Byline: Edward Russo The Register-Guard

The proposal by Bi-Mart Corp. to sell the company to employees would deliver a profit of about $80 million to the current owners while shouldering employees with enormous new debt, the sale documents indicate.

To buy the Eugene-based discount

That could cause trouble if Bi-Mart's sales wilt under pressure from rival discount retailers, the documents spell out.

But Bi-Mart's owners insist that the firm would remain viable and profitable even with the greatly increased debt. And despite many warnings in the sale documents, the current owners say the deal makes sense for employees.

For Bi-Mart's 2,300 eligible workers, it may be tough deciding whether to buy into the employee stock ownership plan - or ESOP - that the owners proposed last month.

The purchase would give workers a personal stake in the firm. That sense of ownership might help Bi-Mart survive in the cutthroat world of discount retailing, observers say.

Also, employees could benefit if Bi-Mart continued to do well and the value of Bi-Mart stock rose.

But workers and their families in Oregon and Washington have only a little more than two weeks to decide on the complex proposal delivered to them by Bi-Mart CEO Marty Smith, a leader of the ownership group.

The firm's future is important to Eugene-Springfield. Bi-Mart employs 830 people in Lane County. About 350 are at the company's headquarters in west Eugene, with the rest at 10 Lane County stores. The chain has 64 stores and 2,900 employees in the Northwest.

Some employees like the plan. "I'm confident in the company and in our executives that it's the right thing to do," said Leslie Wilson, receiving department supervisor at Bi-Mart's store at West 18th Avenue and Chambers Street in Eugene. Wilson has pledged part of her retirement savings to buy stock in the company.

Employees' response has been "very positive," Bi-Mart spokesman Don Leber said. "I believe we will complete and follow through with this process."

Bi-Mart executives last month declined to release a copy of the ESOP documents to The Register-Guard, saying they were barred by federal securities rules from promoting the stock offering.

The Register-Guard independently obtained and reviewed a copy. Bi-Mart executives and the ESOP trustee declined to answer questions from the newspaper about the sale documents.

Under the plan, the owners would sell the company for $94 million in cash.

Employees would dip into some or all of the employer-contributions part of their 401(k) retirement accounts to assemble a down payment of up to $10 million. They would have to borrow the rest of the purchase price - about $84 million.

That debt, added to the company's existing long-term debt of $61 million, could prove tough to handle, the plan warns. "Loan servicing payments will consume a substantial portion of the cash flows and operating income of the company," the sale proposal warns. "If the company's operating results were to deteriorate significantly, the company may need to obtain additional financing, which may not be available on terms acceptable to the company."

A windfall for owners

Under the ESOP, Bi-Mart would still be run by its present executives, many of whom are also owners and who would profit substantially from the sale.

The Portland investment firm Endeavour Capital is the lead owner, with 50.1 percent of the firm. The rest of the firm is owned by 135 individuals, mostly executives, including Smith.

The current owners bought the firm seven years ago from Rite-Aid Corp., putting up $8.2 million of their own cash and having Bi-Mart take on $55 million in debt, for a total payment to Rite-Aid of $63.2 million, according to the ESOP documents. Subsequently, the owners appear to have chipped in about $2 million more in equity into the company, ESOP documents indicate.

Under the ESOP, employees would pay $94 million for the company, assume all its current debts, plus take on the new debt to finance the purchase.

In effect, the current owners would be making a profit of more than $80 million on their investment of just over $10 million, the ESOP documents indicate.

Bi-Mart officials have declined repeated requests from The Register-Guard to clarify their profit in the deal.

Bi-Mart is giving employees until Feb. 19 to decide. Bi-Mart executives want to complete the sale by Feb. 27. It is unclear why the company has given employees so little time.

A high-risk proposition

Experts caution that only workers with retirement savings spread among different investments should consider using retirement funds to buy stock in their employer.

"If most of an employee's assets wind up in Bi-Mart stock, they are putting themselves in a pretty risky position," said Larry Dann, a University of Oregon finance professor.

Even with diversified investments, employees should be wary of an ESOP, experts said.

"As with any investment in a single security, you need to make sure it is an appropriate, potentially good, long-term investment," said Todd Smithpeter, a Portland-based retirement plan investment adviser with Union Bank of California. "Just because you work there at the company, and just because it's familiar to you, doesn't necessarily give you the answer. Research is required."

There are about 12,000 ESOP firms in the United States In the best circumstances, Dann said, the performance of such firms improves under employee ownership.

"Employees have an interest in seeing the company do well, not just collecting their paychecks and saying 'Whatever problems the company has, it's not my worry,' " he said.

Bi-Mart's ESOP documents show the company has grown rapidly, with sales rising from $448 million in 1999 to $601 million in the 12 months ended February 2003. The company has said it expects sales to top $620 million in the fiscal year that ends later this month.

But profits haven't kept pace with sales growth. That's mainly because Bi-Mart has spent heavily to add a dozen new stores in the past five years. Also, the company's profits have been reduced because Bi-Mart paid dividends to shareholders and bought back some stock from shareholders. In the 12 months ended February 2003, the company recorded a $7.4 million profit.

By taking on the new ESOP debt, Bi-Mart's interest expense in the first year would shoot up by $4.5 million, sharply cutting its profit margin, the ESOP documents warn.

However, under the ESOP, Bi-Mart would change to a Subchapter S corporation, freeing it from paying any federal corporate income taxes. Last fiscal year, the firm allocated $4.2 million to pay federal taxes, an expense it would no longer have under the new structure.

So, the increased interest expense would be largely offset by the reduced tax expenses, the document indicates.

But a Subchapter S corporation operates under many restrictions, including that it cannot pay dividends to shareholders.

Stock would be illiquid

Federal regulators require ESOP proposals to detail the risks, and Bi-Mart's plan does just that.

For example, the new debt would be secured by Bi-Mart's real estate, other assets, and shares owned by the ESOP. If Bi-Mart failed to make loan payments, banks could foreclose, sell the company and wipe out employees' equity, the ESOP document said.

Plus, Bi-Mart's stock would not be traded on a stock exchange like shares of publicly owned companies. It could only be owned by people who work at the firm, so the market would be very limited.

The stock price would be set based on an annual review of the company's finances. "Depending on the company's performance and other factors, it is possible that the fair market value of the stock could be significantly reduced," the offering document said.

The document even cautions that it's hard to place a value on Bi-Mart, so the $94 million asking price might be too high.

Before the sale takes place, however, the ESOP trustee, LaSalle Bank of Chicago, is to get an opinion on the fairness of the purchase price, and the rates and terms of the loans. Bi-Mart hired Portland-based Willamette Management Associates to produce that opinion.

As for the future, Bi-Mart said it plans to open nine new stores in the next three years. But it said those plans could be hindered by failing to find desirable store sites or the right managers.

Bi-Mart, which sells household merchandise in much smaller stores than Wal-Mart and other big-box retailers, noted in the offering document that discount retailing has become increasingly competitive.

"This increased competition has forced various traditional competitors of Bi-Mart to go out of business, withdraw from the region, or shift retail focus," the offering said. "No assurances can be made that the company will be able to effectively compete."

Wilson, the supervisor at the 18th and Chambers store, has worked at the firm for 28 years.

Describing herself as financially "extremely conservative," Wilson said she was skeptical of the sale offer until she learned that Smith and other leaders would stay in charge for a few years after the sale.

"I didn't want them to (sell) and then retire three months down the road," she said.

Wilson, 46, declined to say how much she will invest. Exchanging part of her retirement savings for Bi-Mart stock is a "risk," she said. "It's like owning other kinds of stock. But being with this company for this long and seeing what our past has been, I can only believe that we'll keep growing."

Bi-Mart's Leber said that if too few employees opt for the ESOP, the business would simply carry on under the current owners.

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Leslie Wilson, a receiving supervisor for the Bi-Mart store at West 18th and Chambers in Eugene, has worked for the company for 28 years and favors the employee buyout of the company. "I'm confident in the company and in our executives that it's the right thing to do," she said.