100,000 in connection with the
rendering of its September 15, 2003 opinion, all of which fees are creditable
against the contingent transaction fee referred to below but were not contingent
on the consummation of a transaction. In the event that a transaction of the
kind covered by the engagement letter is completed during or within 24 months
following the end of RBC's engagement, RBC will be entitled to the transaction
fee and if the Offer is completed, the transaction fee is estimated to be
approximately $2.2 million. We and RBC believe that the retainer, opinion and
transaction fees are customary for transactions of this nature. Whether or not
the Offer or the Merger closes, we have also agreed to reimburse RBC for its
reasonable out-of-pocket expenses and to indemnify it against liabilities
relating to or arising out of services performed by RBC in connection with its
engagement, including without limitation, liabilities arising under the federal
securities laws.
26
The terms of the engagement letter were negotiated at arm's-length between us
and RBC, and our board of directors was aware of this fee arrangement when it
approved the Transaction.
INTENT TO TENDER. After reasonable inquiry and to the best knowledge of
the Company, each executive officer, director and affiliate of the Company who
owns Shares intends to tender in the Offer all such Shares that each person owns
of record or beneficially, other than such Shares, if any, that any such persons
may have an unexercised right to purchase by exercising stock options. Upon the
completion of the Merger, all outstanding options to purchase Shares will be
cancelled and the Company will pay the holders thereof, in respect of each Share
subject thereto, cash equal to the excess, if any, of the Merger Price over the
exercise price per Share of such option. See "Item 3. Past Contacts,
Transactions, Negotiations and Agreements - Company Stock Options."
ITEM 5. PERSONS/ASSETS RETAINED, EMPLOYED, COMPENSATED OR USED.
Neither the Company nor any person acting on its behalf has directly or
indirectly employed, retained or compensated, or currently intends to employ,
retain or compensate, any person to make solicitations or recommendations to the
shareholders of the Company on its behalf with respect to the Offer or the
Merger.
ITEM 6. INTEREST IN SECURITIES OF THE SUBJECT COMPANY.
Except as set forth in this Statement, no transactions in Shares have been
effected during the past 60 days by the Company or, to the knowledge of the
Company, by any executive officer, director, affiliate or subsidiary of the
Company, other than the execution and delivery of the Merger Agreement.
ITEM 7. PURPOSES OF THE TRANSACTION AND PLANS OR PROPOSALS.
Except as set forth in this Statement, the Company is not currently
undertaking or engaged in any negotiations in response to the Offer that relate
to: (i) a tender offer for or other acquisition of the Company's securities by
the Company, any subsidiary of the Company or any other person; (ii) an
extraordinary transaction, such as a merger, reorganization or liquidation,
involving the Company or any subsidiary of the Company; (iii) a purchase, sale
or transfer of a material amount of assets of the Company or any subsidiary of
the Company; or (iv) any material change in the present dividend rate or policy,
or indebtedness or capitalization of the Company.
Except as set forth in this Statement, there are no transactions,
resolutions of the Board of Directors, agreements in principle, or signed
contracts in response to the Offer that relate to one or more of the events
referred to in the preceding paragraph.
ITEM 8. ADDITIONAL INFORMATION.
PURCHASER'S DESIGNATION OF PERSONS TO BE ELECTED TO THE COMPANY'S BOARD OF
DIRECTORS. The Information Statement attached as Annex A to this Statement is
being furnished in connection with the possible designation by Purchaser,
pursuant to the terms of the Merger Agreement, of certain persons to be elected
to the Board of Directors of the Company other than at a meeting of the
Company's shareholders.
OHIO GENERAL CORPORATION LAW. The Company is incorporated under the laws
of the State of Ohio. The following provisions of the OGCL are applicable to the
Offer and the Merger.
SHORT FORM MERGER. Under Section 1701.80 of the OGCL, if Purchaser
acquires, pursuant to the Offer or otherwise, at least 90% of the outstanding
Shares, Purchaser will be able to effect the Merger after completion of the
Offer without a vote by the Company's shareholders. However, if Purchaser does
not acquire at least 90% of the outstanding Shares pursuant to the Offer or
otherwise, a vote by the Company's shareholders will be required under the OGCL
to effect the Merger. As a result, the Company will be required to comply with
the federal securities laws and regulations governing votes of its shareholders.
Among other things, the Company will be required to prepare and distribute an
information statement and, as a consequence, a longer period of time will be
required to effect the Merger. This will delay payment of the Merger Price to
shareholders who do not tender their Shares in the Offer. It is a condition to
the completion of the Offer that at least two-thirds of the outstanding Shares
on a fully diluted basis be tendered. In addition, Parent and Purchaser have
agreed to cause all of the Shares owned by them, if any, to be voted in favor of
the adoption of the Merger Agreement. If the Minimum
27
Tender Condition shall have been satisfied, Shares owned by Parent and Purchaser
would represent at least two-thirds of the outstanding Shares, comprising voting
power sufficient to approve the Merger Agreement. Accordingly, adoption of the
Merger Agreement would be assured.
APPRAISAL RIGHTS. Shareholders do not have appraisal rights in connection
with the Offer. However, if the Merger is completed, shareholders of the Company
at the time of the Merger who comply with all statutory requirements and do not
vote in favor of the Merger will have the right under the OGCL to demand an
appraisal of and receive the fair cash value of their Shares. The "fair cash
value" of the Shares is the amount that a willing seller who is under no
compulsion to sell would be willing to accept and that a willing buyer who is
under no compulsion to buy would be willing to pay. The fair cash value is
determined as of the day prior to the day on which the vote of the shareholders
to adopt the Merger Agreement is taken. When determining fair cash value, any
appreciation or depreciation in market value resulting from the Merger will be
excluded. In no event will the fair cash value of a Share exceed the amount
specified in the shareholder's demand. If you exercise appraisal rights, your
right to be paid the fair cash value of your Shares will terminate if the Merger
is not completed for any reason or you fail to follow the statutory
requirements.
OHIO CONTROL BID LAW. Consummation of the Offer is conditioned upon the
expiration of the period during which the Ohio Division of Securities may
suspend the Offer pursuant to Sections 1707.01, 1707.041 and 1707.042 of the
Ohio Revised Code (the "Ohio Control Bid Law") without the occurrence of any
such suspension, or Parent being satisfied in its reasonable discretion that the
Ohio Control Bid Law is invalid or inapplicable to the acquisition of the Shares
pursuant to the Offer.
The Ohio Control Bid Law regulates tender offers for any equity security of
a subject company from a resident of Ohio if, after the purchase, the offeror
would directly or indirectly be the beneficial owner of more than 10% of any
class of issued and outstanding equity securities of such company (a "control
bid"). A subject company is an issuer (such as the Company) that:
- has its principal place of business or principal executive offices
located in Ohio or owns or controls assets located in Ohio that have a
fair market value of at least $1.0 million; and
- has more than 10% of its beneficial or record equity security holders
resident in Ohio, has more than 10% of its equity securities owned,
beneficially or of record, by residents of Ohio or has 1,000 beneficial
or record equity security holders who are resident in Ohio.
The Ohio Control Bid Law prohibits an offeror from making a control bid for
securities of a subject company pursuant to a tender offer until the offeror has
filed specified information with the Ohio Division of Securities. In addition,
the offeror is required to deliver a copy of such information to the subject
company not later than the offeror's filing with the Ohio Division of Securities
and to send or deliver such information and the material terms of the proposed
offer to exchange to all offerees in Ohio as soon as practicable after the
offeror's filing with the Ohio Division of Securities.
Within five calendar days of such filing, the Ohio Division of Securities
may, by order, summarily suspend the continuation of the control bid if it
determines that the offeror has not provided all of the specified information or
that the control bid materials provided to offerees do not provide full
disclosure of all material information concerning the control bid. If the Ohio
Division of Securities summarily suspends a control bid, it must schedule and
hold a hearing within 10 calendar days of the date on which the suspension is
imposed and must make its determination within three calendar days after the
hearing has been completed but no later than 14 calendar days after the date on
which the suspension is imposed. The Ohio Division of Securities may maintain
its suspension of the continuation of the control bid if, based upon the
hearing, it determines that all of the information required to be provided by
the Ohio Control Bid Law has not been provided by the offeror, that the control
bid materials provided to offerees do not provide full disclosure of all
material information concerning the control bid or that the control bid is in
material violation of any provision of the Ohio securities laws. If, after the
hearing, the Ohio Division of Securities maintains the suspension, the offeror
has the right to correct the disclosure and other deficiencies identified by the
Ohio Division of Securities and to reinstitute the control bid by filing new or
amended information pursuant to the Ohio Control Bid Law.
28
Purchaser states in the Offer to Purchase that it filed the information
required under the Ohio Control Bid Law on September 23, 2003.
ANTITRUST LAWS. Under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended (the "HSR Act"), and the rules that have been promulgated
thereunder by the Federal Trade Commission (the "FTC"), certain acquisition
transactions may not be consummated unless certain information has been
furnished to the Antitrust Division of the Department of Justice (the "Antitrust
Division") and the FTC and certain waiting period requirements have been
satisfied. The purchase of Shares by Purchaser pursuant to the Offer is subject
to such requirements.
Pursuant to the requirements of the HSR Act, Purchaser filed a Notification
and Report Form with respect to the Offer with the Antitrust Division and the
FTC on September 22, 2003. As a result, the waiting period applicable to the
purchase of Shares by Purchaser pursuant to the Offer will expire at 11:59 P.M.,
New York City time, on Tuesday, October 7, 2003. However, before such time, the
Antitrust Division or the FTC may extend the waiting period by requesting
additional information or documentary material relevant to the Offer from
Purchaser. If such a request is made, the waiting period will be extended until
11:59 P.M., New York City time, 10 days after Purchaser's substantial compliance
with such request. Thereafter, such waiting period can be extended only by court
order.
Purchaser's Offer to Purchase states that Shares will not be accepted for
payment or paid for by Purchaser pursuant to the Offer until the expiration or
earlier termination of the applicable waiting period under the HSR Act. Subject
to certain circumstances described in "The Offer--Section 4" of Purchaser's
Offer to Purchase, any extension of the waiting period will not give rise to any
withdrawal rights not otherwise provided for by applicable law. If Purchaser's
acquisition of Shares is delayed pursuant to a request by the Antitrust Division
or the FTC for additional information or documentary material pursuant to the
HSR Act, the Offer may be extended.
The Antitrust Division and the FTC frequently scrutinize the legality under
the antitrust laws of transactions such as Purchaser's acquisition of Shares
pursuant to the Offer. Private parties and individual states may also bring
legal actions under the antitrust laws. The Company does not believe that the
consummation of the Offer will result in a violation of any applicable antitrust
laws. However, there can be no assurance that a challenge to the Offer on
antitrust grounds will not be made, or if such a challenge is made, what the
result will be. See "The Offer--Section 15" of Purchaser's Offer to Purchase for
certain conditions to the Offer, including conditions with respect to litigation
and certain governmental actions.
29
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS.
The following exhibits are filed with this Statement:
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
(a) (1) Offer to Purchase, dated September 23, 2003 (incorporated by
reference to Exhibit (a)(1) to the Schedule TO of Purchaser
filed on September 23, 2003).
(a) (2) Form of Letter of Transmittal (incorporated by reference to
Exhibit (a)(2) to the Schedule TO of Purchaser filed on
September 23, 2003).
(a) (3) Letter to the shareholders of the Company, dated September
23, 2003.*
(a) (4) Press Release issued by the Company on September 16, 2003
(incorporated by reference to the press release filed under
cover of Schedule 14D-9 by the Company on September 16,
2003).
(e) (1) Agreement and Plan of Merger, dated as of September 15,
2003, by and among Parent, Purchaser and the Company
(incorporated by reference to Exhibits 2.1 and 2.2 of the
Current Report on Form 8-K filed by the Company on September
16, 2003).
(g) None.
ANNEX A Information Statement of the Company, dated September 23,
2003
ANNEX B Fairness Opinion of RBC Dain Rauscher Inc. (RBC Capital
Markets)
</Table>
- ---------------
* Included as the cover page to the Solicitation/Recommendation Statement on
Schedule 14D-9 mailed to the shareholders of the Company.
30
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.
THE ELDER-BEERMAN STORES CORP.
By: /s/ BYRON L. BERGREN
------------------------------------
Name: Byron L. Bergren
Title: President and Chief Executive
Officer
Dated: September 23, 2003
31
ANNEX A
THE ELDER-BEERMAN STORES CORP.
[ELDER-BEERMAN LOGO]
3155 El-Bee Road
Dayton, Ohio 45439
INFORMATION STATEMENT PURSUANT TO
SECTION 14(F) OF THE SECURITIES EXCHANGE ACT
OF 1934 AND RULE 14F-1 THEREUNDER
This Information Statement is being mailed on or about September 23, 2003
as part of the Solicitation/ Recommendation Statement on Schedule 14D-9 (the
"Statement") of The Elder-Beerman Stores Corp., an Ohio corporation (the
"Company"). You are receiving this Information Statement in connection with the
possible election of persons designated by Elder Acquisition Corp.
("Purchaser"), an Ohio corporation and an indirect wholly owned subsidiary of
The Bon-Ton Stores, Inc., a Pennsylvania corporation ("Parent"), to at least
two-thirds of the seats on the board of directors of the Company (the "Board" or
the "Board of Directors").
On September 15, 2003, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Parent and Purchaser, pursuant to which
Purchaser is required to commence a tender offer to purchase all of the
outstanding Common Shares, no par value, of the Company (the "Shares"), at a
price per Share of $8.00, net to the seller in cash, without interest thereon
(such price, or the highest price per Share as may be paid in the Offer, is
hereinafter referred to as the "Offer Price"), on the terms and subject to the
conditions set forth in the Offer to Purchase, dated September 23, 2003 (the
"Offer to Purchase"), and in the related Letter of Transmittal (the "Letter of
Transmittal"). The Offer to Purchase and the Letter of Transmittal, together
with any amendments or supplements thereto, collectively constitute the "Offer."
Copies of the Offer to Purchase and the Letter of Transmittal have been mailed
to the shareholders of the Company and are filed as Exhibit (a)(1) and (a)(2),
respectively, to the Tender Offer Statement on Schedule TO filed by Purchaser
and Parent (the "Schedule TO") with the Securities and Exchange Commission (the
"SEC") on September 23, 2003.
The Merger Agreement provides that on the terms and subject to the
satisfaction or waiver of the conditions set forth in the Merger Agreement,
following completion of the Offer, and in accordance with the Ohio General
Corporation Law (the "OGCL"), Purchaser will be merged with and into the Company
(the "Merger"). Following the effective time of the Merger, the Company will
continue as the surviving corporation and an indirect wholly-owned subsidiary of
Parent. At the effective time of the Merger, each issued and outstanding Share
(other than Shares held by (i) the Company, (ii) Purchaser or Parent or (iii)
shareholders who are entitled to and have properly exercised appraisal rights
under the OGCL) will be converted into the right to receive a per Share price
equal to the Offer Price, without interest thereon (the "Merger Price").
The Offer, the Merger and the Merger Agreement are more fully described in
the Statement to which this Information Statement is annexed as Annex A, which
was filed by the Company with the SEC on September 23, 2003.
This Information Statement is being mailed to you in accordance with
Section 14(f) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and Rule 14f-1 promulgated thereunder. The information set forth herein
supplements certain information set forth in the Statement. Information set
forth herein related to Parent, Purchaser or the Parent Designees (as identified
herein) has been provided by Parent. You are urged to read this Information
Statement carefully. You are not, however, required to take any action in
connection with the matters set forth herein. Capitalized terms used but not
otherwise defined herein have the meanings set forth in the Statement.
A-1
Pursuant to the Merger Agreement, Purchaser commenced the Offer on
September 23, 2003. The Offer is scheduled to expire at 12:00 Midnight, New York
City time, on Tuesday, October 21, 2003, unless extended in accordance with its
terms.
GENERAL INFORMATION REGARDING THE COMPANY
The Shares are the only class of equity securities of the Company
outstanding that is entitled to vote at a meeting of the shareholders of the
Company. Each Share is entitled to one vote. As of September 15, 2003, there
were 11,585,457 Shares issued and outstanding. Parent and Purchaser own 100
Shares as of the date hereof.
PURCHASER'S RIGHT TO DESIGNATE DIRECTORS TO THE COMPANY'S BOARD OF DIRECTORS
The Merger Agreement provides that, promptly upon the date that Purchaser
first accepts Shares tendered in the Offer, Purchaser will be entitled to
designate such number of directors to the Company's Board of Directors, subject
to compliance with Section 14(f) of the Exchange Act, as will give Purchaser
representation on the Board of Directors equal to at least that number of
directors, rounded up to the next whole number, which is the product of (i) the
total number of directors on the Company's Board of Directors (giving effect to
the directors elected as described in this sentence) multiplied by (ii) the
percentage that (a) such number of Shares so accepted for payment by Purchaser
bears to (b) the number of Shares then outstanding. The Company agrees in the
Merger Agreement that it will use its reasonable best efforts to, upon request
by Purchaser, take such actions as are necessary to cause Purchaser's designees
to be elected to the Company's Board of Directors. In connection with such
request, the Company may either increase the size of the Company's Board of
Directors (subject to the provisions of the Company's articles of incorporation
and code of regulations) or obtain the resignation of such number of its current
directors as is necessary to enable Purchaser's designees to be elected to the
Company's Board of Directors.
The Merger Agreement also requires the Company to use its reasonable best
efforts to cause the individuals designated by Purchaser for election to the
Company's Board of Directors to be elected in the same proportions to each
committee of the Board, each board of directors of each subsidiary of the
Company, and each committee of each subsidiary's board.
In the event that Purchaser's designees are elected to the Company's Board
of Directors, until the effective time of the Merger, the Board of Directors
will have at least four members consisting of (i) three persons who were
directors on the date of the Merger Agreement and who are not employed by the
Company and are not affiliates, associates or employees of Parent or Purchaser,
or in the event of a vacancy, persons designated by such persons and (ii) the
Chief Executive Officer of the Company as of the date of the Merger Agreement.
Accordingly, following the date that Purchaser first accepts Shares
tendered in the Offer, the Company expects to increase the size of the Company's
Board of Directors to 11, obtain the resignation of six of its existing
directors, and appoint up to seven persons designated by Purchaser. The Company
currently expects that the following four directors of the Company will continue
to serve until the effective time of the Merger: Charles Macaluso, Steven C.
Mason, Jack A. Staph and Byron L. Bergren.
The following table sets forth certain information with respect to the
individuals Parent may designate to serve on the Company's Board of Directors
(each, a "Parent Designee"), including their respective ages as of the date
hereof, current principal occupation or employment and five-year employment
history. Each Parent Designee is a citizen of the United States. Unless
otherwise indicated, the business address of each designee is 2801 East Market
Street, York, Pennsylvania 17402.
<Table>
<Caption>
PRESENT PRINCIPAL OCCUPATION OR
NAME AGE EMPLOYMENT; MATERIAL POSITIONS HELD DURING PAST FIVE YEARS
- ---- --- ----------------------------------------------------------
Tim Grumbacher.................................. 63 Chairman of the Board of The Bon-Ton since August 1991,
and Chief Executive Officer since June 2000. From 1977 to
1989 he was President and from 1985 to 1995 he was Chief
Executive Officer of The Bon-Ton.
</Table>
A-2
<Table>
<Caption>
PRESENT PRINCIPAL OCCUPATION OR
NAME AGE EMPLOYMENT; MATERIAL POSITIONS HELD DURING PAST FIVE YEARS
- ---- --- ----------------------------------------------------------
Michael L. Gleim................................ 60 Vice Chairman and Chief Operating Officer of The Bon-Ton
from December 1995 to February 2002. From 1991 to December
1995 he was Senior Executive Vice President and from 1989
to 1991 he was Executive Vice President of The Bon-Ton.
Leon D. Starr................................... 85 Management consultant to department and specialty stores
since 1984. Prior to such time, he held various positions
with Allied Stores Corporation, a national operator of
department stores, for over 35 years.
Thomas W. Wolf.................................. 54 President of the Wolf Organization, Inc., a building
materials manufacturer and distributor based in York,
Pennsylvania, since 1985. He is also a director of Irex
Corporation, a national building contractor.
Frank Tworecke.................................. 56 President and Chief Operating Officer of The Bon-Ton since
March 2003. He joined the Company in November 1999 as Vice
Chairman and Chief Merchandising Officer. From January
1996 until November 1999, he was with Jos. A. Bank
Clothiers, serving as President from February 1997 until
November 1999.
James H. Baireuther............................. 57 Vice Chairman, Chief Administrative Officer and Chief
Financial Officer of The Bon-Ton since September 2001.
From February 2000 to September 2001, he was Executive
Vice President -- Chief Financial Officer, and for more
than two years prior to that time he was Senior Vice
President -- Chief Financial Officer.
Robert E. Stern................................. 58 Vice President -- General Counsel of The Bon-Ton since
June 1997.
</Table>
Parent has informed the Company that each of the individuals listed above
has consented to act as a director of the Company, if so designated. If
necessary, Parent may choose additional or other Parent Designees, subject to
the requirements of Rule 14f-1. None of the Parent Designees is currently a
director of, or holds any position with the Company. Parent has advised the
Company that, to Parent's knowledge, none of the Parent Designees has a familial
relationship with any director or executive officer of the Company or
beneficially owns any securities (or any rights to acquire any such securities)
of the Company. The Company has been advised by Parent that, to Parent's
knowledge, none of the Parent Designees has been involved in any transactions
with the Company or any of its directors, executive officers or affiliates that
are required to be disclosed pursuant to the rules and regulations of the SEC,
other than transactions between Parent and the Company that have been described
in the Schedule TO or the Statement.
A-3
PRINCIPAL SHAREHOLDERS
Our only outstanding class of voting securities is the Shares. The
following table sets forth information regarding ownership of our Shares as of
September 15, 2003 (except as otherwise noted) by: (i) each person who owns
beneficially more than 5% of our Shares, to the extent known by our management,
(ii) each of our directors, our Chief Executive Officer and our three other most
highly paid executive officers, and (iii) all directors and executive officers
as a group. All information with respect to beneficial ownership has been
furnished by the named person or is based on filings with the SEC.
<Table>
<Caption>
AMOUNT AND NATURE
OF BENEFICIAL PERCENT
BENEFICIAL OWNER OWNERSHIP(1) OF CLASS
- ---------------- ----------------- --------
Snyder Capital Management, Inc. ............................ 2,669,800(2) 23.05%
350 California Street, Suite 1460
San Francisco, CA 94104
PPM America, Inc. .......................................... 1,418,368(3) 12.20%
225 West Wacker Drive, Suite 1200
Chicago, IL 60606
Byron L. Bergren............................................ 142,365(4) 1.23%
Mark F.C. Berner............................................ 17,378(4) *
Dennis S. Bookshester....................................... 39,378(4) *
Eugene I. Davis............................................. 17,378(4) *
Charles Macaluso............................................ 94,642(4) *
Steven C. Mason............................................. 107,898(4) *
Thomas J. Noonan, Jr. ...................................... 50,442(4) *
Laura H. Pomerantz.......................................... 26,200(4) *
Jack A. Staph............................................... 65,387(4) *
Charles H. Turner........................................... 51,504(4) *
Edward A. Tomechko.......................................... 8,334 *
James M. Zamberlan.......................................... 124,066(4) 1.07%
Steven D. Lipton............................................ 49,511(4) *
All directors and executive officers as a group............. 788,409 6.81%
</Table>
- ---------------
* less than 1%
(1) "Beneficial ownership" is a technical term broadly defined by the SEC to
mean more than ownership in the usual sense. So, for example, you not only
"beneficially" own the Shares that you hold directly, but also the Shares
that you indirectly (through a relationship, a position as a director or
trustee, or a contract or understanding) have or share the power to vote or
sell or that you have the right to acquire within 60 days of the applicable
date.
(2) Snyder Capital Management, Inc. is the general partner of Snyder Capital
Management, L.P., a registered investment advisor. These entities reported
the beneficial ownership (as of August 5, 2003) of such Shares in a Form
13D/A filed with the SEC on August 15, 2003.
(3) PPM America, Inc. ("PPM"), an investment advisor, reported the beneficial
ownership of such Shares in a Form 13D/A filed with the SEC on September 9,
2003 and a Form 4 filed with the SEC on September 11, 2003. All such Shares
are held in portfolios of PPM America Special Investments Fund, L.P. ("SIF
I") and PPM America Special Investments CBO II, L.P. ("CBO II"). PPM serves
as an investment advisor to both SIF I and CBO II. PPM, PPM America CBO
Management II Management Company (general partner of CBO II) ("CBO II GP"),
PPM America Fund Management GP, Inc. (general partner of SIF I) ("SIF I
GP"), PPM Bermuda (as managing partner of CBO II GP) and PPM Holdings, Inc.
(as parent company of SIF I GP and CBO II GP) disclaim beneficial ownership
of all such Shares.
A-4
(4) These amounts include Shares that the following persons have a right to
acquire within 60 days:
<Table>
<Caption>
NAME NUMBER OF SHARES EXERCISABLE
- ---- ----------------------------
Mr. Bergren................................. 83,334
Mr. Berner.................................. 4,667
Mr. Bookshester............................. 25,123
Mr. Davis................................... 4,667
Mr. Macaluso................................ 80,387
Mr. Mason................................... 92,817
Mr. Noonan.................................. 35,361
Ms. Pomerantz............................... 13,419
Mr. Staph................................... 49,906
Mr. Turner.................................. 34,793
Mr. Tomechko................................ 5,000
Mr. Zamberlan............................... 104,000
Mr. Lipton.................................. 36,074
</Table>
CURRENT DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
DIRECTORS
<Table>
<Caption>
NAME AGE DIRECTOR SINCE
- ---- --- --------------
Byron L. Bergren............................................ 56 2002
Mark F. C. Berner........................................... 49 2000
Dennis S. Bookshester....................................... 64 1999
Eugene I. Davis............................................. 48 2000
Charles Macaluso............................................ 59 1999
Steven C. Mason............................................. 67 1997
Thomas J. Noonan, Jr. ...................................... 64 1997
Laura H. Pomerantz.......................................... 55 1997
Jack A. Staph............................................... 57 1997
Charles H. Turner........................................... 46 2000
</Table>
Mr. Bergren has served as President and Chief Executive Officer of the
Company since February 2002. Prior to this time, Mr. Bergren served as Chairman
of the Southern Division of Belk Stores, Inc. ("Belk") from 1999 to February
2002. Prior to that he served as Managing Partner of the Belk Lindsey division
of Belk from 1992 to 1999; Senior Vice President of Corporate Sales Promotion
and Marketing of Belk from 1991 to 1992; and Senior Vice President of
Merchandising and Marketing of the Belk Charlotte division from 1988 to 1991.
Mr. Berner is Managing Partner of SDG Resources, L.P., an oil and gas
investment fund. From 1996 to 1999, he was a private investment consultant in
New York. In 1995, Mr. Berner served as Senior Vice President and Counsel for
Turnberry Capital Management, L.P., a private equity fund. Mr. Berner also
currently serves as a Director of ThinkSheet, Inc., a privately held technology
company. Mr. Berner is also a member of the Bar of the State of New York.
Mr. Bookshester serves as Chairman of the Illinois Racing Board. He also
serves as the Chairman of Cutanix Corporation, a privately held biotechnology
company. From 1999 through May 2002, he served as the President and Chief
Executive Officer of Fruit of the Loom, Inc., a garment manufacturer that filed
for protection under Chapter 11 of the United States Bankruptcy Code in December
1999. Mr. Bookshester also currently serves as a Director of Playboy
Enterprises, Inc.
A-5
Mr. Davis is Chairman and Chief Executive Officer of Pirinate Consulting
Group, L.L.C., a corporate strategy consulting firm, Murdock Communications
Corporation, a telecommunications holding company, and of RBX Industries, Inc.,
a rubber and foam manufacturer and distributor that filed for protection under
Chapter 11 of the United States Bankruptcy Code in December 2000. Prior to
serving as RBX's Chairman and Chief Executive Officer, he served as its Chief
Restructuring Officer from January to September 2001. From 1999 to 2001, he
served as Chief Executive Officer of SmarTalk Teleservices Corp., an independent
provider of prepaid calling cards, that filed for protection under Chapter 11 of
the United States Bankruptcy Code in January 1999, and is currently being
liquidated. During 1998 and 1999, Mr. Davis was Chief Operating Officer of
Total-Tel Communications, Inc., a long distance telecommunications provider.
From 1996 to 1997, Mr. Davis was the Chief Executive Officer of Sport Supply
Group, Inc., a sporting goods and athletic equipment distributor. Mr. Davis also
currently serves as a Director of Coho Energy, Inc., Murdock Communications
Corp., Tipperary Corporation, Flag Telecom Group Limited, Metals USA, Inc. and
Metrocall Holdings, Inc.
Mr. Macaluso is a Principal in Dorchester Capital Advisors (formerly East
Ridge Consulting, Inc.), a management advisory and investment firm he founded in
1998. Prior to this, Mr. Macaluso served as a Principal from 1996 through 1998
in Miller Associates, Inc., a management consulting firm. Mr. Macaluso also
currently serves as a Director of Flag Telecom, Ltd. and Darling International.
Mr. Mason was appointed interim President effective January 1, 2002, and
served in this capacity until Mr. Bergren's appointment as President. Mr. Mason
was also appointed as non-executive Chairman of the Board in January, 2002. 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 also
currently serves as a Director of PPG Industries, Inc. and Convergys Corp.
Mr. Noonan is the Chairman and Chief Executive Officer of the Coppergate
Group ("Coppergate"), a financial investment and management company, and has
served in this capacity since May 1996. Prior to that, he served as a Managing
Director of Coppergate from April 1993 through May 1996. He also serves as the
Chairman, President and Chief Executive Officer of Intrenet, Inc. ("Intrenet"),
a truckload carrier service provider that filed for protection under Chapter 11
of the United States Bankruptcy Code in January 2001, and is currently being
liquidated. Mr. Noonan has served in his current position at Intrenet since
January 2001. He has been a Director of Intrenet since 1991 and was named
Chairman in December 2000. Mr. Noonan is Managing Director of Solutions
Management, a financial advisory firm, and has served in that capacity since
September 2001. From April 2000 to April 2002, Mr. Noonan served as the Chief
Executive of R&S Liquidating Company, Inc., which was formerly known as WSR,
Inc. ("WSR"), an automotive aftermarket retailer that filed for protection under
Chapter 11 of the United States Bankruptcy Code in 1998, and is currently being
liquidated. Prior to that, Mr. Noonan was WSR's Chief Restructuring Officer from
August 1998 through December 1999. Mr. Noonan served as Executive Vice President
and Chief Financial Officer of Herman's Sporting Goods, Inc. from August 1994
through 1999, a sporting goods retailer that filed for protection under Chapter
11 of the United States Bankruptcy Code, and is currently being liquidated.
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 PBS Realty Advisors, LLC as one of the Principals, a company providing
commercial real estate advisory and brokerage services. The partnership was
formed in September of 2002. Prior to that, she was associated with Newmark &
Company Real Estate, Inc., a commercial real estate company, as Senior Managing
Director and served in this capacity from August 1996 to August 2002. Mrs.
Pomerantz served as Executive Vice President and a Director of the Leslie Fay
Companies, Inc. ("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.
Mr. Staph is currently a consultant, lawyer and private investor. He also
serves as President of Cleveland Marathon, Inc. Mr. Staph has also served in an
advisory capacity to CVS Corp. 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.
A-6
Mr. Turner is Executive Vice President of Finance, Chief Financial Officer
and Treasurer of Pier 1 Imports, Inc. ("Pier 1"), and has served in this
capacity since August 1999. Mr. Turner served as Pier 1's Senior Vice President
of Stores from August 1994 through August 1999.
EXECUTIVE OFFICERS
<Table>
<Caption>
NAME AGE POSITION
- ---- --- --------------------------------------
Byron L. Bergren...................... 56 President and Chief Executive Officer
Edward A. Tomechko.................... 54 Executive Vice President, Chief
Financial Officer, Treasurer and
Secretary
James M. Zamberlan.................... 56 Executive Vice President, Stores
Steven D. Lipton...................... 52 Senior Vice President, Controller
</Table>
Mr. Bergren has served as President and Chief Executive Officer of the
Company since February 2002. Prior to this time, Mr. Bergren served as Chairman
of the Southern Division of Belk Stores, Inc. ("Belk") from 1999 to February
2002. Prior to that he served as Managing Partner of the Belk Lindsey division
of Belk from 1992 to 1999; Senior Vice President of Corporate Sales Promotion
and Marketing of Belk from 1991 to 1992; and Senior Vice President of
Merchandising and Marketing of the Belk Charlotte division from 1988 to 1991.
Mr. Tomechko has served as Executive Vice President, Chief Financial
Officer, Treasurer and Secretary of the Company since June 2002. Prior to this
time, he was a Managing Partner of M.E. Thomas & Associates, LLC, a business
advisory firm, from October 2000 to May 2002. Prior to that, he served as Chief
Executive Officer of Net Radio Corp., a media distribution company, from January
1999 to October 2000. He served as that company's Senior Vice President and
Chief Financial Officer from August 1998 to December of 1998. Prior to that, he
served as Senior Vice President, Chief Financial Officer of David's Bridal, a
specialty retailer, from April 1997 to May 1998.
Mr. Zamberlan has served as Executive Vice President, Stores of the Company
since July 1997. Prior to this time, Mr. Zamberlan served as Executive Vice
President of Stores for Bradlee's, Inc. 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.
Mr. Lipton has served as Senior Vice President, Controller of the Company
since March 1996. Prior to this time, Mr. Lipton served as Operating Vice
President of Payroll for Federated Financial & Credit Services 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.
INFORMATION REGARDING THE COMPANY'S BOARD OF DIRECTORS
BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD.
The Company's Board of Directors oversees the business and affairs of the
Company and monitors the performance of management. The Board met nine times
during fiscal year 2002. Every director attended more than 75% of the meetings
of the Board of Directors and the committees on which they served in fiscal year
2002.
The Board of Directors has an Executive Committee, an Audit and Finance
Committee, a Compensation Committee and a Nominating and Corporate Governance
Committee. Each Committee reports to the Board of Directors at its first meeting
after any Committee meeting.
EXECUTIVE COMMITTEE. During fiscal year 2002, the members of the Executive
Committee were Messrs. Mason (Chairman), Davis (who served on the Executive
Committee until August 28, 2002), Noonan and Macaluso. Messrs. Berner and Staph
joined the Executive Committee on August 28, 2002. The Executive Committee held
two meetings in 2002. Except to the extent that its powers are limited by law,
by the Company's Amended Articles of Incorporation or Regulations or by the
Board of Directors, during the intervals between meetings of the Board of
Directors, the Executive Committee may exercise, subject to the control of the
Board of
A-7
Directors, all of the powers of the Board of Directors in the management and
control of the Company's business. All action taken by the Executive Committee
is reported to the Board of Directors at its first meeting thereafter.
AUDIT AND FINANCE COMMITTEE. During fiscal year 2002, the members of the
Audit and Finance Committee were Messrs. Noonan (Chairman), Davis, Macaluso and
Turner. Mr. Bookshester joined the Audit and Finance Committee on August 28,
2002. The Audit and Finance Committee held nine meetings in 2002. The Audit and
Finance Committee is responsible for: (i) monitoring the Company's corporate
compliance program; (ii) recommending the Company's outside auditors; (iii)
reviewing the independence of the Company's outside auditors; (iv) reviewing the
audit results and recommendations of the Company's outside auditors; (v)
reviewing the Company's financial statements, including meeting each quarter
with management and the Company's outside auditors to review quarterly earnings
results and the quality of those earnings prior to their public release; (vi)
reviewing and evaluating the Company's systems of internal accounting controls;
(vii) reviewing and evaluating the Company's internal audit functions and
meeting from time to time with the internal auditors outside the presence of
other employees; and (viii) reviewing such other matters in relation to the
accounting, auditing and financial reporting practices and procedures of the
Company as the Audit and Finance Committee may, in its own discretion, deem
desirable in connection with the review functions described above.
COMPENSATION COMMITTEE. During fiscal year 2002, the members of the
Compensation Committee were Messrs. Staph (Chairman until August 28, 2002) and
Berner (Chairman after August 28, 2002). Mr. Bookshester and Mrs. Pomerantz
joined the Compensation Committee on August 28, 2002. Mr. Mason served on the
Compensation Committee until August 28, 2002. The Compensation Committee held
five meetings in 2002. The Compensation Committee is responsible for: (i)
reviewing executive salaries; (ii) approving the salaries and other benefits of
the executive officers of the Company; (iii) administering the bonus, stock
option and other incentive compensation plans of the Company; and (iv) advising
and consulting with the Company's management regarding pension and other benefit
plans and compensation policies and practices of the Company.
NOMINATING AND CORPORATE GOVERNANCE COMMITTEE. During fiscal year 2002,
the members of the Nominating and Corporate Governance Committee were Messrs.
Mason (Chairman until August 28, 2002) and Staph (Chairman after August 28,
2002). Mr. Bookshester and Mrs. Pomerantz served on the Nominating and Corporate
Governance Committee until August 28, 2002. Messrs. Berner, Davis and Noonan
joined the Nominating and Corporate Governance Committee on August 28, 2003. The
Nominating and Corporate Governance Committee held three meetings in 2002. The
Nominating and Corporate Governance Committee is responsible for the selection,
evaluation and nomination of candidates for election to the Board of Directors.
The Nominating and Corporate Governance Committee is also responsible for
recommending to the Board the members and chair of each Board Committee. In
addition, the Nominating and Corporate Governance Committee is responsible for
the process of evaluating the overall performance of the Board of Directors and
its individual members to ensure effective operations of the Board of Directors
and overall corporate governance. The Nominating and Corporate Governance
Committee does not consider nominees recommended by shareholders. Instead, these
nominees would be considered by the entire Board of Directors.
COMPENSATION OF DIRECTORS.
Directors who are employees of the Company do not receive any separate fees
or other remuneration for serving as a director. For fiscal year 2002,
non-employee directors were paid an annual retainer of $20,000 for their service
on the Board of Directors. Non-employee directors may elect to take their annual
retainer as cash or in the form of discounted stock options. At the beginning of
each fiscal year, non-employee directors also receive an annual grant of
restricted shares with a market value of $10,000 on the date of the grant. When
first joining the board, a non-employee director also receives an initial grant
of 1,300 restricted shares and options to purchase 7,000 Shares. Non-employee
committee chairpersons are paid an additional $5,000 fee for their services on
their respective committees. Non-employee directors are also paid a meeting fee
of $1,500 for each board meeting attended, plus $500 for each committee meeting
attended, other than members of the Executive Committee, which has the fee
structure described in the next paragraph.
For fiscal year 2002, compensation for members of the Executive Committee,
all of whom are non-employee directors, was $2,500 for in person meetings and
$1,000 for telephonic meetings.
A-8
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Except as noted in the following sentence, no member of the Compensation
Committee was or ever has been an officer or employee of the Company or engaged
in transactions with the Company (other than in his capacity as a director).
During Mr. Mason's tenure as interim President from January 1, 2002 until Mr.
Bergren's appointment as President on February 11, 2002, Mr. Mason remained on
the Compensation Committee. During this time, the Compensation Committee neither
met nor acted on any matters. No executive officer of the Company serves as a
director or member of the compensation committee of any other entity whose
executive officer serves as a member of the Compensation Committee or a director
of the Company.
EXECUTIVE COMPENSATION
The following sections present compensation information for the years shown
for the Company's Chief Executive Officer, the next three highest paid executive
officers (the "Named Executive Officers") at the end of fiscal year 2002, and
one former executive officer. The information is presented on a fiscal year
basis.
SUMMARY COMPENSATION TABLE
<Table>
<Caption>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
-------------------------------- --------------------------------------
AWARDS PAYOUTS
----------------------- ------------
RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING ALL OTHER
NAME AND SALARY BONUS COMPENSATION AWARD(S) OPTIONS/ COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($) ($) SARS (#) ($)(8)
------------------ ---- ------- ------- ------------ ---------- ---------- ------------
Byron L. Bergren,(1)........... 2002 498,626 200,000(4) 140,257(5) 10,000(7) 178,606
President and 2001 142,500 250,000
Chief Executive Officer 2000
Edward A. Tomechko,(2)......... 2002 190,137 69,603(4) 18,990(6) 8,700(7) 25,000 25,834
Executive Vice President 2001
Chief Financial Officer, 2000
Secretary and Treasurer
James M. Zamberlan,............ 2002 368,431 131,400 2,893
Executive Vice President 2001 364,046 3,558
Stores 2000 351,346 9,703 30,000 4,359
Steven D. Lipton,.............. 2002 226,104 63,000(4) 7,875(7) 6,143
Senior Vice President -- 2001 220,821 6,480
Controller 2000 203,538 43,315 11,876 15,000 6,660
Scott J. Davido,(3)............ 2002 95,110 209,352
Former Executive Vice 2001 292,199 3,816
President, Chief Financial 2000 261,923 37,295 29,690 30,000 4,236
Officer, Secretary and
Treasurer
</Table>
- ---------------
(1) Mr. Bergren was elected as President and Chief Executive Officer of the
Company effective February 11, 2002. As part of his employment contract, Mr.
Bergren was issued options and shares of restricted stock upon the execution
of his employment agreement, which occurred during the Company's 2001 fiscal
year.
(2) Mr. Tomechko's salary reflects compensation received since he joined the
Company in June 2002.
(3) Mr. Davido's salary reflects compensation received until his departure from
the Company on May 28, 2002.
(4) Includes the dollar value as of January 31, 2003 of deferred shares as
follows: Mr. Bergren -- 15,326 shares; Mr. Tomechko -- 13,344 shares and
Mr. Lipton -- 12,069 shares. Under the Company's Equity and Performance
Incentive Plan, executives may elect to be paid a portion of their cash
bonus in "deferred shares" of the Company rather than cash; and if such
election is made, one restricted share is awarded for each four deferred
shares. Deferred shares are paid to an executive after a three-year deferral
period or
A-9
cessation of employment, whichever occurs first. Restricted matching shares
are forfeited if the executive does not continue in the employ of the
Company for three years after the award.
(5) Reimbursement for relocation expense of $93,342 and taxes associated with
said expense of $46,915.
(6) Reimbursement for relocation expense of $11,672 and taxes associated with
said expense of $7,318.
(7) Includes the dollar value of restricted shares awarded under the Company's
Equity and Performance Incentive Plan, as follows: Mr. Bergren -- 3,831
shares, Mr. Tomechko -- 3,334 shares and Mr. Lipton -- 12,069 shares.
(8) Includes for 2002 life insurance premium payments paid by the Company in the
following amounts: Mr. Bergren -- $3,606, Mr. Tomechko -- $834, Mr.
Zamberlan -- $2,893, Mr. Lipton -- $2,093 and Mr. Davido -- $1,537; a
matching contribution paid by the Company under the Company's Retirement
Savings Plan in the following amount: Mr. Lipton -- $4,050 and Mr. Davido
-- $2,430; signing bonuses of $175,000 to Mr. Bergren and $25,000 to Mr.
Tomechko; and severance payments of $205,385 to Mr. Davido.
STOCK OPTION GRANTS
The following table sets forth information concerning the only stock option
grants made to any Named Executive Officers during fiscal year 2002 pursuant to
the Company's Equity and Performance Incentive Plan, as amended (the "Plan").
OPTION GRANTS IN LAST FISCAL YEAR
<Table>
<Caption>
INDIVIDUAL GRANTS
------------------------------------------------------- POTENTIAL REALIZABLE
PERCENT VALUE AT ASSUMED
NUMBER OF OF TOTAL ANNUAL RATE OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO FOR OPTION TERM
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION ---------------------
NAME GRANTED(#)(1) FISCAL 2002 PRICE($/SH) DATE 5% ($) 10% ($)
---- ------------- ------------ ----------- ---------- -------- ----------
Edward A. Tomechko........ 25,000 56.9 3.15 06/10/12 448,087 1,135,541
</Table>
- ---------------
(1) Options vest annually in one-fifth increments beginning one year from date
of grant and have a term of ten years.
STOCK OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table sets forth information about any stock options
exercised during fiscal year 2002 by the Named Executive Officers and the fiscal
year-end value of unexercised options held by any Named Executive Officers. All
of such options were granted under the Plan.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<Table>
<Caption>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS HELD AT OPTIONS/SARS HELD AT
SHARES VALUE FEBRUARY 1, 2003 (#) FEBRUARY 1, 2003 ($)(1)
ACQUIRED ON REALIZED --------------------------- ---------------------------
NAME EXERCISE(#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ----------- -------------
Byron L. Bergren......... 0 0.00 83,334 166,666 $0.00 $0.00
Edward A. Tomechko....... 0 0.00 0 25,000 $0.00 $0.00
James M. Zamberlan....... 0 0.00 97,000 29,000 $0.00 $0.00
Steven D. Lipton......... 0 0.00 33,000 13,000 $0.00 $0.00
</Table>
- ---------------
(1) Based on the closing price on NASDAQ of the Shares on January 31, 2003 (the
last trading day in fiscal year 2002) of $2.61.
A-10
EMPLOYMENT AND SEVERANCE AGREEMENTS WITH CERTAIN OFFICERS
The Company entered into an employment agreement with Mr. Bergren in
January 2002 under which he is employed as President and Chief Executive Officer
of the Company at a base annual salary with benefits plus any increases granted
to him at the discretion of the Board. The Company has also agreed to nominate
him for election as a director at each annual meeting of shareholders. The
initial term of the agreement expires on January 30, 2005, except that it
automatically extends for successive one-year periods unless notice of
termination is given within 120 days prior to the expiration of the initial term
or any extended term. If the Company terminates Mr. Bergren's employment at any
time for any reason other than cause, disability or death, the Company will
continue to pay him his base salary for the longer of the remaining term of the
employment agreement or one year following termination. If such termination
occurs after a "change of control" of the Company, then, in lieu of the
foregoing payments, the Company will pay him in a lump sum within 45 days after
his termination of employment a severance payment equal to 2.99 times his "base
amount," as such term is defined in Section 280G of the Internal Revenue Code.
In addition, all unexercisable options held by Mr. Bergren become exercisable
and unvested restricted shares held by him vest. If any payment to Mr. Bergren
as a result of a change of control of the Company is subject to the Section 280G
excise tax, such payments will be grossed up to offset the impact of the tax. If
Mr. Bergren terminates his employment for "good reason" within two years of a
change of control of the Company, he will be entitled to the same payments that
the Company would be required to make to him if the Company had terminated him
for any reason other than cause, disability or death. Mr. Bergen may voluntarily
terminate his employment with the Company at any time, but in such an event he
would not be entitled to any severance payments. Any payment under the severance
clause is conditioned on the execution of a release of claims agreement.
The Company entered into a severance agreement with Mr. Tomechko in June
2002. The agreement provides that (i) if the Company terminates his employment
at any time for any reason other than cause, disability or death or (ii) if Mr.
Tomechko resigns his employment for "good reason," the Company will continue to
pay him his base salary and will continue his participation in Company health
plans for 12 months following termination. If either of the foregoing
terminations occur within 24 months following a "change of control" of the
Company, the Company will, in lieu of the foregoing severance benefits, pay Mr.
Tomechko in a lump sum within 45 days of his termination of employment an amount
equal to 2 times his salary and will continue his participation in Company
health plans for 24 months. Any payment under the severance clause is subject to
the execution of a release of claims agreement.
The Company entered into an employment agreement with Mr. Zamberlan in
December 1997, which was amended on June 15, 2001. The agreement as now in
effect provides that Mr. Zamberlan will be employed as Executive Vice President,
Stores of the Company at a base salary with benefits, plus any increases granted
to him at the discretion of the Board. The agreement is for a one-year period,
except that it automatically extends for successive one-year periods unless
notice of termination is given 120 days prior to the expiration date of the then
current one-year period. If the Company terminates Mr. Zamberlan's employment at
any time during the term of the agreement for any reason other than cause,
disability or death, the Company will continue to pay him his base salary for
one year and will continue his participation in Company health and life
insurance programs until the earlier of his obtaining new employment providing
equivalent benefits or the expiration of two years from termination of
employment. If Mr. Zamberlan is terminated by the Company or resigns for "good
reason" within two years of a "change of ownership" of the Company or he resigns
within the 30-day period following the one-year anniversary date of the change
of ownership of the Company or he is terminated by the Company in connection
with, but prior to, a change of ownership, then, in lieu of the foregoing cash
payments, the Company will pay him in a lump sum within 45 days after his
termination of employment a severance payment equal to the greater of (i) 2.99
times his "base amount," as such term is defined in Section 280G of the Internal
Revenue Code, or (ii) 2.0 times his most recent base salary and bonus, subject
to the execution of a release of claims agreement. If any payment to Mr.
Zamberlan as a result of a change of ownership of the Company is subject to the
Section 280G excise tax under the Internal Revenue Code, such payments will be
grossed up to offset the impact of the tax.
The Company entered into an employment agreement with Mr. Lipton in
December 1997, which was amended on June 15, 2001. The agreement as now in
effect provides that Mr. Lipton will be employed as Senior
A-11
Vice President and Controller of the Company at a base salary with benefits plus
any increases granted to him at the discretion of the Board. The agreement is
for a one-year period, except that it automatically extends for successive
one-year periods unless notice of termination is given 120 days prior to the
expiration date of the then current one-year period. If the Company terminates
Mr. Lipton's employment at any time during the term of the agreement for any
reason other than cause, disability or death, the Company will continue to pay
him his base salary for one year and will continue his participation in Company
health and life insurance programs until the earlier of his obtaining new
employment providing equivalent benefits or the expiration of two years from
termination of employment. If Mr. Lipton is terminated by Company or resigns for
"good reason" within two years of a "change of ownership" of the Company or he
resigns within the 30-day period following the one-year anniversary date of a
change of ownership of the Company or he is terminated by the Company in
connection with, but prior to, a change of ownership of the Company, then, in
lieu of the foregoing cash payments, the Company will pay him in a lump sum
within 45 days after his termination of employment a severance payment equal to
1.5 times his most recent base salary and bonus, subject to the execution of a
release of claims agreement. If any payment to Mr. Lipton as a result of a
change of ownership of the Company is subject to the Section 280G excise tax
under the Internal Revenue Code, such payments will be grossed up to offset the
impact of the tax.
The Company has also entered into Indemnification Agreements with each
current member of the Board of Directors as well as each of the Company's
executive officers. These agreements provide that, to the extent permitted by
Ohio law, the Company will indemnify the director or officer against all
expenses, costs, liabilities and losses (including attorneys' fees, judgments,
fines and settlements) incurred or suffered by the director or officer in
connection with any suit in which the director or officer is a party or is
otherwise involved as a result of the individual's service as a member of the
Board of Directors or as an officer so long as the individual's conduct that
gave rise to such liability meets certain prescribed standards.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
OVERVIEW AND PHILOSOPHY.
The Compensation Committee of the Board of Directors (the "Committee") has
responsibility for setting and administering the policies that govern executive
compensation. The Committee reviews, analyzes and recommends compensation
programs to the Board and administers and grants awards under the Company's
Equity and Performance Incentive Plan, as amended (the "Plan"). The Committee is
comprised entirely of non-employee directors. Reports of the Committee's actions
and decisions are recommended to the full Board. The purpose of this report is
to summarize the philosophical principles, specific program objectives and other
factors considered by the Committee in reaching its determination regarding the
executive compensation of the Chief Executive Officer and the Company's other
executive officers.
The Committee's goal is to ensure the establishment and administration of
executive compensation policies and practices that will enable the Company to
attract, retain and motivate the management talent necessary to achieve the
Company's goals and objectives. The Committee's philosophy is that executive
compensation should include the following:
- A competitive mix of short-term (base salary and annual incentive bonus)
and long-term (stock options and restricted and deferred shares)
compensation that helps the Company attract and retain executive talent.
- Cash compensation that generally reflects competitive industry levels,
with annual incentive bonus opportunities that may produce total
compensation at or above competitive levels if performance against
predetermined objectives exceeds targets.
- Opportunities for ownership of the Company's Shares that align the
interests of Company executives with the long-term interests of
shareholders.
The Company's executive compensation is comprised primarily of (i)
salaries, (ii) annual cash incentive bonuses and (iii) long-term incentive
compensation in the form of stock options, deferred shares and restricted
A-12
shares granted under the Plan. Periodically, the Committee reviews market data
and assesses the Company's competitive position for each of these three
components. To assist in benchmarking the competitiveness of its compensation
programs, the Committee retains a third-party consultant to compile an executive
compensation survey for comparably sized retail companies. Because the Committee
believes that compensation in the retail industry is more directly tied to the
size of enterprise than the type of retail business, these surveys also include
comparably sized retailers outside of the department store business. Each of the
components of executive compensation is discussed below.
COMPONENTS OF COMPENSATION.
BASE SALARY. The Committee reviews base salaries annually and makes
adjustments on the basis of the performance of both the individual executive and
the Company, the executive's level of responsibility in the Company, the
executive's importance to the Company and the general level of executive
compensation in the retail industry. Base salaries and increases in the base
salaries of the Company's executive officers (other than the Chief Executive
Officer) are reviewed and approved by the Committee after considering
recommendations made by the Chief Executive Officer in light of the criteria
discussed above.
ANNUAL BONUS.
General parameters: Annual bonus awards are designed to promote the
achievement of the Company's business objectives. In setting annual bonus
award targets, the Committee considers the Company's prior year performance
and objectives, as well as its expectations for the upcoming year. The
Committee establishes objective and measurable performance goals. Executive
officers must meet or exceed the established thresholds to receive a bonus
payout.
Bonus targets are fixed as a percentage of annual base salary based on
comparable incentives paid by other retail companies. Target bonuses for
the executive officers ranged from 35% to 50% of base salary. The target
percentage increases with the level of responsibility of the executive.
Bonus payments may range from 0% to 150% of the target annual bonus, with
payments increasing as performance improves.
2002 bonus objectives: Executive officers annual bonuses for 2002
were based on meeting a corporate operating profit goal. For the fiscal
year 2002, the Company achieved the threshold, but not the target award
level established for operating profit. Therefore, the Company paid this
bonus component at 80% of the target level to the executive officers.
Deferred shares and restricted shares: An executive may elect to
defer up to 50% of his annual bonus in the form of deferred shares.
Deferred shares are subject to a deferral period of at least three years,
which is accelerated in the event of death, permanent disability,
termination of employment or change in control of the Company. Holders of
deferred shares do not have voting rights for their deferred shares, but
the terms of the deferred shares may provide for dividend equivalents. The
Company matches 25% of the value of the deferred shares in restricted
shares.
Restricted shares vest in three years from the date of grant, which is
accelerated in the event of death, permanent disability or a change in
control of the Company. Prior to vesting, restricted shares are forfeitable
upon termination of employment. The restricted shares provide for dividend
equivalents and voting rights. The deferred shares and restricted shares
are granted to executives in accordance with the Plan.
LONG-TERM INCENTIVE AWARDS.
Stock options, deferred shares and restricted shares: The Committee
administers the Plan, which provides for long-term incentives to executive
officers in the form of stock options, deferred shares and restricted
shares. The awards of stock options, deferred shares and restricted shares
provide compensation to executives only if shareholder value increases. To
determine the number of stock options, deferred shares and restricted
shares awarded, the Committee periodically reviews a survey prepared by a
third-party consultant of awards made to individuals in comparable
positions at other retail companies and the
A-13
executive's past performance, as well as the number of long-term incentive
awards previously granted to the executive. The deferred shares and
restricted shares are subject to the terms and conditions described above.
COMPENSATION OF CHIEF EXECUTIVE OFFICER.
The base salary and increases in the base salary of the Chief Executive
Officer are reviewed annually and approved by the Committee and the nonemployee
members of the Board of Directors after review of the Chief Executive Officer's
performance against predetermined performance criteria set by the nonemployee
Directors.
2002 base salary and annual bonus: Mr. Bergren's annual base salary was
$500,000. Mr. Bergren also earned a performance-based bonus of $200,000 for
fiscal year 2002 results in accordance with the Plan, and an 80% payout of his
annual bonus target of 50% of his base salary. Mr. Bergren's bonus is determined
in the same manner described above for the executive officers.
TAX DEDUCTIBILITY OF EXECUTIVE COMPENSATION.
Under Section 162(m) of the Internal Revenue Code, the Company is precluded
from deducting compensation in excess of $1 million per year paid to each of the
Named Executive Officers. Qualified performance-based compensation is excluded
from this deduction limitation if certain requirements are met. The Plan is
designed to permit (but not require) the Committee to grant awards that will
qualify as performance-based compensation that is excluded from the limitation
in Section 162(m). The Committee believes that Section 162(m) should not cause
the Company to be denied a deduction for fiscal year 2002 compensation paid to
the Named Executive Officers. The Committee will work to structure components of
its executive compensation package to achieve maximum deductibility under
Section 162(m) while at the same time considering the goals of its executive
compensation policies.
The Committee believes its compensation policies and programs for executive
officers and the Chief Executive Officer effectively tie executive compensation
to the Company's performance and value creation for the shareholders.
THE COMPENSATION COMMITTEE
Mark F.C. Berner (Chairman)
Jack A. Staph
Dennis S. Bookshester
Laura H. Pomerantz
CERTAIN TRANSACTIONS
In fiscal year 2002, Mr. Tomechko participated in a relocation program that
was offered by the Company to executive officers and other key employees who
relocated at the request of the Company. Under the program, a third-party
relocation service purchased Mr. Tomechko's former residence in Minnesota,
pursuant to an agreement dated July 16, 2002, at its appraised value of
$595,000. The Company advanced the funds to the relocation service for the
purchase on July 29, 2002 and was reimbursed the funds on August 1, 2002, less
costs of $39,296 associated with the transaction.
John S. Lupo served as Executive Vice President Merchandising & Marketing
from August 19, 2001 to October 31, 2002. His services were made available to
the Company under an agreement between the Company and Renaissance Partners,
LLP. The Company paid to Renaissance Partners a total of $369,000 in fiscal year
2002.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers and persons who own more than 10 percent of the Company's
Shares to file reports of beneficial ownership on Forms 3, 4 and 5 with the SEC.
The SEC requires this group to furnish us with copies of all such filings. Based
upon the Company's review of such forms and written representations from
directors and executive officers that no other
A-14
reports were required, the Company is not aware of any instances of
noncompliance, or late compliance, with such filings by its directors, executive
officers or 10 percent shareholders.
STOCK PRICE PERFORMANCE
The following graph depicts the value of $100 invested in the Company's
Shares beginning February 17, 1998 (the first trading day of the Shares) through
January 31, 2003 (the last trading day of the Company's 2002 fiscal year).
Comparisons are made to:
1. The Standard & Poor's SmallCap 600 Index, a market-value weighted
index of 600 domestic companies with an average equity market value of
approximately $400 million; and
2. A Regional Department Store Peer Group, consisting of The Bon-Ton
Stores, Inc., Goody's Family Clothing, Inc. and Gottschalks Inc. The return
for this group was calculated assuming an equal dollar amount was invested
in each retailer's stock based on closing prices as of February 17, 1998.
Jacobson Stores Inc. has been deleted from this year's index since it is
currently being liquidated and no longer trades on any exchange. No other
changes in the peer group index were made since last year.
[ELDER-BEERMAN LINE GRAPH]
<Table>
<Caption>
S&P REGIONAL
SMALLCAP DEPARTMENT
600 STORE PEER
FISCAL YEAR END EBSC INDEX GROUP INDEX
- --------------- ---- -------- -----------
February 17, 1998....................................... 100 100 100
1998.................................................... 54 93 57
1999.................................................... 30 103 36
2000.................................................... 18 120 31
2001.................................................... 16 123 19
2002.................................................... 16 100 18
</Table>
A-15
ANNEX B
<Table>
RBC Logo Suite 1200
Two Embarcadero Center
San Francisco, CA 94111
(415) 633-8500
(415) 633-8585 Fax
</Table>
September 15, 2003
The Board of Directors
The Elder-Beerman Stores Corp.
3155 El-Bee Rd.
Dayton, OH 45439
Members of the Board:
You have requested our opinion as to the fairness, from a financial point
of view, to the holders of the shares (the "Company Common Shares") of the
common stock of The Elder-Beerman Stores Corp., an Ohio corporation (the
"Company"), of the consideration to be received by the holders of Company Common
Shares set forth in the proposed Agreement and Plan of Merger (the "Agreement"),
by and among the Company, The Bon-Ton Stores, Inc., a Pennsylvania corporation
("Parent"), and Elder Acquisition Corp., an Ohio corporation and an indirect
wholly-owned subsidiary of Parent ("Sub"). Capitalized terms used herein shall
have the meanings used in the Agreement unless otherwise defined herein.
The Agreement provides, among other things, for the commencement by Sub,
subject to the conditions specified in the Agreement, of a tender offer (the
"Offer") to acquire all of the outstanding Company Common Shares (subject to the
Minimum Tender Condition, the Financing Condition and the other conditions
specified in Annex A to the Agreement) at a price of $8.00 per Company Common
Share (subject to any required withholding taxes) net to the seller thereof in
cash (the "Transaction Consideration") and, subject to the consummation of the
Offer and the other conditions specified in the Agreement, the subsequent merger
(the "Merger") of Sub with and into the Company, in which the remaining Company
Common Shares (other than shares held by Parent or Sub or as to which statutory
dissenters' rights are perfected) will be converted into the right to receive
the Transaction Consideration per share upon compliance with the surrender
procedures specified in the Agreement. In addition, each option to purchase
Company Common Shares outstanding immediately prior to the Effective Time will
be cancelled in consideration for the right to receive from the Company the
product of (x) the excess, if any, of the Transaction Consideration over the
exercise price of each such option and (y) the number of Company Common Shares
underlying such option. The terms and conditions of the Offer and the Merger
(together, the "Transaction") are set forth more fully in the Agreement.
RBC Dain Rauscher Inc. ("RBC"), a member company of RBC Capital Markets, as
part of its investment banking services, is regularly engaged in the valuation
of businesses and their securities in connection with mergers and acquisitions,
corporate restructurings, underwritings, secondary distributions of listed and
unlisted securities, private placements, and valuations for corporate and other
purposes.
We are acting as financial advisor to the Company in connection with the
Transaction, and we will receive a fee for our services, which is contingent
upon the consummation of the Merger or a similar transaction involving the
Company. We will also receive a fee for providing this opinion, which is not
contingent upon the consummation of the Merger but all of which is creditable
against the contingent transaction fee (as is the retainer fee we received in
connection with our engagement) and we have previously received a fee, all of
which is creditable against such contingent transaction fee, for our opinion
rendered on June 25, 2003 in connection with the then-proposed and currently
pending merger (the "Wright Holdings Merger") of a wholly-owned subsidiary of
Wright Holdings, Inc. with and into the Company. In addition, the Company has
agreed to indemnify us for certain liabilities that may arise out of our
engagement. In the ordinary course of business, RBC may act as a market maker
and broker in the publicly traded securities of the Company and Parent and
receive customary
B-1
compensation in connection therewith, and may also actively trade securities of
the Company and Parent for its own account and the accounts of its customers,
and, accordingly, may hold a long or short position in such securities.
In connection with our review of the Transaction, and in connection with
the preparation of our opinion, we have undertaken such review and inquiries as
we deemed necessary or appropriate under the circumstances, including the
following: (i) we reviewed the financial terms of the draft Agreement dated
September 15, 2003 (the "Latest Draft Agreement"); (ii) we reviewed and analyzed
certain publicly available financial and other data with respect to the Company
and certain other relevant historical operating data relating to the Company
made available to us from published sources and from the internal records of the
Company; (iii) we conducted discussions with members of the senior management of
the Company with respect to the business prospects and financial outlook of the
Company; (iv) we reviewed historical financial information (both as reported and
as normalized through adjustments to eliminate extraordinary and non-recurring
items) and financial forecasts prepared by the Company's management and (except
for the Company's adjusted historical results as of August 2, 2003 and the
current management forecast for 2003, which have been provided to us
subsequently) included in the Company's amended preliminary proxy statement (the
"Amended Preliminary Proxy Statement") filed with the SEC on Schedule 14A on
August 29, 2003 in connection with the Wright Holdings Merger (the "Company
Financials"); (v) we reviewed the reported prices and trading activity for
Company Common Shares; and (vi) we performed other studies and analyses and
considered such other factors as we deemed appropriate.
In arriving at our opinion, we performed the following analyses in addition
to the review, inquiries and analyses referred to in the preceding paragraph:
(i) we compared the premium implied by the Transaction Consideration with the
premiums paid in certain selected precedent transactions where the acquired
company was publicly traded prior to the transaction; (ii) we prepared a
discounted cash flow analysis using the Company Financials; (iii) we compared
selected market valuation metrics of the Company and other comparable publicly-
traded companies with the metrics implied by the Transaction Consideration; and
(iv) we compared the financial metrics, to the extent publicly available, of
certain selected precedent transactions with the financial metrics implied by
the Transaction Consideration.
In rendering our opinion, we have assumed and relied upon the accuracy and
completeness of the financial, legal, tax, operating and other information
provided to us by the Company or otherwise made available to us (including,
without limitation, the financial statements and related notes thereto of the
Company), and have not assumed responsibility for independently verifying and
have not independently verified such information.
In rendering our opinion, we have relied, without independent
investigation, upon the advice received by us from the Company that the Company
Financials were prepared by the Company's management in good faith and in the
ordinary course of business for use by the Company and were based on both (i)
adjustments, consistent with the Company's financial books and records and
summarized in the Amended Preliminary Proxy Statement, to eliminate
extraordinary and non-recurring items, and (ii) in the case of the
forward-looking Company Financials, the best currently available estimates of
the Company's future financial performance, which, in both cases, management
believed reasonable at the time of their preparation. The Company has also
advised us that our use of the Company Financials in connection with our
fairness analysis and the preparation of this opinion has been authorized by the
Company's Board of Directors. In addition, we have assumed that the Company will
perform substantially in accordance with the forward-looking Company Financials.
We acknowledge that the Company has further advised us that actual results for
the periods covered by the forward-looking Company Financials may differ
materially from the results forecasted therein and that the Company has referred
us to its Report on Form 10-K for the fiscal year ended February 1, 2003 and the
Amended Preliminary Proxy Statement for an identification of certain factors
that could materially affect its future operations and results.
In rendering our opinion, we have not assumed any responsibility to
perform, and have not performed, an independent evaluation or appraisal of any
of the assets or liabilities of the Company, and we have not been furnished with
any such valuations or appraisals. We have not assumed any obligation to
conduct, and have not conducted, any physical inspection of the property or
facilities of the Company.
We have assumed, in all respects material to our analysis, that the
representations and warranties of each party contained in the Agreement are true
and correct, that each party will perform all of the covenants and
B-2
agreements required to be performed by it under the Agreement, and that all
conditions to the consummation of the Merger will be satisfied without waiver
thereof. We have assumed that the executed version of the Agreement will not
differ, in any respect material to our opinion, from the Latest Draft Agreement.
Our opinion speaks only as of the date hereof, is based on the conditions
as they exist and information which we have been supplied as of the date hereof,
and is without regard to any market, economic, financial, legal, or other
circumstances or event of any kind or nature which may exist or occur after such
date.
Our advisory services and the opinion expressed herein are provided for the
information and assistance of the Board of Directors of the Company in
connection with the Transaction contemplated by the Agreement. We express no
opinion and make no recommendation to any stockholder as to whether such
stockholder should tender any of such stockholder's Company Common Shares into
the Offer or as to how such stockholder should vote any of such Company Common
Shares with respect to the Merger. This opinion shall not be disclosed, referred
to, published or used (in whole or in part), nor shall any public references to
us be made without our prior written consent. However, this opinion may be
included in its entirety in the Offer Documents and/or the Schedule 14D-9, in
each case filed with the SEC in connection with the Offer, and the Proxy
Statement (if any) filed with the SEC in connection with the Merger, provided
that any description of or reference to us or summary of this opinion and the
related analysis in such filing is reasonably acceptable to us and our counsel.
We express no view as to, and our opinion does not address, the merits of
the underlying decision by the Company to engage in the Transaction compared to
any alternative business strategy or transaction in which the Company might
engage.
Our opinion addresses solely the fairness of the Transaction Consideration
payable in the Transaction, from a financial point of view, to the holders of
Company Common Shares. Our opinion does not in any way address other Transaction
terms or arrangements, including, without limitation, the financial or other
terms of any voting, employment or financing agreement.
Based on our experience as investment bankers and subject to the foregoing,
including the various assumptions and limitations set forth herein, it is our
opinion that, as of the date hereof, the Transaction Consideration to be paid to
the holders of Company Common Shares in the Offer and the Merger pursuant to the
terms of the Agreement is fair, from a financial point of view, to the holders
of Company Common Shares.
Very truly yours,
RBC DAIN RAUSCHER INC.
B-3