<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED: JANUARY 25, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-12203
THE CLOTHESTIME, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 33-0469138
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
5325 E. HUNTER AVENUE, ANAHEIM, CALIFORNIA 92807
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (714) 779-5881
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.001 par value
(TITLE OF CLASS)
Rights to Purchase Shares
of Common Stock
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
As of April 11, 1997, the aggregate market value of the voting stock held
by non-affiliates of the registrant (based on the closing sale price of such
stock on such date) was approximately $365,369.
The number of shares of common stock of the registrant outstanding at April
11, 1997 was 14,198,241 (exclusive of 565,000 treasury shares).
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I
Item 1. Business................................................................. 1
Item 2. Properties............................................................... 8
Item 3. Legal Proceedings........................................................ 9
Item 4. Submission of Matters to a Vote of Security Holders...................... 13
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.... 13
Item 6. Selected Financial Data.................................................. 14
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................ 15
Item 8. Financial Statements and Supplementary Data.............................. 22
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure............................................................... 42
PART III
Item 10. Directors and Executive Officers of the Registrant....................... 42
Item 11. Executive Compensation................................................... 44
Item 12. Security Ownership of Certain Beneficial Owners and Management........... 48
Item 13. Certain Relationships and Related Transactions........................... 49
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......... 50
Signatures.. ......................................................................... 56
</TABLE>
i
<PAGE> 3
PART I
ITEM 1. BUSINESS
The Clothestime, Inc., a Delaware corporation ("Clothestime"), and its
subsidiaries (collectively, the "Company"), operate a chain of women's apparel
stores offering value-priced fashionable sportswear, dresses and accessories.
The Company offers a variety of quality brand names found in department and
specialty stores and private label merchandise at savings compared with larger,
more upscale department and specialty stores. The Company's merchandise ranges
from designer fashion and better sportswear to moderate apparel. The Company's
contemporary merchandise is primarily directed to the fashion-conscious woman
who is between 18 to 34 years old, predominantly works full time in a
non-professional career, and has a young attitude. The Company also maintains a
lesser customer base in the 14 to 17 and 35 and over age groups.
Clothestime and its predecessors have been in business since 1974.
Clothestime commenced operations in 1978 as a California corporation and in 1991
reincorporated in the State of Delaware. The Company's executive offices are
located at 5325 East Hunter Avenue, Anaheim, California 92807. Its telephone
number is (714) 779-5881, and its address on the World Wide Web is
http://www.ctme.com.
DEVELOPMENTS DURING THE REORGANIZATION CASES
Chapter 11 Proceedings. On December 8, 1995 (the "Petition Date"),
Clothestime and five of its subsidiaries, MRJ Industries, Inc. ("MRJ"),
Clothestime Stores, Inc. ("Stores"), Clothestime Investment, Inc., Clothestime
Acquisition Corporation and Clothestime International, Inc. (collectively, the
"Debtors") each commenced a reorganization case (collectively, the
"Reorganization Cases") by filing a voluntary petition (collectively, the
"Petitions") for relief under chapter 11, title 11 of the United States Code
(the "Bankruptcy Code") in the United States Bankruptcy Court for the Central
District of California, Santa Ana Division (the "Bankruptcy Court"). The cases
are being jointly administered by the Bankruptcy Court. Hereinafter, all
references to the Company made in connection with any disclosure relating to the
Debtors' chapter 11 cases refer solely to the Debtors and exclude Clothestime
Insurance Company (Clothestime's captive insurance company subsidiary).
The Debtors decided to seek bankruptcy protection after an extensive review
of the retail environment and the Debtor's operations. Management of each of the
respective companies determined that filing of the Petitions would allow the
Debtors the needed time and flexibility to restructure their respective
operations.
As a result of filing the Petitions, the Company is prohibited from paying
any prepetition liabilities and is currently in default under all of its funded
debt agreements in effect prior to the Petition Date. As a result, all unpaid
principal of, and accrued prepetition interest on, such debt became immediately
due and payable.
Generally, interest on a prepetition debt does not accrue after the
commencement of a chapter 11 case. If debts are secured by property with a value
that is greater than the amount of the debt, interest may accrue up to the value
of the collateral. Interest expense on certain secured debt will continue to be
accrued but is subject to settlement. No determination has been made regarding
the value of the property interests which secure certain debt and, consequently,
whether interest thereon will be paid. The Company has ceased accruing interest
expense on unsecured debt. Contractual interest (not including interest at
default rates) exceeds interest expense recorded in the accompanying Fiscal 1996
and Fiscal 1995 consolidated statements of operations by approximately
$1,550,000 and $235,000, respectively.
Since the Petition Date, the Debtors have devoted substantial efforts to
stabilize their businesses and to solidify their relationships with their
employees, vendors and customers. The Debtors have continued in possession of
their properties and, as debtors in possession, are authorized to operate and
manage each of their respective businesses and enter into all transactions
(including obtaining services, supplies and inventories) that each could have
entered into in the ordinary course of their business had there been no
bankruptcy. The Debtors may not engage in transactions outside the normal course
of business without first complying with the notice and hearing provisions of
the Bankruptcy Code and obtaining Bankruptcy Court approval when necessary. The
Company has sought and obtained orders from the Bankruptcy Court intended to
facilitate the
1
<PAGE> 4
normal operations of the Company, including orders (a) authorizing the Company
to maintain its consolidated cash management system, (b) authorizing the payment
of certain prepetition claims, including claims for customer returns and for
wages, salaries and employee benefits, (c) approving the Company's debtor in
possession financing, which is described below, and (d) authorizing the closing
of 190 underperforming stores, as described below. See "Item 3. Legal
Proceedings," and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations," herein.
On December 28, 1995, the Company, through Stores, entered into, and the
Bankruptcy Court approved, a financing agreement (the "DIP Facility") with The
CIT Group/Business Credit, Inc. ("CIT") for debtor in possession financing. See
"Item 8. Financial Statements and Supplementary Data -- Notes to the
Consolidated Financial Statements, Note C," herein. The Debtors (other than
Stores) are guarantors under the agreement. The agreement terminates on the
earlier of December 8, 1997 or the effective date of the Company's plan of
reorganization, subject to earlier termination. Pending its emergence from
bankruptcy, the Company believes that its cash resources, revenues generated
from operations, anticipated expense reduction measures and debtor in possession
financing will enable it to conduct normal business operations. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations," herein.
On December 15, 1995, the Office of the United States Trustee for the
Central District of California (the "U.S. Trustee"), pursuant to Section 1102 of
the Bankruptcy Code, appointed the official unsecured creditors' committee (the
"Creditors' Committee"). The Creditors' Committee has the right to, among other
things, (a) consult with the Debtors concerning administration of the case; (b)
investigate the acts, conduct, assets, liabilities and financial condition of
the Debtors, the operations of the Debtors' business and any other matter
relevant to the case or to the formulation and acceptance or rejection of a plan
of reorganization; and (c) participate in the formulation and acceptance or
rejection of a plan of reorganization.
As debtors in possession, the Debtors have the right, subject to the
approval of the Bankruptcy Court, under relevant provisions of the Bankruptcy
Code, to assume or reject executory contracts and unexpired leases, including
real property leases. Certain parties to such executory contracts and unexpired
leases with the Company, including parties to such real property leases, may
file motions with the Bankruptcy Court seeking to require the Company to assume
or reject those contracts or leases. In this context, "assumption" requires that
the Company cure, or provide adequate assurance that it will cure, all existing
defaults under the contract or lease and provide adequate assurance of future
performance under relevant provisions of the Bankruptcy Code; and "rejection"
means that the Company is relieved from its obligations to perform further under
the contract or lease. Rejection of an executory contract or lease may
constitute a breach of that contract and may afford the non-debtor party the
right to assert a claim against the bankruptcy estate for damages arising out of
the breach, which claim shall be allowed or disallowed as if such claim had
arisen before the date of the filing of the petition. By order of the Bankruptcy
Court, effective February 5, 1996, the Company obtained an extension of time
within which to assume or reject the majority of its non-residential real
property leases through and including the confirmation date of its plan of
reorganization, except for certain leases of objecting landlords (the "Objection
Leases") for which the time within which such leases must be assumed or rejected
was extended initially to September 30, 1996 and subsequently to March 31, 1997.
On March 31, 1997, the Debtors filed a motion with the Bankruptcy Court seeking
to (a) assume the leases for two additional store locations, (b) reject three
additional leases and (c) extend through and including the date of confirmation
of their plan or plans of reorganization the period within which the Debtors may
elect to assume or reject the 24 remaining Objection Leases. Since the Petition
Date and as of March 31, 1997, the Company had rejected 190 retail store leases.
See "Item 2. Properties."
On December 17, 1995, the Bankruptcy Court authorized the Company to close
137 underperforming stores (including the stores comprising the Company's
Lingerie Time division) that were causing a cash drain on the Company's business
and weakening the Company operationally. In an effort to maximize the value of
the assets at the stores to be closed, the Company also obtained Bankruptcy
Court authorization to conduct store closing sales of inventory, equipment,
furniture, fixtures and other assets at these locations and to retain a
consultant to assist the Company in the process of liquidating its inventory.
The store closing sales were completed by January 31, 1996, and at such time one
lease was sold at auction and the others were rejected by
2
<PAGE> 5
the Company as of January 31, 1996 pursuant to an order of the Bankruptcy Court
or as of February 6, 1996, pursuant to section 365(d)(4) of the Bankruptcy Code.
In mid-Fiscal 1996, based on the Debtors' continued analysis of the
profitability of individual store locations and market areas, including an
assessment of operations and financial results for the early months of Fiscal
1996, the Debtors identified 33 additional stores, including 15 individual
stores and all 18 of their stores located in Hawaii, Oregon and Washington, that
were unprofitable. On July 11, 1996, the Debtors obtained Bankruptcy Court
authority to (a) close the 33 additional unprofitable stores; (b) retain a
liquidation consultant to conduct store closing sales at the 18 Hawaii, Oregon
and Washington stores; and (c) conduct store closing sales at the 15 individual
stores. On July 22, 1996, the Debtors received Bankruptcy Court authority to
reject certain of the leases for the 33 closed stores and to retain a lease
marketing consultant to market the other closed store leases. Effective July 31,
1996, the Debtors rejected most of the leases for the closed stores, and, in
August 1996, assumed and assigned one lease that had been marketed successfully.
Near the end of Fiscal 1996, the Debtors identified another 22 stores that
were unprofitable. On December 31, 1996, the Debtors obtained Bankruptcy Court
authority to: (a) close the 22 stores; (b) conduct store closing sales at those
locations; (c) retain a lease marketing consultant to market certain of the
closed store leases; and (d) effective January 21, 1997, reject those leases for
closed stores that were not successfully marketed as of January 31, 1997. As a
final step in this restructuring effort, the Debtors intend to file a motion
with the Bankruptcy Court on or before June 10, 1997 seeking approval to close
approximately 75 additional stores that are underperforming or unprofitable or
are located in markets in which the Company does not plan to operate in the
future.
The Debtors, moreover, have accomplished significant cost reductions in
other areas, including significant reductions in the number of executives and
the size of the workforce at the Debtors' headquarters. See "Item 1.
Business -- Employee Relations" herein. On September 30, 1996, the Debtors
obtained Bankruptcy Court approval to restructure the lease for their
headquarters building. The base rent under such lease was reduced, effective May
15, 1996, from $0.677 per square foot per month to $0.40 per square foot per
month, for an aggregate annual rent reduction of approximately $400,000.
In January 1997, John Ortega II, the Chairman of the Board and Chief
Executive Officer of Clothestime, and Norman Abramson, the President and Chief
Operating Officer of Clothestime, resigned from their positions as officers,
directors and employees of Clothestime and certain of its affiliates.
Immediately following the resignations of Messrs. Ortega and Abramson, David A.
Sejpal assumed the positions of Chairman of the Board, President and Chief
Executive Officer, and Douglas L. Pereira, the controller of Clothestime, and
Robert Klausner, Director of Store Operations of Clothestime, became Directors.
In February 1997, Messrs. Pereira and Klausner were promoted to the executive
officer positions of Senior Vice President, Chief Financial Officer and Vice
President -- Store Operations, respectively, and Barry Herman was hired as Vice
President, General Merchandising. See "Item 11. Executive
Compensation -- Employment Contracts and Termination of Employment and Change of
Control Arrangements," herein.
In the fall of 1996, the Debtors, in consultation with the Creditors'
Committee, began actively exploring an investment by a third party as an
alternative strategy for exiting chapter 11. The Debtors concluded that one
viable alternative for maximization of creditor recoveries was for the Debtors
and the Creditors' Committee, with the assistance of a professional investment
advisor, jointly to seek to identify opportunities for (a) a sale or merger of
the Debtors or (b) a third party willing to make an investment in the Debtors'
assets or business. Accordingly, on November 12, 1996, the Debtors and the
Creditors' Committee filed, and the Bankruptcy Court approved, their joint
application to retain Financo, Inc. ("Financo") as an investment advisor.
Thereafter, Financo assisted the Debtors and the Creditors' Committee in seeking
third party investments in any of a variety of forms, including, but not limited
to: (a) the provision of new financing, either through direct loans, the
purchase of new debt securities or the assumption of existing liabilities; (b) a
merger, joint venture or other similar business combination; or (c) the purchase
or other acquisition of some or all of the Debtors' assets. By this process,
several prospective third party investors indicated interest in purchasing
certain assets of, or making another investment in, the Company. No third party
investment
3
<PAGE> 6
proposal was received, however, that was acceptable to either the Debtors or the
Creditors' Committee. On April 8, 1997, the Debtors and the Creditors' Committee
jointly terminated their engagement with Financo.
Plan of Reorganization. The formation of a plan of reorganization is the
overriding purpose of a chapter 11 case. A plan of reorganization is the vehicle
for satisfying the rights of holders of claims against and interests in a
debtor. Under the Bankruptcy Code, a debtor has the exclusive right to (a) file
a plan of reorganization during the first 120 days of its chapter 11 case (the
"Exclusive Filing Period") and (b) solicit acceptances of such a plan during the
first 180 days of the case (the "Exclusive Solicitation Period"). By orders of
the Bankruptcy Court entered on March 28, 1996 and September 12, 1996, the
Exclusive Filing Period and the Exclusive Solicitation period were extended
through and including January 31, 1997 and March 31, 1997, respectively. By
order of the Bankruptcy Court entered on February 5, 1997, (a) effective as of
January 31, 1997 and through and including March 31, 1997, the Debtors and the
Creditors' Committee, jointly and severally, have the exclusive right to file a
plan or plans of reorganization in the Reorganization Cases; and (b) effective
as of January 31, 1997 and through and including May 30, 1997, the Debtors and
the Creditors' Committee, jointly and severally, have the exclusive right to
solicit acceptances of such a plan or plans. On March 31, 1997, the Debtors and
the Creditors' Committee filed a joint motion seeking a further extension of the
dates set forth in the preceding sentence. A hearing on the motion is presently
scheduled for May 7, 1997.
On March 21, 1997, the Debtors filed a joint plan of reorganization (as
amended, the "Plan") and related disclosure statement (the "Disclosure
Statement") with the Bankruptcy Court. The initial hearing before the Bankruptcy
Court to consider approval of the Disclosure Statement is scheduled for April
28, 1997. A number of steps must take place before the Plan will be approved and
consummated. The Debtors are still negotiating certain aspects of the Plan with
the Creditors' Committee, certain other creditors and the largest prepetition
creditor of the Debtors, and the Debtors anticipate amending the Plan to reflect
the results of such negotiations. In addition, the Bankruptcy Court must approve
the Disclosure Statement, creditors must vote whether to accept or reject the
Plan and the Bankruptcy Court must confirm the Plan. The confirmation and
effectiveness of the Plan also will be subject to a number of conditions
precedent. Given these uncertainties, there can be no assurance whether the Plan
will be approved by creditors or confirmed by the Bankruptcy Court or when or
whether the Plan will become effective. Existing stockholders would receive no
distributions under the Plan, and their stock would be canceled.
FOR ADDITIONAL INFORMATION ON THE FINANCIAL IMPACT OF THE REORGANIZATION
CASES ON THE COMPANY'S BUSINESS, SEE "ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," HEREIN.
COPIES OF THE PLAN AND OTHER DOCUMENTS FILED WITH THE BANKRUPTCY COURT AND
THE U.S. TRUSTEE MAY BE OBTAINED, UPON REQUEST FROM CPT GROUP, INC. ("CPT"),
1151 DOVE STREET, SUITE 170, NEWPORT BEACH, CALIFORNIA 92660, (714) 852-8240;
HOWEVER, THE REQUESTING PARTY WILL BE CHARGED A FEE BY CPT. THE PRECEDING
DISCUSSION AS WELL AS DISCUSSION THROUGHOUT THIS REPORT REGARDING DEVELOPMENTS
IN THE COMPANY'S CHAPTER 11 PROCEEDINGS, INCLUDING THE PLAN, ARE NOT INTENDED TO
BE EXHAUSTIVE SUMMARIES AND ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCES TO THE
ACTUAL DOCUMENTS FILED WITH THE BANKRUPTCY COURT AND THE U.S. TRUSTEE.
STORE OPERATIONS
As of January 25, 1997, the Company operated stores in 17 states and Puerto
Rico, with a large concentration of stores in California, Florida and Texas. All
stores are Company-owned and the majority operate under the "Clothestime" name.
The Company added no new stores and closed 67 stores during the fiscal year
ended January 25, 1997 ("Fiscal 1996"), ending Fiscal 1996 with 333 stores.
Since the Petition Date, the Company has closed approximately 200 stores. The
Company will continue to focus, on eliminating unproductive stores. Currently,
there are no plans to open any additional stores during the fiscal year ending
January 31, 1998 ("Fiscal 1997"). See "Item 1. Business -- Developments During
the Reorganization Cases -- Chapter 11 Proceedings," herein.
4
<PAGE> 7
The following table illustrates the changes in the number of stores
operated by Clothestime during the past five fiscal years:
<TABLE>
<CAPTION>
STORES STORES
STORES AT OPENED CLOSED STORES AT
FISCAL BEGINNING DURING DURING END OF
YEAR OF YEAR YEAR YEAR YEAR
--------------------------------------------- --------- ------ ------ ---------
<S> <C> <C> <C> <C>
1992......................................... 401 73 17 457
1993......................................... 457 92 10 539
1994......................................... 539 63 25 577
1995......................................... 577 6 183 400
1996......................................... 400 0 67 333
</TABLE>
All of the stores occupy leased facilities and are located primarily in
non-enclosed retail locations in heavily populated urban and suburban areas. The
Company employs a strategy of operating stores mainly in convenient, lower-cost
real estate locations as compared to major enclosed malls as a means of lowering
its cost structure and thereby passing the savings to the customer.
Sales of merchandise are paid for in cash and by credit cards issued by
banks and other financial institutions. The Company does not grant credit or
carry its own charge accounts. The Company offers a full money-back guarantee of
its merchandise and permits return of merchandise within 30 days after purchase.
Cash and credit card refunds are given for merchandise returned with a receipt
and exchanges are made for merchandise returned without a receipt.
MERCHANDISING AND MARKETING
The Company's merchandise ranges from designer fashion and better
sportswear to moderate apparel. The Company maintains a private label program to
provide better quality fashionable merchandise that offers significant savings
to the budget conscious consumer. In addition, the Company offers, on a more
limited basis, quality brand name merchandise, with an emphasis on everyday low
prices. Currently, approximately 75% of the Company's apparel merchandise is
private label, designed and manufactured to the Company's specifications.
In Fiscal 1996, the Company offered more novel and "fashion-forward"
merchandise and broader assortments than in prior years. In addition, the
Company altered the merchandise mix by featuring a greater percentage of novelty
items than were featured in Fiscal 1995.
The Company has maintained a chain-wide, uniform merchandising concept for
its "Clothestime" stores. Management continues to believe that this uniform
merchandising concept promotes a consistent and comfortable shopping
environment. All newly-constructed and remodeled stores conform to the Company's
standards for design and convenience.
Marketing studies conducted both before and after the Petition Date have
shown that the Clothestime customer shops frequently, visiting the stores as
often as twice per week to shop for new junior fashion arrivals. In addition,
because the Company's stores are located predominantly in convenient local
shopping centers, the stores also attract the busy customer, who attends to
other shopping needs while in the shopping center.
The Company's policy is, and has been, to maintain sufficient quantities of
inventory on hand in its retail stores and distribution center so that it can
offer customers a full selection of current merchandise with ample quantities.
During the course of the Reorganization Cases, the Company often has been unable
to offer the proper and timely assortment of junior fashion merchandise
necessary to attract repeat or new customers. With the hiring of Barry Herman as
Vice President, General Merchandise Manager, the Company plans to implement
during Fiscal 1997 a number of strategies to improve the flow of merchandise to
its stores and to upgrade the appearance of its stores to increase customer
interest.
To keep pace with current fashion trends, the Company continuously tracks
inventory in each of its stores through utilization of a "point-of-sale"
terminal system designed to improve tracking of merchandise and sales
performance. This system and the related software are regularly upgraded or
modified as needs arise or
5
<PAGE> 8
change. In Fiscal 1997, the Company intends to refine its inventory control
systems to manage more effectively the timely delivery of new inventory to their
stores. Buyers' efforts will continue to be supervised to assure delivery of
goods on a consistent basis to meet customer needs to new merchandise. These
control systems also will enable the Company to respond more quickly to market
changes and to take advantage of trends and opportunities.
Management also intends to take steps to enhance communication between the
stores and the buyers. This will provide buyers with increased knowledge of
individual markets and customer style preferences, competition and opportunities
within various geographic and demographic markets. Enhanced communication also
will provide selling teams with a better understanding of new merchandise
arrivals, product knowledge and selling techniques. Management believes that the
successful implementation of these strategies will enable repeat customers to
see new merchandise on a consistent basis.
The Company intends to broaden its pricing strategy which is expected to
marginally raise the overall price points for sales, resulting in higher
revenues per store. In addition, management anticipates that this broadened
focus will attract new "brand conscious" customers who currently shop at mall
stores or other competitors.
To improve its presentation of merchandise and upgrade certain stores, the
Company intends to engage in a limited and focused store remodeling program.
Although the Company does not intend to increase the number of stores it
anticipates operating immediately after the effective date of the Plan, the
Company will consider selective opportunities to relocate stores into new
shopping centers with more growth opportunities. Store signage and banners and
window displays will be updated to better showcase merchandise to attract
"walk-by" customers.
The Company's advertising and marketing program is designed to reach women
between the ages of 18 and 34. In Fiscal 1996, the Company launched a
sensationalized, controversial and aggressive marketing campaign, focused
primarily towards television, radio and print media spots, designed to rebuild
customer traffic and to promote and reinforce that Clothestime is a "cool" place
to shop. In Fiscal 1997, the Company intends to tailor its marketing efforts to
reach its core customer base. National marketing efforts will shift from
television and radio to direct mailings with limited radio support. A newly
developed customer database will be utilized to target existing customers and
develop demographic information for new potential customers. The Company plans
to utilize more frequent direct mailing to target events and sales in particular
geographic areas.
Recognizing the important role played by store personnel in customer
satisfaction, management intends to place increased emphasis on customer service
through a number of programs including the following:
- Education. Product knowledge will be communicated to selling teams,
which will have direct lines of communications with buyers regarding the
merchandise being ordered and desired by customers.
- Competition. Selling teams will be provided incentives to increase sales
through more frequent contests and incentive rewards.
- Incentives. Selling teams' compensation will have performance
incentives.
- Training. Focused training will be provided to selling teams to increase
performance and reduce turnover.
PURCHASING AND DISTRIBUTION
The Company purchases most of its merchandise directly from manufacturers
who also sell to department stores, specialty stores, retail chain stores,
factory-outlet stores, mass merchandisers and catalogue merchandisers. During
Fiscal 1996, the Company purchased from approximately 600 vendors, with no one
vendor accounting for 10% or more of the Company's purchases. Management
believes that the loss of any one vendor would not have a material adverse
effect on the Company. The Company does not maintain any long-term or exclusive
commitments or arrangements to purchase from any one vendor. The Company
believes that it will be able to continue to purchase merchandise from such
vendors or from other vendors supplying similar merchandise. In addition, in
Fiscal 1997 the Company intends to explore partnering opportunities relating to
6
<PAGE> 9
product development/testing with certain of its key vendors. Unlike many
clothing retailers which make large inventory purchases substantially prior to a
fashion season, the Company's inventory purchase pattern corresponds closer in
time to, or occurs during, the fashion season. The Company's cash from
operations and available credit facilities allow management the flexibility to
take advantage of opportunities to effect volume purchases during these periods
and the Company's distribution capabilities allow such merchandise to be in the
stores quickly.
Merchandise is shipped directly from vendors to the Company's central
distribution facility located in Anaheim, California. The Company's utilization
of a computer control system to track inventory and monitor distribution plays a
key role in inventory control and merchandise distribution.
To stabilize vendor relations and address significant vendor claims issues
arising in the early stages of their chapter 11 cases, the Company: (a)
developed and obtained Bankruptcy Court approval of a "return to vendor"
program; and (b) analyzed the multitude of reclamation notices served by vendors
during the initial days following the Petition Date and, on that basis,
developed a program which was approved by the Bankruptcy Court on March 28, 1996
for the reconciliation and eventual payment of reconciled reclamation claims by
the end of Fiscal 1996.
TRADEMARKS AND SERVICE MARKS
The Company is the owner of the federally registered trademarks
"Clothestime," "Best World Brand," "CTME," "Spoiled Girls," "Star Cody," "Via
Max," "Day 2 Day" and the federally registered service marks "Clothestime,"
"Lingerie Time," "Trend Club" and "Always in Fashion, Never Full Price." The
expiration dates for the initial registration for these marks range from July
2003 to May 2009. In addition, the Company has registered the trademarks
"Clothestime" and "Lingerie Time" in Mexico, such initial Mexican registrations
to expire in July 2004. The Company believes these marks are important to its
business. The Company intends to maintain the marks and related registrations it
currently uses in its business.
EMPLOYEE RELATIONS
In connection with the Company's restructuring efforts and the closure of a
significant number of unproductive stores, the Company eliminated approximately
700 jobs during Fiscal 1996. As of January 25, 1997, the Company had 2,046
employees, 905 of whom were part-time. A number of additional temporary
employees are usually added during peak selling periods. The Company developed
and the Bankruptcy Court approved a key employee retention incentive program to
ensure that employees who are crucial to the Company's restructuring efforts
will have adequate incentives to remain employed by the Company for the
foreseeable future. None of the Company's employees are covered by a collective
bargaining agreement. The Company considers its employee relations to be good.
COMPETITION
The women's retail apparel business is highly competitive. The Company's
stores compete with regional and national department store chains, mass
merchandiser stores, independent retail stores, factory-outlet stores and
numerous national and regional catalogue merchandisers. Many of its competitors
are considerably larger than the Company and have substantially greater
financial and other resources.
Clothestime competes primarily on the basis of fashion, price, selection
and style, merchandise display and store location and design. The Company
believes that its strategy of offering a mix of brand name and private label
merchandise to the junior-sized customer at savings compared with department and
specialty stores and its ability to effect volume purchases are important
elements in its operations.
SEASONALITY
The Company's business is comprised of two principal selling seasons:
Spring (the first and second quarters), which includes the period during which
spring and summer styles are introduced; and Fall (the third and fourth
quarters), which includes the back-to-school, winter and Christmas selling
seasons. The
7
<PAGE> 10
Company normally posts its strongest sales during the second and third quarters.
Second quarter sales have traditionally been strong due to the customer's
acceptance of the Company's summer merchandise and the concentration of the
Company stores in warm weather climates. Third quarter sales have been primarily
driven by back-to-school sales. Typically, clothing retailers post their
strongest sales during the fourth quarter as a result of a strong Christmas
selling period. While the Company has sought to increase its fourth quarter
sales consistent with most clothing retailers, during the last several years a
highly competitive promotional environment surrounding the holiday season as
well as the lack of acceptance of merchandise offered contributed to weak
Company sales in the fourth quarter. First quarter sales are generally lower
than sales in the other quarters primarily as a result of the high general level
of retail sales activity during the fourth quarter.
As is the case for most clothing retailers, abnormal seasonal weather also
may affect sales because the seasonal merchandise then in the stores may not
correspond to the merchandise consistent with the abnormal weather. In addition,
since most of the Company's stores are located in non-enclosed retail locations
as opposed to enclosed malls, the Company's sales can be adversely affected by
abnormal rain or other inclement weather. There was no evidence of adverse
weather affecting the Company's sales during Fiscal 1996.
ITEM 2. PROPERTIES
The Company's principal executive offices and distribution facility are
located on a five-acre tract in Anaheim, California, in a building designed
specifically for the Company, consisting of approximately 27,000 feet of
two-story office space and approximately 82,400 square feet of
distribution/warehouse space (the "Headquarters' Facility"). The Company
occupies the Headquarters' Facility under a triple net lease which expires in
May 2006 (the "Headquarters' Lease").
Stores owns an office and warehouse facility located on the same block as
the Headquarters' Facility (the "Support Facility"). It consists of
approximately 25,700 square feet of two-story office space and approximately
24,600 square feet of warehouse space. This office and warehouse building is
security for a $1.4 million loan agreement between Stores and Wells Fargo Bank
and a $40 million credit agreement between Stores, on the one hand, and Wells
Fargo Bank and Union Bank, on the other hand. The loan agreement and the credit
facility are both guaranteed by the Company and certain other of the Company's
subsidiaries. As part of the Company's consolidation of its corporate office and
distribution operations, on March 7, 1997, the Company completed the move of all
of its corporate office and distribution operations, located within the Support
Facility to the Headquarters' Facility. On April 14, 1997, Stores agreed to sell
the Support Facility to an unaffiliated third party for approximately $2.7
million. The closing of the sale is subject to a number of conditions, including
approval of the Bankruptcy Court. The Debtors anticipate that they will also
seek an order authorizing the payment of the net proceeds to Wells in full
payment of its secured note payable and to the Banks to reduce the revolving
credit facility debt. See "Item 8. Financial Statements and Supplementary
Data -- Notes to the Consolidated Financial Statements, Notes D and L," herein.
The Company leases all its retail stores. Store leases generally have an
initial term of one to 20 years and will expire at various dates through 2007.
Some leases contain renewal options for periods ranging from one to ten years on
substantially the same terms and conditions as the initial leases. The following
table sets forth information concerning lease expirations with respect to leases
in effect as of Fiscal 1996 year end, excluding
8
<PAGE> 11
those leases for stores that were rejected by the Debtors as of January 31 and
February 8, 1997 (see "Item 1. Business -- Developments During the
Reorganization Cases" and "-- Store Operations," herein):
<TABLE>
<CAPTION>
NUMBER OF LEASES
NUMBER OF LEASES EXPIRING WITH
CALENDAR YEARS EXPIRING RENEWAL OPTIONS
-------------------------------- ---------------- -------------------------
<S> <C> <C>
1997-1998....................... 78 68
1999-2000....................... 82 68
2001-2002....................... 98 72
2003-2004....................... 59 55
2005-2006....................... 9 8
2007-2008....................... 1 0
Month to Month.................. 3 0
--- ---
Total...................... 330 271
================ ========================
</TABLE>
Under most of the store leases, the Company is required to pay taxes,
insurance and its pro rata share of common area and maintenance expenses. Most
of these leases also require the Company to pay the greater of a specified
minimum rent or a contingent rent based on a percentage of gross sales. In
addition, many store leases include cancellation clauses exercisable by the
Company upon the occurrence of certain events (e.g., change in the anchor tenant
or a failure to reach certain minimum sales levels). See "Item 8. Financial
Statements and Supplementary Data -- Notes to the Consolidated Financial
Statements; Note I," herein.
For a discussion of the assumption and rejection of the Company's store
leases and store closures in connection with the Reorganization Cases, please
refer to "Item 1. Business -- Developments During the Reorganization Cases,"
herein.
In management's opinion, the Company's current administrative offices and
warehouse and distribution facilities are adequate for its current level of
operations as well as the Company's anticipated level of operations through the
end of the fiscal year ending January 31, 1998.
ITEM 3. LEGAL PROCEEDINGS
On December 8, 1995, Clothestime and five of its subsidiaries, Clothestime
Stores, Inc., MRJ Industries, Inc., Clothestime Acquisition Corporation,
Clothestime Investment, Inc. and Clothestime International, Inc., each filed
petitions in the United States Bankruptcy Court for the Central District of
California, Santa Ana Division, Jointly Administered Case No. SA95-22533JW,
seeking reorganization under chapter 11 of the Bankruptcy Code.
Prepetition claims that were contingent, unliquidated, or disputed as of
the commencement of the Company's chapter 11 cases, including, without
limitation, those that arise in connection with rejection of executory contracts
or unexpired leases, may be allowed or disallowed depending on the nature of the
claim. Such claims may be fixed by the Bankruptcy Court or otherwise settled or
agreed upon by the parties and approved by the Bankruptcy Court. As a general
matter, the treatment of claims pending in the Bankruptcy Court will be
determined as part of the formulation and confirmation of a plan of
reorganization.
The Debtors filed their schedules of assets and liabilities and statements
of financial affairs with the Bankruptcy Court on January 22, 1996. The Debtors
filed amended schedules of assets and liabilities and statements of financial
affairs with the Bankruptcy Court on March 21, 1996, to include additional
claimants and to modify certain information relating to previously scheduled
claims.
The Bankruptcy Court established July 15, 1996 as the date by which, with
certain exceptions, all claimants were to file proofs of claim or be barred from
asserting any claim against the Debtors and voting upon or receiving
distributions under a plan of reorganization of the Debtors. Certain creditors
(essentially entities holding claims that were (a) not scheduled by the Debtors
as disputed, contingent or unliquidated or (b) previously allowed by the
Bankruptcy Court) were not required to file proofs of claim. In addition, the
Bankruptcy Court provided that claims relating to any future rejection of
executory contracts or unexpired
9
<PAGE> 12
leases (other than as part of the Plan) were required to be filed on or before
the later of (a) 30 days from the date of entry of the order rejecting such
contract or lease and (b) the July 15, 1996 bar date. Proofs of claim relating
to the rejection of executory contracts or unexpired leases under the Plan must
be filed and served on the reorganized Debtors on or before 30 days after the
effective date of the Plan.
Approximately 8,000 claims were originally scheduled by the Debtors or
filed against the Debtors prior to the applicable claims bar date imposed by the
Bankruptcy Court. The Debtors are in the process of reconciling and resolving
proofs of claim that differ in amounts from the Debtors' records, through
negotiations with claimants and the anticipated filing of objections. Many of
these claims against various Debtors are believed to be duplicative of claims
filed against other Debtors, erroneously filed or otherwise not allowable.
Described below are certain claims, settlements and litigation in the
Bankruptcy Court. For a discussion of other aspects of the chapter 11 cases,
including a discussion of the Plan of Reorganization filed by the Debtors on
March 21, 1997, see "Item 1. Business -- Developments During the Reorganization
Cases," herein.
Claims Arising from Tax Audit. In early 1996, the Internal Revenue Service
(the "IRS") commenced an audit (the "IRS Audit") of the Debtors' income tax
returns for the fiscal years ended January 29, 1994 ("Fiscal 1993"), January 28,
1995 ("Fiscal 1994") and January 27, 1996 ("Fiscal 1995"). In July 1996, the IRS
reported to the Debtors that it had made only limited progress in its audit and
thus could not, in advance of the claims bar date, estimate accurately the
amounts of outstanding tax liabilities for the periods being audited. As a
result, the IRS reported on its proofs of claim high estimates of the
outstanding tax liabilities for the periods being audited. The Debtors believe
that their actual outstanding tax liabilities for such periods are far lower
than those set forth on the proofs of claim filed by the IRS. For financial
statement purposes, the Company has estimated the Federal and state taxes
(including interest and penalties) expected to be owed as a result of the IRS
Audit. If the Company agrees to any settlement of the IRS Audit and related
claims filed in the Reorganization Cases, such agreement will be subject to
several levels of IRS review and approval and may be subject to approval of the
Bankruptcy Court. The Debtors cannot predict whether the amount estimated for
financial statement purposes will be the final amount of taxes owed as a result
of the IRS Audit or when or whether the IRS and the Bankruptcy Court will
approve any settlement of the IRS Audit. See Note F to the Notes to Consolidated
Financial Statements.
Settlement With MetLife Capital Corporation. In May 1993, the Debtors
purchased various "point of sale" computer equipment and related software
(collectively, the "POS Equipment") used in certain of the Debtors' retail
stores to record data regarding sales transactions, which data is simultaneously
transferred to the Debtors' central computer system and used to track, among
other things, inventory levels and sales performance. The Debtors financed the
POS Equipment through the MetLife Capitalized Lease with MetLife Capital
Corporation ("MetLife"). The lease obligation was in the aggregate original
principal amount of $1,909,725 and was secured by the POS Equipment.
As of the Petition Date, the aggregate unpaid amount of the Debtors'
indebtedness to MetLife, including unpaid principal and accrued interest, was
$1,035,335. On or about May 13, 1996, MetLife filed a motion for relief from the
automatic stay in the Reorganization Cases, pursuant to section 362 of the
Bankruptcy Code, to permit MetLife to foreclose upon its liens on the POS
Equipment during the pendency of the Reorganization Cases. Thereafter, the
Debtors and MetLife entered into, and the Debtors obtained Bankruptcy Court
approval of, a stipulation among the parties (the "MetLife Agreement") which
resolves MetLife's motion for relief from the automatic stay and restructures
the Debtors' loan obligations to MetLife. Under the terms of the MetLife
Agreement, MetLife has an allowed secured claim in the Reorganization Cases in
the amount of $670,000, and the balance of MetLife's claim is an allowed
unsecured claim in the Reorganization Cases. The MetLife Agreement provides
that, in order to amortize MetLife's allowed secured claim the Debtors are
required to: (a) make monthly payments of $5,000 to MetLife, commencing in June
1996, which payments have been and will continue to be applied to reduce the
principal amount of such secured claim, until the effective date of a plan of
reorganization in the Reorganization Cases; and (b) pay the remainder of such
secured claim by making monthly payments to MetLife from and after such
effective date in an amount equal to remaining principal plus interest at the
Bank of America prime rate plus two percentage points, not to
10
<PAGE> 13
exceed 10.5% per annum, amortized over 60 months minus the number of months in
which adequate protection payments were made by the Debtors, as described in
clause (a) above. Under the MetLife Agreement, MetLife's allowed unsecured claim
is to be treated and paid in accordance with the terms of any confirmed plan of
reorganization in the Reorganization Cases.
Wells and Union Claims; Litigation and Partial Settlement. Since the
Petition Date, the Debtors have engaged in a series of disputes with Wells Fargo
Bank, N.A. ("Wells") and Union Bank of California, N.A. ("Union") (collectively,
the "Banks") regarding the treatment of the Banks' Claims. In December 1995, the
Debtors and the Banks engaged in extensive negotiations regarding the scope of
the Banks' security interests in certain of the Debtors' assets, including,
among other things, inventory that was purchased prepetition under commercial
letters of credit and certain cash accounts. On December 28, 1995, in partial
resolution of these issues and in connection with its approval of the DIP
Facility, the Bankruptcy Court entered its Amended Stipulation for Order (1)
Clarifying Order Approving Centralized Cash Management Systems, Etc., (2)
Providing Adequate Protection for Alleged Collateral of Wells Fargo Bank, as
Agent, to the Extent of Valid Liens and (3) Establishing Schedule for Resolution
of Disputes (the "Amended Wells/Union Stipulation"). The Amended Wells/Union
Stipulation sets forth the parties' agreement regarding: (a) the extent of
Wells' (as agent for the Banks) and the Banks' interest in the Debtors'
inventory; (b) the ability of the Debtors to use the deposits in certain bank
accounts, receipts from credit card purchases of merchandise and proceeds of
certain other collateral of the Banks and Wells, as agent for the Banks; and (c)
certain other matters.
Two adversary proceedings involving obligations under the Wells/Union
Credit Agreement were commenced in the early months of the Reorganization Cases.
On January 24, 1996, Wells, individually and as agent for itself and Union,
commenced an adversary proceeding the Bankruptcy Court, Adversary Proceeding No.
96-1100, (the "Tax Refund Litigation") seeking a judicial determination and
declaration regarding the nature, extent, validity and priority of the Banks'
alleged lien on the Debtors' then-prospective entitlement to receive corporate
income tax refunds in excess of $9 million (collectively, the "Tax Refund") in
respect of the Debtors' 1995 fiscal year. Soon after the inception of this
adversary proceeding, Wells also filed a motion for a temporary restraining
order and preliminary injunction to prevent the Debtors from dissipating the Tax
Refund during the pendency of such adversary proceeding.
Wells also asserted liens on certain of the Debtors' credit card
receivables in transit as of the Petition Date (the "Receivables") and a deposit
account holding approximately $2.5 million in cash (the "Deposit Account"). On
January 5, 1996, the Debtors commenced Adversary Proceeding No. 96-1017 (the
"Credit Card Litigation") against Wells, seeking a judicial determination and
declaration that Wells did not hold a valid and perfected security interest in
either the Receivables or the Deposit Account or, alternatively, that the
security interests held by Wells in such property, if any, could be avoided.
On August 28, 1996, the Bankruptcy Court approved the compromise and
settlement of the Tax Refund Litigation and the Credit Card Litigation
(collectively, the "Adversary Proceedings") and certain related disputes between
the Debtors and the Banks, pursuant to a settlement agreement (the "Settlement
Agreement"). The Settlement Agreement provides for the resolution of all claims
and controversies relating to the Banks' alleged security interests in the
following disputed collateral: (a) refunds of federal, state and local income
taxes in the amount of $9,452,726, representing tax refunds from the Internal
Revenue Service in the amount of $9,450,146, from the State of Illinois in the
amount of $2,280 and from the City of New York in the amount of $300
(collectively, the "Tax Refund"); (b) certain funds held on deposit in
segregated accounts pursuant to the terms of the parties' Amended Stipulation
for Order (i) Clarifying Order Approving Centralized Cash Management Systems,
etc., (ii) Providing Adequate Protection for Alleged Collateral of Wells Fargo
Bank, as Agent, to the Extent of Valid Liens and (iii) Establishing Schedule for
Resolution of Disputes, dated December 27, 1995; (c) the Debtors' prepetition
credit card accounts receivable; and (d) fee and expense retainers paid by the
Debtors to professionals prior to the commencement of the Reorganization Cases
(the collateral described in clauses (a), (b), (c) and (d) above are referred to
herein as the "Disputed Collateral"). The Settlement Agreement also fixes the
allowed amount of the Banks' prepetition claims under the credit facilities
evidenced by the Credit Agreement, dated as of February 28, 1995 between Stores,
as borrower, the other Debtors, as Guarantors, and the Banks (the "Bank Claims")
at $26,306,481, subject to
11
<PAGE> 14
increase for prepetition legal fees and expenses and certain contingent claims
on account of letters of credit. Such amount has been and will be reduced by
certain payments, including payments made pursuant to the Settlement Agreement.
On or about September 5, 1996, pursuant to the terms of the Settlement Agreement
and on account of the Banks' alleged security interests in the Disputed
Collateral other than the Tax Refunds, the Banks (a) applied $3,100,000 of the
funds on deposit in certain segregated accounts held by the Debtors to reduce
the Bank Claims (the "Initial Payment"), (b) released the remainder of all funds
(approximately $6,500,000) on deposit in such accounts to the Debtors and (c)
released the Banks' security interests in all Disputed Collateral other than the
Tax Refund. In addition, on September 5, 1996, to secure its obligation to make
a remaining payment (the "Remaining Payment"), the Debtors deposited the sum of
$3,126,363 into a segregated account (the "Segregated Account"). On September
16, 1996, such amount plus interest of $3,054 was applied by the Banks to reduce
the amount of the Bank Claims pursuant to the terms of the Settlement Agreement.
In consideration for the transactions described above, the Banks: (a) have
released the balance of the Tax Refund to the Debtors and (b) have released
their alleged security interests in the Tax Refund. In addition, under the terms
of the Settlement Agreement, the Adversary Proceedings have been dismissed.
The payments by the Debtors to the Banks and the dismissals of the
adversary proceedings contemplated by the Wells/Union Settlement Agreement have
been completed. The Debtors and Wells currently are engaged in ongoing
negotiations regarding all outstanding issues with respect to the appropriate
treatment of the Banks' prepetition Claims arising under the Wells/Union Credit
Agreement.
The Company's borrowings from Union were secured by a lien on certain
limited partnership interests that were then owned by the Company to take
advantage of the Federal and California tax benefits available to investors in
such partnerships. Following the Petition Date, after examining its tax
position, the Company determined that it would not be able to utilize the
credits and other benefits generated by these partnerships. Accordingly, the
Debtors obtained Bankruptcy Court approval of the sale of such limited
partnership interests for aggregate consideration of $1,550,000. Of the net
proceeds of the sale, $1,229,443 was paid to Union in full satisfaction of its
secured loan. The remaining net proceeds were paid into a segregated Wells
account, pending further order of the Bankruptcy Court.
On April 2, 1997, the Bankruptcy Court granted the motion of Wells,
individually and as agent for itself and Union, seeking relief from the
automatic stay established under section 362 of the Bankruptcy Code and
authorized the Banks to execute upon their security interests in (a) a New York
State Dormitory Authority Revenue Bond in the face amount of $2.0 million and
interest thereon and (b) restricted cash in the amount of $253,916 (plus accrued
interest) (the "Restricted Cash"), consisting of the excess net proceeds of the
Debtors' sale of certain limited partnership interests described above. It is
anticipated that Wells, as agent, will liquidate the bond and apply the proceeds
thereof and the Restricted Cash to reduce the Debtors' obligations to the Banks
under the revolving credit facility.
Reclamation Claims. Beginning before the Petition Date and continuing
through March 1996, the Debtors received 33 demands from 29 sellers claiming a
right of reclamation under Section 2-702 of the California Uniform Commercial
Code and section 546(c) of the Bankruptcy Code (the "Reclamation Demands"). The
alleged value of the goods identified in the Reclamation Demands aggregated
approximately $2.6 million.
Soon after the Petition Date, the Debtors began to implement, and obtained
Bankruptcy Court approval of, a comprehensive reclamation claims reconciliation
and payment program. Under this program, the Debtors analyzed the Reclamation
Demands and determined that only approximately $1.2 million in reclamation
claims were valid. Within nine months after the Petition Date, the Debtors were
able to reach final resolution of all of the Reclamation Demands. Before the end
of 1996, the Debtors paid in full all valid reclamation claims.
Other Litigation. The Company is also subject to other legal proceedings
and claims. Although occasional adverse decisions (or settlements) may occur,
the Company believes that the final disposition of
12
<PAGE> 15
such matters will not have a material adverse effect on the financial position,
results of operations or liquidity of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On July 26, 1996, the Company's common stock was delisted from The Nasdaq
Stock Market, Inc. ("Nasdaq") because the Company no longer complied with the
criteria established by Nasdaq for continuation of listing. The Company's common
stock has been quoted on the OTC Electronic Bulletin Board.
The table sets forth the range of high and low bid information for the
periods and the date indicated as reported by the OTC Electronic Bulletin Board.
These quotations reflect interdealer prices, without retail mark-up, mark-down
or commission and may not necessarily represent actual transactions. The number
of shareholders of record as of April 11, 1997 was 636.
STOCK PRICE SUMMARY
<TABLE>
<CAPTION>
HIGH BID LOW BID
-------- -------
<S> <C> <C>
Year ended January 27, 1996:
1st Quarter.................................................... $3 7/8 $2 1/2
2nd Quarter.................................................... 3 1/8 2 11/16
3rd Quarter.................................................... 3 3/4 2 1/2
4th Quarter.................................................... 2 5/8 3/8
Year ended January 25, 1997:
1st Quarter.................................................... $1 1/8 $ 1/2
2nd Quarter.................................................... 1 1/2 3/8
3rd Quarter.................................................... 3/4 1/8
4th Quarter.................................................... 5/8 1/8
At April 11, 1997................................................ $ .034 $ .031
</TABLE>
The Company has never paid cash dividends on its common stock following a
philosophy of retaining earnings in order to finance the expansion and
development of its business. Currently, the Company is prohibited from making
cash dividend payments under its debtor in possession financing. See "Item 8.
Financial Statements and Supplementary Data -- Notes to the Consolidated
Financial Statements: Note C." Also see the discussion under the caption "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
13
<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes selected financial data for the Company and
should be read in connection with the Consolidated Financial Statements, related
notes and other financial information appearing elsewhere in this report.
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------------------------------------------------------
JANUARY 25, 1997 JANUARY 27, 1996 JANUARY 28, 1995 JANUARY 29, 1994 JANUARY 30, 1993
(52 WEEKS) (52 WEEKS) (52 WEEKS) (52 WEEKS) (53 WEEKS)
(FISCAL 1996) (FISCAL 1995) (FISCAL 1994) (FISCAL 1993) (FISCAL 1992)
---------------- ---------------- ---------------- ---------------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA
Net sales, interest and
other income............. $195,994 $308,810 $342,280 $349,482 $317,122
Cost of sales, including
buying and distribution
and occupancy costs...... 139,460 236,872 245,543 237,766 213,147
Selling, general and
administrative
expenses................. 69,627 101,107 110,566 95,307 84,402
Loss on disposal of
property, plant and
equipment................ 199 -- 3,378 1,739 3,110
Asset write down........... -- -- -- -- 1,468
Interest expense........... 827 769 856 71 --
Other expenses (income).... -- 1,103 411 91 (506)
-------- -------- -------- -------- --------
Total costs and
expenses............ 210,113 339,851 360,754 334,974 301,621
-------- -------- -------- -------- --------
Income (loss) before
reorganization costs and
income taxes............. (14,119) (31,041) (18,474) 14,508 15,501
Reorganization costs....... 16,598 21,967 -- -- --
Income (loss) before income
taxes.................... (30,717) (53,008) (18,474) 14,508 15,501
Provision (benefit) for
income taxes............. 927 (10,006) (7,233) 6,340 6,848
-------- -------- -------- -------- --------
Net income (loss)..... $(31,644) $(43,002) $(11,241) $ 8,168 $ 8,653
======== ======== ======== ======== ========
Earnings (loss) per
share.................... $ (2.23) $ (3.03) $ (0.79) $ 0.56 $ 0.58
Weighted average number of
common and common
equivalent shares
outstanding during the
year..................... 14,198 14,190 14,161 14,660 14,958
CONSOLIDATED BALANCE SHEET
DATA
Cash and cash
equivalents.............. $ 20,695 $ 34,478 $ 40,830 $ 2,706 $ 16,928
Working capital............ 14,152 32,671 40,597 21,351 20,931
Total assets............... 51,314 88,280 140,402 115,455 100,838
Long-term debt, excluding
current portion.......... 630 -- 37,234 2,823 --
Shareholders' equity
(deficiency)............. (23,397) 8,311 50,914 62,466 54,210
</TABLE>
14
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CHAPTER 11 REORGANIZATION
On December 8, 1995, the Company and five of its subsidiaries commenced
reorganization cases by filing voluntary petitions for relief under chapter 11,
title 11 of the United States Code in the United States Bankruptcy Court for the
Central District of California, Santa Ana Division. See "Liquidity and Capital
Resources" below.
The Company decided to seek bankruptcy protection after an extensive review
of the current retail environment and the Company's operations. Management
determined that filing the chapter 11 petitions would allow the Company the
needed time and flexibility to restructure its operations.
On March 21, 1997, the Debtors filed a joint plan of reorganization with
the Bankruptcy Court. See "Item 1. Business -- Developments During the
Reorganization Cases -- Plan of Reorganization," herein.
CONSOLIDATED RESULTS OF OPERATIONS
The consolidated financial statements have been presented on the basis that
the Company is a going concern, which contemplates the realization of assets and
the satisfaction of liabilities in the normal course of business. As a result of
the chapter 11 filing and circumstances relating to this event, realization of
assets and satisfaction of liabilities is subject to uncertainty. A plan of
reorganization could materially change the amounts reported in the accompanying
consolidated financial statements, which do not give effect to all adjustments
to the carrying values of assets and liabilities which may be necessary as a
consequence of the confirmation and implementation of a plan of reorganization.
The ability of the Company to continue as a going concern is dependent on, among
other things, confirmation of an acceptable plan of reorganization, future
profitable operations, compliance with the debtor in possession financing
agreement and the ability to generate sufficient cash from operations and obtain
financing sources to meet future obligations.
The following table sets forth certain items in the Consolidated Statements
of Operations expressed in percentage relationship to total revenues and as
compared to the prior periods.
<TABLE>
<CAPTION>
PERCENTAGE
POINT VARIANCE
FISCAL YEAR ENDED FOR FISCAL
----------------------------------------------- YEARS
JANUARY 25, JANUARY 27, JANUARY 28, --------------
1997 1996 1995 1996 1995
(52 WEEKS) (52 WEEKS) (52 WEEKS) TO TO
(FISCAL 1996) (FISCAL 1995) (FISCAL 1994) 1995 1994
------------- ------------- ------------- ----- -----
<S> <C> <C> <C> <C> <C>
Total revenues............................. 100.0% 100.0% 100.0% 0.0 % 0.0%
Cost of sales, including buying and
distribution and occupancy costs......... 71.2 76.7 71.7 5.5 (5.0)
Selling, general and administrative
expenses................................. 35.5 32.7 32.3 (2.8) (0.4)
Loss on disposal of property, plant and
equipment................................ 0.1 -- 1.0 (0.1) 1.0
Interest expense........................... 0.4 0.3 0.3 (0.1) --
Other expenses............................. -- 0.4 0.1 0.4 (0.3)
Loss before reorganization costs and income
taxes.................................... (7.2) (10.1) (5.4) 2.9 (4.7)
Reorganization costs....................... 8.5 7.1 -- (1.4) (7.1)
Loss before income taxes................... (15.7) (17.2) (5.4) 1.5 (11.8)
Provision (benefit) for income taxes....... 0.5 (3.2) (2.1) (3.7) (1.1)
----- ----- ----- ----- -----
Net loss................................. (16.2)% (14.0)% (3.3)% (2.2)% (10.7)%
===== ===== ===== ===== =====
</TABLE>
NET SALES
Net sales decreased 36.7% in Fiscal 1996 after having decreased 9.6% in
Fiscal 1995 and decreasing 1.9% in Fiscal 1994. Comparable store sales (stores
in operation for at least 15 months) decreased 17.6% in Fiscal
15
<PAGE> 18
1996 compared to Fiscal 1995. Clothestime ended Fiscal 1996 with 67 fewer stores
than at the end of Fiscal 1995, which contributed to the overall decline in
sales. In addition, in spite of an aggressive marketing campaign, there was a
decrease in customer traffic as well as customer resistance to product and
pricing which also contributed to the sales decrease.
The quarterly sales performance in Fiscal 1996 versus the comparable
periods of Fiscal 1995 decreased 39.6%, 33.4%, 41.1% and 32.7% in the first,
second, third and fourth quarters, respectively. For the same periods of Fiscal
1996 compared to Fiscal 1995, comparable stores sales decreased 22.5%, 11.8%,
19.1%, and 18.3% in the first, second, third and fourth quarters, respectively.
The decline in the fourth quarter total and comparable store sales for Fiscal
1996 was primarily the result of a reduction in customer traffic.
Net sales decreased 9.6% in Fiscal 1995 after having decreased 1.9% in
Fiscal 1994. Comparable store sales decreased by 6.1% in Fiscal 1995 compared to
Fiscal 1994. Clothestime ended Fiscal 1995 with 177 fewer stores than at the end
of Fiscal 1994, which contributed to the overall decline in sales. In addition,
management believes that the continued weakness in the women's apparel specialty
retail segments in general, and the soft California markets in particular,
combined with increased competition from department stores, mass-merchandisers
and discount retailers were principal factors which negatively affected sales.
In Fiscal 1995, the Company increased its offering of basic merchandise and
carried less novel and fashion forward merchandise. This resulted in the Company
being forced to compete on price, and not being able to differentiate itself
from the mass merchandisers and department stores.
The quarterly sales performance in Fiscal 1995 versus the comparable
periods of the prior fiscal year decreased to 13.4%, 4.5%, 2.1% and 18.7% in the
first, second, third, and fourth quarters, respectively. For the same periods,
comparable store sales decreased 17.4% and 5.2% in the first and second
quarters, respectively, increased 2.0% in the third quarter, and decreased 2.9%
in the fourth quarter. The decrease in fourth quarter sales for Fiscal 1995 is
the result of the Company filing chapter 11 on December 8, 1995 causing a sharp
decrease of merchandise shipments and a general uncertainty among the Company's
customers as to its continuing operations. Comparable store sales results
benefited in the fourth quarter of Fiscal 1995 from aggressive discounts taken
chain-wide to compete in the highly promotional environment. Comparable store
sales results for the fourth quarter are better than total sales results due to
the closing of 137 underperforming stores early in the fourth quarter.
The Company's primary target market is women in the 18 to 34 age group.
While customer demographics revealed that this age range represents a
significant portion of our customers, the Company still maintains a lesser
customer base in the 14 to 17 and 35 and over age groups.
The Company's business is comprised of two principal selling seasons:
Spring (the first and second quarters) which includes the period during which
spring and summer styles are introduced; and, Fall (the third and fourth
quarters) which includes the back-to-school, winter and Christmas selling
seasons. The Company normally posts its strongest sales during the second and
third quarters. Second quarter sales have traditionally been strong due to the
customer's acceptance of the Company's summer merchandise and the concentration
of stores in warm weather climates. Third quarter sales have been primarily
driven by back-to-school sales. Typically, clothing retailers post their
strongest sales during the fourth quarter as a result of a strong Christmas
selling period. While the Company has sought to increase its fourth quarter
sales consistent with most clothing retailers, during the last several years a
highly competitive promotional environment surrounding the holiday season as
well as the lack of acceptance of merchandise offered contributed to weak
Company sales in the fourth quarter. First quarter sales are generally lower
than sales in the other quarters primarily as a result of the high general level
of retail sales activity during the fourth quarter.
As is the case for most clothing retailers, abnormal seasonal weather may
also affect sales because the seasonal merchandise then in the stores may not
correspond to the merchandise consistent with the abnormal weather. In addition,
since most of the Company's stores are located in non-enclosed retail locations
as opposed to enclosed malls, the Company's sales can be adversely affected by
abnormal rain or other inclement weather. There was no evidence of adverse
weather affecting sales during Fiscal 1996.
16
<PAGE> 19
INTEREST AND OTHER INCOME
Interest and other income was $755 thousand in Fiscal 1996, compared to
$579 thousand in Fiscal 1995 and $1.5 million in Fiscal 1994. The increase in
Fiscal 1996 as compared to Fiscal 1995 was attributable to a gain (net of
expenses) of $309 thousand from the sale of the Company's interests in two
limited partnerships and interest income of $179 thousand earned on segregated
cash accounts that have now been released pursuant to a settlement of certain
claims relating to the revolving credit facility, partially offset by the fact
that the Company maintained a lower invested cash balance during Fiscal 1996
after excluding invested cash balances attributable to the bankruptcy
proceeding. See "Item 3. Legal Proceedings" for a discussion of the sale of the
limited partnership interests and the settlement of certain claims relating to
the revolving credit facility. A lower invested cash balance was the primary
factor leading to the decrease in interest and other income in Fiscal 1995 as
compared to Fiscal 1994.
COST OF SALES
Cost of sales as a percentage of total revenues decreased to 71.2% in
Fiscal 1996 from 76.7% in Fiscal 1995 and 71.7% in Fiscal 1994. The decrease in
cost of sales as a percentage of total revenues in Fiscal 1996 compared to
Fiscal 1995 was primarily due to reduction in markdowns and a higher initial
mark up due to the change in merchandise mix and improved buying practices. The
increase in cost of sales as a percentage of total revenues in Fiscal 1995
compared to Fiscal 1994 was primarily due to customer resistance to product and
pricing and a fiercely competitive retail environment resulting in significant
markdown activity.
Cost of sales as a percentage of total revenues decreased to 79.7% in the
fourth quarter of Fiscal 1996 compared to 89.2% in Fiscal 1995 and increased as
compared to 76.1% in Fiscal 1994. The decrease in cost of sales as a percentage
of total revenues for the fourth quarter of Fiscal 1996 compared to the same
period of Fiscal 1995 was a result of less markdown activity versus an
aggressive markdowns position in the previous year. The increase in cost of
sales as a percentage of total revenues for the fourth quarter of Fiscal 1995
compared to the same period of Fiscal 1994 was the result of aggressive
markdowns taken to clear out the Fall merchandise by the end of the holiday
selling season.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $69.6 million in Fiscal
1996 compared to $101.1 million in Fiscal 1995 and $110.6 million in Fiscal
1994. The decrease of $31.5 million in selling, general and administrative
expenses in Fiscal 1996 compared to Fiscal 1995 was principally attributable to
a reduction of 67 stores and various cost cutting measures implemented at the
corporate office.
Selling, general and administrative expenses as a percentage of total
revenues increased to 35.5% in Fiscal 1996 compared to 32.7% in Fiscal 1995 and
32.3% in Fiscal 1994. The increase in selling, general and administrative
expenses as a percentage of revenues in Fiscal 1996 compared to Fiscal 1995 was
primarily due to increases in (i) store operations and supervisory payroll, (ii)
advertising costs, (iii) employee benefits and (iv) other fixed operating
expenses. Store operations and supervisory payroll as a percentage of total
revenues were higher as a result of staffing to support higher than realized
sales levels. Advertising costs as a percentage of total revenues were higher
due to the major advertising campaign launched during Fiscal 1996. Employee
benefits as a percentage of total revenues were higher due to increased benefit
costs necessary to support the planned staffing levels referenced above. As in
the case with most operating expenses, increases in other fixed operating
expenses as a percentage of total revenues were incurred due to decreased
leverage on fixed operating expenses resulting from fewer stores and lower
average sales. The increase in selling, general and administrative expenses as a
percentage of total revenues in Fiscal 1995 compared to Fiscal 1994 was
primarily due to an increase in store operating and supervisory payroll costs to
support sales levels which were not realized, partially offset by a decrease in
advertising costs due to the elimination of television advertising.
INTEREST EXPENSE; OTHER EXPENSES
Interest expense was $827 thousand in Fiscal 1996, compared to $769
thousand in Fiscal 1995 and $856 thousand in Fiscal 1994. Interest expense in
Fiscal 1996 is primarily the result of an accrual for interest
17
<PAGE> 20
expense for the estimated impact of the Internal Revenue Service audit of the
Company's Federal income tax returns for Fiscal 1995, Fiscal 1994 and Fiscal
1993. (See Note F to the Consolidated Financial Statements). The interest
expense recorded in Fiscal 1995 and Fiscal 1994 stemmed from outstanding
borrowings under the Company's revolving credit facility; additional borrowings
of $1.4 million made during the first quarter of Fiscal 1995; bank loans of $1.9
million taken out in the fourth quarter of Fiscal 1993; and a capital lease
obligation of $1.9 million entered into during Fiscal 1993. In Fiscal 1996 and
Fiscal 1995, approximately $1.6 million and $235 thousand, respectively, of
contractual interest expense was not recorded as a result of the chapter 11
filing. (See Note D to the Consolidated Financial Statements).
Other expenses in Fiscal 1995 of $1.1 million are made up of $405 thousand
of capital losses from the sale of marketable securities and $706 thousand to
write down investments. Other expenses in Fiscal 1994 of $411 thousand are due
to capital losses from the sale of marketable securities.
REORGANIZATION COSTS
The Company recorded $16.6 million in Fiscal 1996 and $22.0 million in
Fiscal 1995 for costs associated with the chapter 11 filing. Included for Fiscal
1996 are approximately $13.1 million for costs and expenses associated with the
closing of 67 unprofitable stores in Fiscal 1996 and the accrual for additional
store closures that are planned to occur in the second quarter of Fiscal 1997
(including estimated lease rejection claims), and approximately $3.3 million for
legal, accounting and other professional fees. Included for Fiscal 1995 are
approximately $19.9 million for costs and expenses associated with the closing
of 137 unprofitable stores (including estimated lease rejection claims), and
approximately $1.7 million for legal, accounting and other professional fees.
The Company anticipates that it will incur additional reorganization costs
throughout its chapter 11 reorganization. The reorganization costs are more
fully described in Note E to the Consolidated Financial Statements.
PROVISION (BENEFIT) FOR INCOME TAXES
The Company's effective tax rate was 3.0% for Fiscal 1996. This rate was
less than the Federal benefit rate due to the recognition of a valuation
allowance to fully offset the net deferred tax assets, offset partially by a
provision for taxes related to the IRS Audit. The Company's effective income tax
benefit rate decreased to 18.9% in Fiscal 1995 from 39.2% in Fiscal 1994. The
decrease in Fiscal 1995 resulted primarily from limitations on the amount of
taxes available to recover from prior years' and the recognition of a valuation
allowance to fully offset the net deferred tax asset. Income taxes are more
fully described in Note F to the Consolidated Financial Statements.
NET LOSS AND LOSS PER SHARE
Net loss and loss per share for Fiscal 1996 were $31.6 million and $2.23,
respectively. This compared to a net loss and loss per share of $43.0 million
and $3.03, respectively, in Fiscal 1995 and a net loss and loss per share of
$11.2 million and $0.79, respectively, in Fiscal 1994. The decrease in net loss
for Fiscal 1996 as compared to Fiscal 1995 was due primarily to the realization
of the full year benefit of closing 137 unprofitable stores at the end of Fiscal
1995 and a decrease in reorganization costs incurred in Fiscal 1996 compared to
Fiscal 1995 of $5.4 million. The increase in net loss for Fiscal 1995 as
compared to Fiscal 1994 was due principally to lower average store sales and
$22.0 million of reorganization charges incurred during Fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
Chapter 11 Filing
As discussed previously, the Company and five of its subsidiaries filed
voluntary petitions for relief under chapter 11 of title 11 of the United States
Code on December 8, 1995. Under chapter 11, actions to enforce certain claims
against the Company are stayed if the claims arose, or are based on, events that
occurred on or before the Petition Date. The ultimate terms of settlement of
these claims will be determined in accordance
18
<PAGE> 21
with a plan of reorganization which requires the approval of the impaired
prepetition creditors and shareholders and confirmation by the Bankruptcy Court.
Until a plan of reorganization is confirmed by the Bankruptcy Court, only
such payments on prepetition obligations that are approved or required by the
Bankruptcy Court will be made. Except as approved by the Bankruptcy Court,
principal and interest payments on prepetition debt have not been made since the
Petition Date and will not be made without the Bankruptcy Court's approval or
until a plan of reorganization, defining the repayment terms, has been confirmed
by the Bankruptcy Court. As a result, $53.0 million has been established as
liabilities subject to compromise as of January 25, 1997. Included in this
amount is $3.7 million for estimated store lease rejection claims for store
closures that are planned to occur in the second quarter of Fiscal 1997. See
Note E to the Consolidated Financial Statements. Other liabilities may arise or
be subject to compromise as a result of rejection of executory contracts and
unexpired leases or the Bankruptcy Court's resolution of claims for
contingencies and other disputed amounts.
The prohibition on payments of prepetition liabilities as a result of the
chapter 11 filing and the receipt of income tax refunds in the second quarter of
Fiscal 1996 enabled the Company to report $20.7 million in cash and cash
equivalents at January 25, 1997. Included in cash and cash equivalents at
January 25, 1997 is approximately $530 thousand being held in segregated
accounts for a prepetition lender pursuant to orders of the Bankruptcy Court.
See Note D to the Consolidated Financial Statements.
Inherent in a successful plan of reorganization is a capital structure
which permits the Company to generate sufficient cash flow after reorganization
to meet its restructured obligations and fund the current obligations of the
reorganized Company. Under the Bankruptcy Code, the rights of and ultimate
payment to prepetition creditors may be substantially altered and, as to some
classes, eliminated. See "Item 1. Business -- Developments During the
Reorganization Cases -- Plan of Reorganization."
Subsequent to the chapter 11 filing, the Company reached an agreement with
The CIT Group/Business Credit, Inc. (the "DIP Lender") to provide debtor in
possession financing (the "DIP Facility"). On December 28, 1995, the Debtors
obtained preliminary Bankruptcy Court approval of, and on January 9, 1996, the
Debtors obtained final Bankruptcy Court approval of, the DIP Facility. As
amended, the DIP Facility provides for revolving loans to be made up to the
lesser of (a) $25 million or (b) the lesser of (i) 60% of eligible inventory
valued on a cost basis and (ii) 36.5% of eligible inventory valued on a retail
basis, subject to adjustment. At January 25, 1997, the maximum availability
under the DIP Facility as determined under the borrowing base was $6.0 million.
The revolving line of credit may be in the form of letters of credit determined
as provided under the amended DIP Facility. Cash borrowings bear interest at
either a reference rate plus 0.5% or LIBOR plus 2.5%, at the option of the
Company. The DIP Facility, as amended, contains various restrictive covenants
requiring, among other things, minimum levels of earnings before interest,
income taxes, depreciation and amortization ("EBITDA"), the establishment of
maximum levels of capital expenditures, and a prohibition regarding declaring or
making any cash dividends by the Company or its subsidiaries. Pursuant to a
provision of the DIP Facility, in March 1997, the Company provided $2.7 million
in cash collateral to CIT representing 75% of the maximum potential liability
under certain outstanding letters of credit.
During Fiscal 1996 the Company had not used the direct borrowing capacity
on the line. There were $1.1 million of letters of credit outstanding at January
25, 1997. The DIP Facility will terminate on the earlier of December 8, 1997 or
the date of consummation of a plan of reorganization, subject to earlier
termination. Pursuant to the amended DIP Facility and a related order issued by
the Bankruptcy Court, cash borrowings and letters of credit issued under the DIP
Facility have been granted superpriority status over all obligations except
certain administrative expenses, as defined in such Agreement. The DIP Facility
agreement is more fully described in Note C to the Consolidated Financial
Statements.
General
The Company's principal needs for liquidity are to finance the purchase of
merchandise inventories, fund its operations and pay professional and
administrative fees in connection with its reorganization.
19
<PAGE> 22
Net cash used in operating activities for Fiscal 1996 was $7.8 million
compared to net cash provided by operating activities in Fiscal 1995 and Fiscal
1994 of $8.5 million and $4.5 million, respectively. The Company's cash used in
operating activities of $7.8 million in Fiscal 1996 resulted primarily from
losses incurred during Fiscal 1996, partially offset by the add back of non-cash
charges representing non-cash reorganization costs and income tax refunds
received in the second quarter of Fiscal 1996. Merchandise inventories increased
to $9.3 million at Fiscal 1996 year end compared to $8.6 million at the end of
Fiscal 1995. The increase was primarily due to aggressive markdowns taken in the
fourth quarter of Fiscal 1995 which substantially reduced inventory, and a delay
in receiving merchandise due to the initial uncertainty in the vendor and factor
community caused by the chapter 11 filing until the DIP financing was approved.
The Company has an indirect relationship with the factoring community,
which assists vendors of merchandise inventories in securing up front payment
(as opposed to payment terms from the Company directly) for goods shipped to the
Company. Subsequent to the approval of the DIP Facility, most factors have been
willing to extend credit for goods shipped to the Company. To the extent that
(i) cash provided from operating activities is inadequate to meet the Company's
liquidity requirements, (ii) the factors require greater credit support and/or
(iii) manufacturers are less willing to deliver merchandise pursuant to payment
terms, short or long-term liquidity will be adversely impacted.
Income taxes receivable decreased to $0 in Fiscal 1996 from $9.3 million in
Fiscal 1995. The decrease was due to the Company receiving tax refunds of $9.4
million in the second quarter of Fiscal 1996. The Company has recorded a
valuation allowance to fully offset the potential tax benefit of the Company's
Federal net operating loss carryforward and the other net deferred tax assets.
The components of income taxes are more fully described in Note F to the
Consolidated Financial Statements.
Investments decreased to $0 in Fiscal 1996 from $1.2 million in Fiscal
1995. The decrease was due to the sale of the Company's interests in two limited
partnerships. For a discussion of the sale of the limited partnership interests,
see Note D to the Consolidated Financial Statements.
Net property, plant and equipment decreased to $15.8 million at the end of
Fiscal 1996, compared with $27.9 million at the end of Fiscal 1995. The decrease
primarily resulted from disposals of leasehold improvements and furniture,
fixtures and equipment associated with the closing of 67 store locations during
Fiscal 1996 and the accelerated depreciation and amortization of leasehold
improvements and fixtures for additional store closings that are planned to
occur in the second quarter of Fiscal 1997 based on the estimated net book value
at the time of store closure. See Note E to the Consolidated Financial
Statements.
Accounts payable decreased to $4.2 million in Fiscal 1996 from $11.1
million in Fiscal 1995. The decrease in accounts payable resulted primarily from
(i) professional fees relating to the Company's chapter 11 filing, which were
accrued as part of the accounts payable balance at the end of Fiscal 1995 and
paid primarily in the second quarter of Fiscal 1996, (ii) a reclassification of
a portion of the accounts payable balance to liabilities subject to compromise
done after Fiscal 1995 year-end and (iii) tighter credit terms experienced in
the last month of Fiscal 1996 from the Company's merchandise vendor community.
Accrued sales tax decreased to $1.7 million in Fiscal 1996 from $2.0 million in
Fiscal 1995 due to a decrease in Fiscal 1996 January sales over the same period
for Fiscal 1995 and payment timing differences. Accrued payroll and related
taxes decreased from $4.6 million at the end of Fiscal 1995 to $3.6 million at
the end of Fiscal 1996 primarily due to decreasing group health and
payroll-related tax payments as a result of the Company's reduction in its store
base. Other accrued liabilities increased to $9.9 million in Fiscal 1996 from
$8.4 million in Fiscal 1995. The increase resulted primarily from accrued legal
costs.
Income taxes payable increased to $1.7 million in Fiscal 1996 from $0 in
Fiscal 1995. The increase was due to the Company recording a provision for taxes
and corresponding interest related to taxes due as a result of the IRS Audit.
The IRS Audit and the components of income taxes are more fully described in
Note F to the Consolidated Financial Statements.
The DIP Facility, cash on hand, revenues generated from operations and
credit terms extended by the vendor and factor community are the principal
sources of liquidity. The Company believes that these sources will be sufficient
to meet the Company's operating and capital requirements. However, to the extent
that
20
<PAGE> 23
results of operations continue to decline, short and long term liquidity will be
adversely affected, particularly if the availability of funds under the DIP
Facility are significantly decreased or are no longer made available. The
Company believes that it will be able to secure financing for operations on and
after the effective date of a plan of reorganization.
IMPACTS OF INFLATION
The Company's financial condition and results of operations are presented
on a historical cost basis. While it is difficult to accurately measure the
impact of inflation due to the imprecise nature of the estimates required, the
Company believes that the effects of inflation, if any, on the financial
condition and results of operations have been relatively minor.
FORWARD-LOOKING STATEMENTS
Included in "Item 1. Business," "Item 3. Legal Proceedings," and this "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations," herein are certain forward-looking statements reflecting
management's current expectations. Although the Company believes that its
expectations are based upon reasonable assumptions, there can be no assurance
that the Plan as proposed or as amended will be confirmed and that the Company's
financial goals will be realized prior or subsequent to such confirmation. In
addition to uncertainties relating to confirmation of the Plan discussed in
"Item 1. Business -- Developments During the Reorganization Cases," herein,
numerous factors may affect the Company's actual financial results and may cause
results to differ materially from those expressed in forward-looking statements
made by or on behalf of the Company. Some of these factors include the
competition in the retail industry and in the women's specialty market segment,
the general economic factors affecting consumer spending particularly in the
geographic markets in which the Company competes, customer acceptance of the
merchandise offered by the Company, pricing and other competitive factors.
21
<PAGE> 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors........................................................ 23
Consolidated Balance Sheets -- As of January 25, 1997 and January 27, 1996............ 24
Consolidated Statements of Operations -- Years Ended January 25, 1997, January 27,
1996 and January 28, 1995........................................................... 25
Consolidated Statements of Shareholders' Equity (Deficiency) -- Years Ended January
25, 1997, January 27, 1996 and January 28, 1995..................................... 26
Consolidated Statements of Cash Flows -- Years Ended January 25, 1997 January 27, 1996
and January 28, 1995................................................................ 27
Notes to Consolidated Financial Statements............................................ 28
</TABLE>
22
<PAGE> 25
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
The Clothestime, Inc.:
We have audited the accompanying consolidated balance sheets of The
Clothestime, Inc. and subsidiaries as of January 25, 1997 and January 27, 1996,
and the related consolidated statements of operations, shareholders' equity
(deficiency) and cash flows for each of the years in the three-year period ended
January 25, 1997. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The
Clothestime, Inc. and subsidiaries as of January 25, 1997 and January 27, 1996,
and the results of their operations and their cash flows for each of the years
in the three-year period ended January 25, 1997, in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
A, The Clothestime, Inc. and certain of its subsidiaries (collectively, the
"Debtors") commenced reorganization cases by filing voluntary petitions for
relief under chapter 11 of the United States Bankruptcy Code in the United
States Bankruptcy Court for the Central District of California (the "Bankruptcy
Court") on December 8, 1995. The Debtors are currently operating their
respective businesses as debtors-in-possession under the jurisdiction of the
Bankruptcy Court and continuation of The Clothestime, Inc. and its subsidiaries
as a going concern is contingent upon, among other things, the ability to (1)
formulate an acceptable plan of reorganization that will be confirmed by the
Bankruptcy Court, (2) achieve satisfactory levels of profitable operations and
(3) maintain compliance with the debtor-in-possession financing and generate
adequate sources of other liquidity, as described in Note A to the consolidated
financial statements. These contingencies and the uncertainties inherent in the
bankruptcy process raise substantial doubt about the ability of The Clothestime,
Inc. and its subsidiaries to continue as a going concern. The consolidated
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
/s/ KPMG PEAT MARWICK LLP
Orange County, California
March 21, 1997
23
<PAGE> 26
THE CLOTHESTIME, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 25, JANUARY 27,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents....................................... $ 20,695,409 $ 34,477,823
Marketable securities........................................... 3,142,667 3,191,737
Merchandise inventories......................................... 9,292,338 8,551,207
Income taxes receivable......................................... -- 9,336,008
Prepaid expenses and other current assets....................... 2,044,527 2,707,926
Deferred income taxes........................................... 16,106 471,000
------------ ------------
Total Current Assets.................................. 35,191,047 58,735,701
Investments..................................................... -- 1,174,497
Property, plant and equipment -- on the basis of cost
Land and building............................................. 1,925,907 1,925,907
Furniture, fixtures and equipment............................. 19,204,838 20,635,176
Leasehold improvements........................................ 27,348,716 32,720,548
------------ ------------
48,479,461 55,281,631
Less: accumulated depreciation and amortization............... (32,643,684) (27,384,443)
------------ ------------
Net property, plant and equipment............................... 15,835,777 27,897,188
Other assets.................................................... 287,648 472,766
------------ ------------
$ 51,314,472 $ 88,280,152
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities
Accounts payable................................................ $ 4,203,060 $ 11,074,076
Accrued sales taxes............................................. 1,657,311 1,982,300
Accrued payroll and related taxes............................... 3,551,300 4,629,524
Other accrued liabilities....................................... 9,911,517 8,378,305
Income taxes payable............................................ 1,716,043 --
------------ ------------
Total Current Liabilities............................. 21,039,231 26,064,205
Long-term Liabilities
Long-term debt.................................................. 630,000 --
Deferred income taxes........................................... 16,106 471,000
------------ ------------
Total Long-term Liabilities........................... 646,106 471,000
Liabilities Subject To Compromise............................... 53,025,675 53,433,703
SHAREHOLDERS' EQUITY (DEFICIENCY)
Common Stock, $.001 par value, authorized 50,000,000 shares,
issued and outstanding 14,198,241 shares...................... 14,763 14,763
Additional paid-in capital...................................... 10,861,514 10,861,514
Retained earnings (accumulated deficit)......................... (29,341,868) 2,301,860
Less: Treasury stock, 565,000 shares at cost.................... (4,850,215) (4,850,215)
Securities valuation allowance.................................. (80,734) (16,678)
------------ ------------
Total Shareholders' Equity (Deficiency)............... (23,396,540) 8,311,244
Commitments and Contingencies
Subsequent Events
------------ ------------
$ 51,314,472 $ 88,280,152
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
24
<PAGE> 27
THE CLOTHESTIME, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------------------------
JANUARY 25, 1997 JANUARY 27, 1996 JANUARY 28, 1995
(52 WEEKS) (52 WEEKS) (52 WEEKS)
---------------- ---------------- ----------------
<S> <C> <C> <C>
REVENUES:
Net sales...................................... $195,239,018 $308,230,685 $340,800,733
Interest and other income...................... 755,027 578,767 1,479,136
------------ ------------ ------------
Total Revenues................................. 195,994,045 308,809,452 342,279,869
------------ ------------ ------------
COSTS AND EXPENSES:
Costs of sales, including buying and
distribution and occupancy costs............. 139,460,018 236,872,079 245,543,337
Selling, general and administrative expenses... 69,626,869 101,107,238 110,565,360
Loss on disposal of property, plant and
equipment.................................... 199,580 -- 3,377,637
Interest expense............................... 826,773 769,162 856,348
Other expenses................................. -- 1,102,697 411,011
------------ ------------ ------------
Total Costs and Expenses....................... 210,113,240 339,851,176 360,753,693
------------ ------------ ------------
LOSS BEFORE REORGANIZATION COSTS AND INCOME
TAXES........................................ (14,119,195) (31,041,724) (18,473,824)
Reorganization costs........................... 16,597,533 21,966,648 --
------------ ------------ ------------
LOSS BEFORE INCOME TAXES....................... (30,716,728) (53,008,372) (18,473,824)
Provision (benefit) for income taxes........... 927,000 (10,006,000) (7,233,000)
------------ ------------ ------------
NET LOSS....................................... $(31,643,728) $(43,002,372) $(11,240,824)
============ ============ ============
LOSS PER SHARE................................. $ (2.23) $ (3.03) $ (0.79)
============ ============ ============
Weighted average number of common shares
outstanding during the year.................. 14,198,241 14,190,482 14,160,647
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements
25
<PAGE> 28
THE CLOTHESTIME, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
-------------------- ADDITIONAL EARNINGS TREASURY SECURITIES
NUMBER PAID-IN (ACCUMULATED STOCK VALUATION
OF SHARES AMOUNT CAPITAL DEFICIT) AT COST ALLOWANCE TOTAL
---------- ------- ----------- ------------ ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT JANUARY
29, 1994.......... 14,152,449 $14,717 $10,756,826 $56,545,056 $(4,850,215) $ -- $ 62,466,384
Proceeds from
exercise of stock
options........... 28,897 29 46,676 -- -- -- 46,705
Tax benefit of
nonqualifying
options........... -- -- 25,271 -- -- -- 25,271
Change in securities
valuation
allowance......... -- -- -- -- -- (383,845) (383,845)
Net loss for the
year.............. -- -- -- (11,240,824) -- -- (11,240,824)
---------- ------- ----------- ------------ ----------- --------- ------------
BALANCES AT JANUARY
28, 1995.......... 14,181,346 14,746 10,828,773 45,304,232 (4,850,215) (383,845) 50,913,691
Proceeds from
exercise of stock
options........... 16,895 17 32,741 -- -- -- 32,758
Change in securities
valuation
allowance......... -- -- -- -- -- 367,167 367,167
Net loss for the
year.............. -- -- -- (43,002,372) -- -- (43,002,372)
---------- ------- ----------- ------------ ----------- --------- ------------
BALANCES AT JANUARY
27, 1996.......... 14,198,241 14,763 10,861,514 2,301,860 (4,850,215) (16,678) 8,311,244
Changes in
securities
valuation
allowance......... -- -- -- -- -- (64,056) (64,056)
Net loss for the
year.............. -- -- -- (31,643,728) -- -- (31,643,728)
---------- ------- ----------- ------------ ----------- --------- ------------
BALANCES AT JANUARY
25, 1997.......... 14,198,241 $14,763 $10,861,514 $(29,341,868) $(4,850,215) $(80,734) $(23,396,540)
========== ======= =========== ============ =========== ========= ============
</TABLE>
See Notes to Consolidated Financial Statements
26
<PAGE> 29
THE CLOTHESTIME, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------------------------
JANUARY 25, 1997 JANUARY 27, 1996 JANUARY 28, 1995
(52 WEEKS) (52 WEEKS) (52 WEEKS)
---------------- ---------------- ----------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss....................................... $(31,643,728) $(43,002,372) $(11,240,824)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Noncash reorganization costs................... 13,005,498 18,346,070 --
Depreciation and amortization.................. 6,121,359 9,968,462 6,715,799
Deferred income taxes.......................... -- (653,138) 271,806
(Gain) loss on sales of marketable securities
and investments.............................. (375,503) 1,110,697 411,011
Loss on disposal of property, plant and
equipment.................................... 199,580 -- 3,377,637
Changes in operating assets and liabilities:
(Increase) decrease in merchandise
inventories............................... (741,131) 16,261,058 7,047,320
(Increase) decrease in income taxes
receivable................................ 9,336,008 (3,985,724) (5,325,013)
Decrease in prepaid expenses and other
assets.................................... 848,517 860,846 805,985
Increase (decrease) in accounts payable...... (5,657,694) 12,683,506 3,023,369
Increase (decrease) in accrued payroll and
related taxes............................. (1,078,224) 599,356 (1,679,166)
Increase (decrease) in accrued sales tax and
other accrued liabilities................. 447,885 (3,645,939) 4,407,046
Increase (decrease) in income taxes
payable................................... 1,716,043 -- (3,353,593)
------------ ------------ ------------
Net cash provided by (used in) operating
activities................................... (7,821,390) 8,542,822 4,461,377
------------ ------------ ------------
INVESTING ACTIVITIES:
Investment in marketable securities............ (14,986) (18,370) (3,396,023)
Proceeds from sales of marketable securities... -- 4,718,600 15,298,719
Proceeds from sale of investments.............. 1,550,000 -- --
Purchases of property, plant, and equipment.... (52,120) (914,128) (13,843,751)
Proceeds from sale of property, plant and
equipment.................................... 285,000 112,000 1,109,039
------------ ------------ ------------
Net cash provided by (used in) investing
activities................................... 1,767,894 3,898,102 (832,016)
------------ ------------ ------------
FINANCING ACTIVITIES:
Net borrowings (repayments) under revolving
credit facilities............................ (6,514,421) (19,545,738) 35,153,000
Proceeds from other long-term borrowings....... -- 1,400,000 --
Principal payments on long-term debt........... (1,214,497) (679,862) (705,013)
Proceeds from the exercise of stock options.... -- 32,758 46,705
------------ ------------ ------------
Net cash provided by (used in) financing
activities................................... (7,728,918) (18,792,842) 34,494,692
------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................. (13,782,414) (6,351,918) 38,124,053
Cash and cash equivalents at beginning of
year......................................... 34,477,823 40,829,741 2,705,688
------------ ------------ ------------
Cash and cash equivalents at end of year....... $ 20,695,409 $ 34,477,823 $ 40,829,741
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Income taxes paid.............................. $ 4,806 $ 16,325 $ 1,186,218
============ ============ ============
Interest paid.................................. $ 56,038 $ 761,116 $ 727,351
============ ============ ============
Income tax refunds received.................... $ 9,456,346 $ 5,372,198 $ --
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements
27
<PAGE> 30
THE CLOTHESTIME, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 25, 1997, JANUARY 27, 1996 AND JANUARY 28, 1995
NOTE A -- REORGANIZATION AND BASIS OF REPORTING
On December 8, 1995, (the "Petition Date"), The Clothestime, Inc.
("Clothestime") and five of its subsidiaries, MRJ Industries, Inc. ("MRJ"),
Clothestime Stores, Inc. ("Stores"), Clothestime Investment, Inc., Clothestime
Acquisition Corporation and Clothestime International, Inc. (collectively, the
"Debtors") commenced reorganization cases (the "Bankruptcy Cases" or the
"Reorganization Cases") by filing voluntary petitions for relief under chapter
11, Title 11 of the United States Code (the "Bankruptcy Code") in the United
States Bankruptcy Court for the Central District of California, Santa Ana
Division (the "Bankruptcy Court"). Unless otherwise referenced, the defined term
"Company" shall apply to Clothestime and its consolidated group of subsidiaries,
except that references to the Company in connection with any disclosure relating
to the Debtors' chapter 11 cases refer solely to the Debtors and exclude
Clothestime Insurance Company (Clothestime's captive insurance company
subsidiary).
The Debtors decided to seek bankruptcy protection after an extensive review
of the current retail environment and the Debtors' operations. Management of
each of the respective companies determined that filing the chapter 11 petitions
would allow the Debtors the needed time and flexibility to restructure their
respective operations.
Since the Petition Date, the Debtors have continued in possession of their
properties and, as debtors in possession, are authorized to operate and manage
each of their respective businesses and enter into all transactions (including
obtaining services, supplies and inventories) that each could have entered into
in the ordinary course of business had there been no bankruptcy filings. As
debtors in possession, the Debtors may not engage in transactions outside of the
ordinary course of business without approval of the Bankruptcy Court, after
notice and a hearing.
Liabilities subject to compromise in the accompanying consolidated balance
sheets represent the Company's estimate of liabilities as of January 25, 1997
and January 27, 1996, subject to adjustment in the reorganization process (see
Note D). Under chapter 11, actions to enforce certain claims against the Company
are stayed if the claims arose, or are based on events that occurred, on or
before the Petition Date. Other liabilities may arise or be subject to
compromise as a result of rejection of executory contracts and unexpired leases
or the Bankruptcy Court's resolution of claims for contingencies and other
disputed amounts. As a general matter, the treatment of these liabilities will
be determined as a part of the formulation and confirmation of a plan of
reorganization.
The accompanying consolidated financial statements have been presented on
the basis that the Company is a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. As a result of the chapter 11 filing and circumstances relating to
this event, realization of assets and satisfaction of liabilities is subject to
uncertainty. A plan of reorganization could materially change the amounts
reported in the accompanying consolidated financial statements, which do not
give effect to adjustments to the carrying values of assets and liabilities
which may be necessary as a consequence of a plan of reorganization. The ability
of the Company to continue as a going concern is dependent on, among other
things, confirmation of an acceptable plan of reorganization, future profitable
operations, compliance with the debtor in possession financing agreement (see
Note C), and the ability to generate sufficient cash from operations and obtain
financing sources to meet future obligations.
On March 21, 1997, the Debtors filed a joint plan of reorganization (as
amended, the "Plan") and related disclosure statement (the "Disclosure
Statement") with the Bankruptcy Court. The initial hearing before the Bankruptcy
Court to consider approval of the Disclosure Statement is scheduled for April
28, 1997. A number of steps must take place before the Plan will be approved and
consummated. The Debtors are still negotiating certain aspects of the Plan with
the Official Committee of Unsecured Creditors (the "Committee"), certain other
creditors and the largest prepetition creditor of the Debtors, and the Debtors
anticipate amending the
28
<PAGE> 31
THE CLOTHESTIME, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Plan to reflect the results of such negotiations. In addition, the Bankruptcy
Court must approve the Disclosure Statement, creditors must vote whether to
accept or reject the Plan and the Bankruptcy Court must confirm the Plan. The
confirmation and effectiveness of the Plan also will be subject to a number of
conditions precedent. Given these uncertainties, there can be no assurance
whether the Plan will be approved by creditors or confirmed by the Bankruptcy
Court or when or whether the Plan will become effective.
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS: The principal business of the Company is the retail sale of
junior size women's clothing. As of January 25, 1997, the Company operated
stores in 17 states and Puerto Rico, with a large concentration of stores in
California, Florida and Texas.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of The Clothestime, Inc. and its consolidated group of
subsidiaries, MRJ, Stores, Clothestime Insurance Company, Clothestime
International, Inc., Clothestime Investment, Inc., and Clothestime Acquisition
Corporation. MRJ serves as a purchasing and distribution company, as well as a
management company, providing administrative services to the other subsidiaries
in the consolidated group. Stores was incorporated to own and operate all of the
existing and future retail operations. Clothestime Insurance Company was
established as a captive insurance company. Clothestime International, Inc. was
established to facilitate anticipated international expansion that has not come
to fruition. Clothestime Investment, Inc. was established to manage investments,
and Clothestime Acquisition Corporation was established to provide uniform
financing for the Company's subsidiaries and to acquire other business ventures
in the future. All material intercompany balances and transactions have been
eliminated in consolidation.
FISCAL YEAR: The fiscal year of the Company ends on the Saturday closest
to January 31. Fiscal 1996, Fiscal 1995 and Fiscal 1994, refer to the years
ended January 25, 1997, January 27, 1996 and January 28, 1995, respectively.
CASH EQUIVALENTS: The Company considers all highly liquid investments with
an original maturity of three months or less to be cash equivalents.
Approximately $530 thousand is held in segregated accounts for a prepetition
lender pursuant to orders of the Bankruptcy Court (see Note D).
MARKETABLE SECURITIES: Investments in securities which do not meet the
definition of cash equivalents are classified as marketable securities.
Marketable securities consist of U.S. and state government agency issues.
Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities ("SFAS 115"), was adopted by the
Company at the beginning of Fiscal 1994. SFAS 115 requires that investments be
classified as "held to maturity," "available for sale" or "trading securities".
The statement defines investments in securities as "held to maturity" based upon
a positive intent and ability to hold those securities. Securities that are
bought and held principally for the purpose of selling them in the near term are
classified as "trading securities" and would be reported at fair value, with
unrealized gains and losses included in operations. Debt and equity securities
not classified as "held to maturity" or "trading securities" are classified as
"available for sale" and would be recorded at fair value, with unrealized gains
and losses excluded from operations and reported as a separate component of
equity. At January 25, 1997, the Company classified all of its investments in
securities which did not meet the definition of cash equivalents as marketable
securities available-for-sale.
MERCHANDISE INVENTORIES: Merchandise inventories are accounted for by the
retail inventory method and are stated at the lower of cost (first-in, first-out
method) or market.
PROPERTY, PLANT AND EQUIPMENT: Depreciation of property, plant and
equipment (excluding land) is provided for by the straight-line method over the
estimated useful lives of the related assets. Assets held under
29
<PAGE> 32
THE CLOTHESTIME, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
capital leases and leasehold improvements, including certain lease acquisition
costs, are amortized by the straight-line method, over the lesser of related
lease terms or the estimated useful lives of such assets.
ADVERTISING COSTS: Advertising costs are expensed as incurred. Selling,
general and administrative expenses of the Company include advertising costs of
approximately $10.6 million, $15.0 million and $17.1 million for Fiscal 1996,
Fiscal 1995 and Fiscal 1994, respectively.
INCOME TAXES: The Company accounts for income taxes under Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS
109"). This Statement requires recognition of deferred tax liabilities and
assets for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method, deferred
tax assets and liabilities are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
REVENUE RECOGNITION: Revenue is recognized at the point of sale.
LOSS PER SHARE: The computation of loss per common share is based upon the
weighted average number of common shares outstanding during the period.
REORGANIZATION COSTS: Professional fees, the write-off of assets and other
costs and expenditures directly related to the chapter 11 filing are classified
as reorganization costs.
FAIR VALUE OF FINANCIAL INSTRUMENTS: In Fiscal 1995, the Company adopted
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments. The carrying amount of cash and cash
equivalents, income taxes receivable, accounts payable and accrued liabilities
approximate fair value because of the short-term maturity of these financial
instruments. Since the market for claims against some companies under chapter 11
is not well developed, no reliable source of market price is available for
financial instruments included in liabilities subject to compromise.
Accordingly, no attempt has been made to determine the fair value of such
financial instruments.
ACCOUNTING FOR STOCK-BASED COMPENSATION: Prior to January 28, 1996, the
Company accounted for its stock option plan and stock purchase plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 28, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123 ("SFAS 123"), Accounting for Stock-Based Compensation, which
permits entities to recognize as expense over the vesting period the fair value
of all stock-based awards on the date of grant. Alternatively, SFAS 123 also
allows entities to continue to apply the provisions of APB Opinion No. 25 and
provide pro forma net income and pro forma net income per share disclosures for
employee stock option grants made in 1995 and future years as if the
fair-value-based method defined in SFAS 123 had been applied. The Company has
elected to continue to apply the provisions of APB Opinion No. 25 and has not
provided any disclosures in accordance with SFAS 123, pro forma or otherwise,
related to its stock option plans as management has deemed all stock, stock
options and warrants to be worthless as a result of the Bankruptcy Cases (see
Note A).
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED
OF: The Company adopted the provisions of Statement of Financial Accounting
Standards No. 121 ("SFAS 121"), Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, at the beginning of Fiscal
1996. SFAS 121 requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the
30
<PAGE> 33
THE CLOTHESTIME, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
assets exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to sell.
As described in Note E, the Company recorded a $2.7 million charge to operations
in Fiscal 1996 in connection with the planned closure of certain stores.
USE OF ESTIMATES: Company management has made a number of estimates and
assumptions relating to the reporting of assets and liabilities in conformity
with generally accepted accounting principles. Actual results could differ from
these estimates.
RECLASSIFICATIONS: Certain amounts for the prior years have been
reclassified to conform to the Fiscal 1996 presentation.
NOTE C -- DEBTOR IN POSSESSION FINANCING
The Company, through Stores, has a financing agreement with The CIT
Group/Business Credit, Inc. (the "DIP Lender" or "CIT") for debtor in possession
financing (the "DIP Facility"). At January 25, 1997, the agreement provided for
revolving loans to be made up to the lesser of (a) $25 million or (b) the lesser
of (i) sixty percent (60%) of eligible inventory valued on a cost basis and (ii)
thirty-six and one half percent (36.5%) of eligible inventory valued on a retail
basis, subject to adjustment. The revolving line of credit may be in the form of
letters of credit determined as provided under the agreement.
Cash borrowings bear interest at a reference rate plus one half percent
(0.5%) per annum or, at the request of Stores, the London Interbank Rate plus
two and one half percent (2.5%). The agreement calls for a loan facility fee of
$250,000, a semi-annual inventory management fee of $30,000, an unused line fee
of 3/8% per annum and a letter of credit fee of 1% per annum. As of January 25,
1997, the Company had not used the direct borrowing capacity on the line and had
outstanding letters of credit in the amount of $1.1 million.
The agreement contains various restrictive covenants requiring, among other
things, minimum levels of earnings before interest, income taxes, depreciation
and amortization ("EBITDA"), the establishment of maximum levels of capital
expenditures, and a prohibition regarding declaring or making any cash dividends
by the Company or its subsidiaries. In addition, the DIP Lender required a
negative pledge on Stores' merchandise inventories and proceeds. The Company was
in compliance with or had obtained waivers for all such covenants as of January
25, 1997. Pursuant to a provision of the DIP Facility, in March 1997, the
Company provided $2.7 million in cash collateral to CIT representing 75% of the
maximum potential liability under certain outstanding letters of credit. The
term of the DIP Facility is the earlier of December 8, 1997 or the effective
date of the Debtors' confirmed plan of reorganization, subject to earlier
termination.
Cash borrowings and letters of credit issued under the agreement have been
granted super priority status by the Bankruptcy Court over all obligations
except certain administrative expenses, as defined in the agreement.
NOTE D -- LIABILITIES SUBJECT TO COMPROMISE
Liabilities subject to compromise include substantially all of the current
and noncurrent liabilities of the Company as of the Petition Date. These
liabilities were transferred from their respective prepetition balance sheet
accounts to liabilities subject to compromise and have been treated as noncash
items in the accompanying Fiscal 1996 and Fiscal 1995 consolidated statements of
cash flows. Certain prepetition
31
<PAGE> 34
THE CLOTHESTIME, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
liabilities have been approved by the Bankruptcy Court for payment and to the
extent not paid, were included in accrued expenses and other payables.
Liabilities subject to compromise are summarized as follows:
<TABLE>
<CAPTION>
JANUARY 25, JANUARY 27,
1997 1996
----------- -----------
<S> <C> <C>
Revolving credit facility debt.................... $18,901,405 $15,607,262
Secured note payable to Wells Fargo Bank.......... 1,358,000 1,358,000
Secured notes payable to Union Bank............... -- 1,174,497
Capital lease obligation.......................... 345,222 1,001,637
Accounts payable, trade........................... 12,175,998 20,771,240
Estimated lease rejection claims.................. 16,368,949 8,871,043
Other payables and accrued expenses............... 3,876,101 4,650,024
----------- -----------
$53,025,675 $53,433,703
=========== ===========
</TABLE>
Prior to the Petition Date, the revolving credit facility debt bore
interest at the bank's prime rate plus 1% and was due February 1, 1997. The
banks assert a security interest in substantially all of the assets of the
Company and its subsidiaries, excluding merchandise inventories. In the third
quarter of Fiscal 1996, pursuant to a settlement of certain claims relating to
the revolving credit facility, the Company paid $6,229,417 to Wells Fargo Bank,
N.A. ("Wells"), as agent. This payment was applied to reduce the amount owed
under the revolving credit facility. As a result of the settlement agreement,
the Company reclassified $9.8 million previously reported in accounts payable to
the revolving credit facility debt to account for the amounts paid under the
credit facility pursuant to letters of credit (see Note K). The note payable to
Wells is secured by an office/warehouse building and underlying real property
that the Company used to house a portion of its administrative offices and
warehouse facilities. The note bears interest based on LIBOR plus 1.5% and was
due March 1, 2005. The office/warehouse building and underlying real property is
also security for the revolving credit facility debt (see Note L). The interest
rates described above do not consider interest rates that may be applicable in
the event of default.
The two notes payable to Union Bank of California, N.A. ("Union"), which
were secured by limited partnership interests in low-income housing projects,
bore interest at 6.1% and 6.2% and were due in September 1998 and January 1999.
On August 28, 1996, the Bankruptcy Court approved the sale of, and on August 30,
1996, the Company sold, its interest in the two limited partnerships for an
aggregate consideration of $1,550,000. $1,229,443 of the net proceeds of the
sale were paid to Union in full satisfaction of its secured loans and related
accrued interest (see Note K). The balance of the net proceeds were paid into a
segregated account, and are subject to any other liens against the partnership
interests, including the lien of the banks under the revolving credit facility
and will not be used by the Debtors without further order of the Bankruptcy
Court (see Note L).
The capital lease obligation at January 27, 1996 was secured by certain
point of sale computer equipment and related software (collectively, the "POS
Equipment") acquired in connection with a capital lease with MetLife Capital
Corporation ("MetLife"). On May 13, 1996, MetLife filed a motion (the "Motion")
for relief from the automatic stay in the Company's chapter 11 case, pursuant to
section 362 of the Bankruptcy Code, to permit MetLife to foreclose upon its
liens on the POS Equipment or, alternatively, to require the Company to make
adequate protection payments to MetLife to protect against any diminution to the
value of the POS Equipment during the pendency of the Company's chapter 11 case.
The Company and MetLife entered into an agreement (the "MetLife Agreement"),
which was approved by the Bankruptcy Court on July 22, 1996, settling the
matters that were the subject of the Motion and restructuring the Company's loan
obligations to MetLife. Under the terms of the MetLife Agreement, MetLife has an
allowed secured claim (the "Secured Claim") in the Company's chapter 11 case in
the amount of $670,000 and the balance of MetLife's claim is an allowed
unsecured claim (the "Unsecured Claim") in the Company's chapter 11 case.
32
<PAGE> 35
THE CLOTHESTIME, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In order to amortize the Secured Claim, the Company agreed to (i) make
monthly payments of $5,000 to MetLife, commencing in June 1996, which have been
and will continue to be applied to reduce the principal amount of the Secured
Claim, until the effective date of a plan of reorganization in the Company's
chapter 11 case (the "Effective Date") and (ii) pay the remainder of the Secured
Claim by making monthly payments to MetLife from and after the Effective Date in
an amount equal to remaining principal plus interest at the Bank of America
prime rate plus 200 basis points (up to a maximum of 10.5% per annum) amortized
over a number of months equal to the difference between 60 and the number of
monthly payments made to MetLife prior to the Effective Date. The Secured Claim
was reclassified in Fiscal 1996 on the balance sheet into long-term debt from
liabilities subject to compromise. The Unsecured Claim will be treated and paid
in accordance with the terms of any confirmed plan of reorganization in the
Company's chapter 11 case (see Note K).
The Company will continue to negotiate with creditors to reconcile claims
filed with the Bankruptcy Court to the Company's financial records. The
additional liability arising from this reconciliation process, if any, is not
subject to reasonable estimation. As a result, no provision has been recorded
for these possible claims. The Company will recognize the additional liability,
if any, as the amounts become subject to reasonable estimation. Additional
bankruptcy claims and prepetition liabilities may arise from the rejection of
executory contracts and unexpired leases, resolution of contingent and
unliquidated claims and the settlement of disputed claims. A plan of
reorganization ultimately approved by the Company's impaired prepetition
creditors and confirmed by the Bankruptcy Court may materially change the
amounts and terms of prepetition liabilities. Consequently, the amounts included
in the consolidated balance sheets as liabilities subject to compromise will be
subject to future adjustment.
In accordance with the American Institute of Certified Public Accountants'
Statement of Position 90-7, Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code, the Company is not required to record interest during
chapter 11 proceedings on unsecured or undersecured prepetition debt. Interest
expense on certain secured debt will continue to be accrued but is subject to
settlement. No determination has been made regarding the value of the property
interests that secure certain debt and, consequently, whether interest thereon
will be paid. The Company has continued accruing interest on its secured
prepetition debt obligations, except for the revolving credit facility debt,
which the Company believes is undersecured. Contractual interest (computed
without regard to default rates of interest) exceeds interest expense recorded
in the accompanying Fiscal 1996 and Fiscal 1995 consolidated statements of
operations by approximately $1,555,000 and $235,000, respectively.
NOTE E -- REORGANIZATION COSTS
Reorganization costs recorded in Fiscal 1996 and Fiscal 1995 consisted of:
<TABLE>
<CAPTION>
JANUARY 25, JANUARY 27,
1997 1996
----------- -----------
<S> <C> <C>
Write-off of leasehold improvements and fixtures
associated with store closures, net of
proceeds........................................ $ 5,405,297 $ 9,612,448
Estimated store lease rejection claims............ 7,497,906 8,464,480
Professional fees................................. 3,341,679 1,744,680
Severance payments................................ 668,773 --
Other related store closure costs................. 178,738 1,852,423
Interest income................................... (885,547) (30,934)
Write-off of unamortized deferred financing costs
associated with prepetition debt................ -- 259,295
Other............................................. 390,687 64,256
----------- -----------
$16,597,533 $21,966,648
=========== ===========
</TABLE>
33
<PAGE> 36
THE CLOTHESTIME, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the Company's continuing reorganization, the Company
closed 67 stores during Fiscal 1996 and accrued for additional store closures
that are planned to occur in the second quarter of Fiscal 1997. The
reorganization charge for the planned store closures in Fiscal 1997 consists of
(i) $3.7 million for estimated store lease rejection claims and (ii) $2.7
million for the accelerated depreciation and amortization of leasehold
improvements and fixtures based on the estimated net book value at the time of
store closure. Included above are the costs associated with these planned store
closures as well as other costs incurred in connection with the Company's
reorganization.
NOTE F -- INCOME TAXES
The components of the provision (benefit) for income taxes are summarized
as follows:
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------
JANUARY 25, JANUARY 27, JANUARY 28,
1997 1996 1995
----------- ------------ -----------
<S> <C> <C> <C>
CURRENT:
Federal............................ $ 560,000 $ (9,194,000) $(5,925,000)
State.............................. 367,000 421,000 (203,000)
-------- ------------ -----------
Total current.............. 927,000 (8,773,000) (6,128,000)
-------- ------------ -----------
DEFERRED:
Federal............................ -- (898,000) (727,000)
State.............................. -- (335,000) (378,000)
-------- ------------ -----------
Total deferred.................. -- (1,233,000) (1,105,000)
-------- ------------ -----------
Total...................... $ 927,000 $(10,006,000) $(7,233,000)
======== ============ ===========
</TABLE>
The actual provision (benefit) for income taxes differs from statutory tax
for all years (computed by applying the Federal tax rate of 35% in Fiscal 1996,
Fiscal 1995 and Fiscal 1994 to loss before income taxes) as follows:
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------
JANUARY 25, JANUARY 27, JANUARY 28,
1997 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
Tax benefit computed at Federal
statutory rates..................... $(10,751,000) $(18,553,000) $(6,466,000)
Nontaxable revenue.................... (53,000) (77,000) (281,000)
Targeted jobs and other tax credits... -- -- (115,000)
State income taxes.................... -- 86,000 (581,000)
Change in Federal valuation
allowance........................... 10,302,000 9,085,000 --
Provision for taxes related to IRS
exam................................ 927,000 -- --
Other, net............................ 502,000 (547,000) 210,000
------------ ------------ -----------
$ 927,000 $(10,006,000) $(7,233,000)
============ ============ ===========
</TABLE>
34
<PAGE> 37
THE CLOTHESTIME, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effected cumulative temporary differences which give rise to
deferred tax assets and liabilities under SFAS 109 are as follows:
<TABLE>
<CAPTION>
JANUARY 25, JANUARY 27, JANUARY 28,
1997 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
Deferred tax assets:
Deferred compensation and employee
benefits......................... $ 832,000 $ 1,365,000 $ 921,000
Accrued liabilities................. 9,146,000 3,572,000 1,725,000
Inventories......................... 876,000 931,000 942,000
Net operating loss carryforward..... 8,381,000 2,304,000 --
Alternative minimum tax credits..... 1,885,000 1,700,000 --
Charitable contributions and other
tax deductible carryforwards..... 2,413,000 1,702,000 --
Depreciation and amortization
including lease acquisition
costs............................ 2,627,000 740,000 --
Other............................... 641,000 738,000 422,000
------------ ------------ -----------
26,801,000 13,052,000 4,010,000
Less: Valuation allowance........ (26,312,000) (12,312,000) (3,227,000)
------------ ------------ -----------
Total deferred tax assets............. 489,000 740,000 783,000
------------ ------------ -----------
Deferred tax liabilities:
Depreciation and amortization
including lease acquisition
costs............................ 288,000 512,000 987,000
Prepaid expenses.................... 201,000 228,000 202,000
------------ ------------ -----------
Total deferred tax liabilities........ 489,000 740,000 1,189,000
------------ ------------ -----------
Net deferred tax liability............ $ -- $ -- $ 406,000
============ ============ ===========
</TABLE>
The valuation allowance against deferred tax assets was increased by
$14,000,000 in Fiscal 1996 and $9,085,000 in Fiscal 1995. The Company's Fiscal
1995 loss was carried back and generated a refund from previous taxes paid of
$9.4 million. This carryback fully exhausted all taxes paid in prior years which
were available for refund. The Company's Federal net operating loss of $20.2
million will be carried forward over the next 15 years, subject to adjustment as
a result of transactions pursuant to a confirmed plan of reorganization. The
Company has recorded a valuation allowance to fully offset this net operating
loss carryforward and the other net deferred tax assets.
In Fiscal 1995, the Company received notice from the Internal Revenue
Service (the "IRS") that it intended to audit, and in Fiscal 1996 the IRS
commenced the audit of, the Company's Federal income tax returns for Fiscal
1995, Fiscal 1994 and Fiscal 1993 (the "IRS Audit"). The provision for taxes
related to the IRS Audit represents the Company's estimate of the Federal and
state taxes expected to be owed as a result of the IRS Audit. If the Company
agrees to any settlement of the IRS Audit and related claims filed in the
Bankruptcy Cases, such agreement will be subject to several levels of IRS review
and approval and may be subject to approval of the Bankruptcy Court. The Company
cannot predict whether this estimated amount will be the final amount of taxes
owed as a result of the IRS Audit or when or whether the IRS and the Bankruptcy
Court will approve any settlement of the IRS Audit (see Note K). In addition to
the above-described taxes, the Company has separately provided for any interest
or penalties expected to be due.
35
<PAGE> 38
THE CLOTHESTIME, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE G -- MARKETABLE SECURITIES
The carrying values (cost) and estimated market values of investment
securities available-for-sale are summarized as follows:
<TABLE>
<CAPTION>
U.S. STATE AND LOCAL GOVERNMENT AGENCY ISSUES
-------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
FAIR HOLDING HOLDING
COST VALUE LOSSES GAINS
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
As of January 25, 1997........... $3,223,401 $3,142,667 $ 80,734 $ --
As of January 27, 1996........... $3,208,415 $3,191,737 $ 16,678 $ --
</TABLE>
Maturities of investment securities available-for-sale are summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------
JANUARY JANUARY
25, 27,
1997 1996
---------- ----------
<S> <C> <C>
Within 1 year....................................... $ -- $ --
After 1 year through 5 years........................ 1,018,821 1,003,835
After 5 years through 10 years...................... 2,204,580 2,204,580
After 10 years...................................... -- --
---------- ----------
$3,223,401 $3,208,415
========== ==========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------
JANUARY JANUARY
25, 27,
1997 1996
---------- ----------
<S> <C> <C>
Proceeds from sales of investment securities
available-for-sale................................ $ -- $4,718,600
Gross realized gains on sales of investment
securities available-for-sale..................... $ -- $ 5,490
Gross realized losses on sales of investment
securities available-for-sale..................... $ -- $ 410,446
Net unrealized holding loss on available-for-sale
securities included as a component of
shareholders' equity (deficiency)................. $ 80,734 $ 16,678
</TABLE>
All realized gain and losses are computed on the specific identification
basis.
Investment securities available-for-sale include securities having a fair
value of $2,143,082 held as collateral under the revolving credit facility debt
(see Notes D and L) and securities having a fair value of $741,228 pledged as
collateral to the issuing bank for an irrevocable letter of credit issued on
behalf of Clothestime Insurance Company.
NOTE H -- EMPLOYEE SAVINGS PLAN
In February 1992, the Board of Directors approved The Clothestime, Inc.
Savings and Investment Plan, a 401(k) Savings Plan (the "401(k) Plan"). Under
the provisions of the 401(k) Plan, beginning on April 1, 1992, all full-time
employees who have completed one year of service and attained the age of 21
years may defer up to 15% of their compensation per year. Further, the Company
may, upon approval of the Board, make a discretionary matching and/or profit
sharing contribution to the plan. For Fiscal 1996, Fiscal 1995 and Fiscal 1994,
the Board approved a 2% matching contribution. In Fiscal 1996, Fiscal 1995 and
Fiscal 1994, the Company expensed $224,534, $296,256 and $273,324, respectively,
for Company matching contributions.
36
<PAGE> 39
THE CLOTHESTIME, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE I -- LEASES
The Company occupies its retail stores, main warehouse and administrative
facilities under non-cancelable operating leases. Most of the retail store
leases require the Company to pay the greater of a specified minimum rental or a
contingent rental based on a percentage of gross sales. Many leases include
cancellation clauses exercisable by the Company upon the occurrence of certain
events (e.g., change in anchor tenant or failure to reach certain minimum sales
levels). Rent expense for Fiscal 1996, Fiscal 1995, and Fiscal 1994 was
$22,758,352, $36,620,933 and $36,919,669, respectively. Included in rent expense
for Fiscal 1996, Fiscal 1995 and Fiscal 1994 is contingent rent of $43,295,
$83,482 and $153,604, respectively.
The operating lease for the main warehouse and administrative facility is
with certain former officers and directors of the Company, some of whom are
currently shareholders. Rent expense related to this lease for Fiscal 1996,
Fiscal 1995 and Fiscal 1994 was $645,027, $886,471 and $851,487, respectively.
Future minimum lease payments, by fiscal year and in the aggregate, with
initial or remaining terms of one year or more consisted of the following at
January 25, 1997:
<TABLE>
<CAPTION>
FUTURE
MINIMUM
FISCAL YEAR LEASE PAYMENTS
--------------------------------------------- --------------
<S> <C>
1997......................................... $ 18,014,000
1998......................................... 15,845,000
1999......................................... 14,391,000
2000......................................... 12,170,000
2001......................................... 9,466,000
Thereafter................................... 13,596,000
-----------
$ 83,482,000
===========
</TABLE>
The analysis of lease commitments above has been adjusted to reflect the
closing of 67 stores in Fiscal 1996 in connection with the chapter 11 filing
(see Note A), but has not been adjusted to reflect possible future lease
rejections. As described in Note E, the Company is planning to close certain
stores in the second quarter of Fiscal 1997. It is expected that the future
minimum lease payments above will be reduced in Fiscal 1997, Fiscal 1998, Fiscal
1999, Fiscal 2000, Fiscal 2001 and fiscal years thereafter by approximately
$1,487,000, $2,595,000, $2,242,000, $1,948,000, $1,594,000 and $2,400,000,
respectively, as a result of these planned store closures and will be further
reduced by any additional store closures.
Subject to the approval of the Bankruptcy Court, the Company can reject
executory contracts, including leases, under the relevant provisions of the
Bankruptcy Code. Rejection of a lease gives the lessor the right to assert a
prepetition claim against the Company as though the lease had been terminated
immediately before the date of the chapter 11 filing. However, the amount of the
claim may be limited by the Bankruptcy Code. The estimated amounts of allowed
claims for rejected leases are included in reorganization costs.
37
<PAGE> 40
THE CLOTHESTIME, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE J -- OTHER ACCRUED LIABILITIES
Other accrued liabilities are summarized as follows:
<TABLE>
<CAPTION>
AS OF AS OF
JANUARY JANUARY
25, 27,
1997 1996
---------- ----------
<S> <C> <C>
Gift certificates outstanding....................... $2,162,477 $2,097,684
Deferred rent....................................... 1,734,083 1,771,680
Legal costs......................................... 1,269,000 98,000
Store credits outstanding........................... 1,161,852 1,109,584
Other............................................... 3,584,105 3,301,357
---------- ----------
$9,911,517 $8,378,305
========== ==========
</TABLE>
NOTE K -- LEGAL PROCEEDINGS
On December 8, 1995, Clothestime and five of its subsidiaries (Stores, MRJ,
Clothestime Acquisition Corporation, Clothestime Investment, Inc. and
Clothestime International, Inc.) filed petitions in the United States Bankruptcy
Court for the Central District of California, Santa Ana Division, Jointly
Administered Case No. SA95-22533JW, seeking reorganization under chapter 11 of
the Bankruptcy Code.
Since the Petition Date, the Debtors have continued in possession of their
properties and, as debtors in possession, are authorized to operate and manage
their respective businesses and enter into all transactions (including obtaining
services, supplies and inventories) that each could have entered into in the
ordinary course of their business had there been no bankruptcy. Although each
Debtor is authorized to operate its business as a debtor in possession, it may
not engage in transactions outside the ordinary course of business without first
complying with the notice and hearing provisions of the Bankruptcy Code and
obtaining Bankruptcy Court approval when necessary.
As debtors in possession, the Debtors have the right, subject to the
approval of the Bankruptcy Court, under the relevant provisions of the
Bankruptcy Code, to assume or reject executory contracts and unexpired leases,
including real property leases. Certain parties to such executory contracts and
unexpired leases with the Company, including parties to such real property
leases, may file motions with the Bankruptcy Court seeking to require the
Company to assume or reject those contracts or leases. In this context,
"assumption" requires that the Company cure, or provide adequate assurance that
it will cure, all existing defaults under the contract or lease and provide
adequate assurance of future performance under relevant provisions of the
Bankruptcy Code; and "rejection" means that the Company is relieved from its
obligations to perform further under the contract or lease. Rejection of any
executory contract or lease may constitute a breach of that contract and may
afford the non-debtor party the right to assert a claim against the bankruptcy
estate for damages arising out of the breach, which claim shall be allowed or
disallowed as if such claim had arisen before the date of the filing of the
petition. By order of the Bankruptcy Court, effective February 5, 1996, the
Company obtained an extension of time within which to assume or reject its
non-residential real property leases through and including the confirmation date
of its plan of reorganization, except for leases of certain objecting landlords
(the "Objection Leases"). With respect to the Objection Leases, the Debtors have
obtained an extension of time to assume or reject such leases through and
including March 31, 1997 (see Note L).
Prepetition claims that were contingent, unliquidated or disputed as of the
commencement of the Company's chapter 11 cases, including, without limitation,
those that arise in connection with rejection of executory contracts or
unexpired leases, may be allowed or disallowed depending on the nature of the
claim. Such claims may be fixed by the Bankruptcy Court or otherwise settled or
agreed upon by the parties and approved by the Bankruptcy Court. As a general
matter, the treatment of claims pending in the Bankruptcy Court will be
determined as part of the formulation and confirmation of a plan of
reorganization.
38
<PAGE> 41
THE CLOTHESTIME, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Bankruptcy Court established July 15, 1996 as the date by which, with
certain exceptions, all claimants were to file proofs of claim or be barred from
asserting any claim against the Debtors and voting upon or receiving
distributions under a plan of reorganization of the Debtors. Certain creditors
(essentially entities holding claims that were (a) not scheduled by the Debtors
as disputed, contingent or unliquidated or (b) previously allowed by the
Bankruptcy Court) were not required to file proofs of claim. In addition, the
Bankruptcy Court provided that Claims relating to any future rejection of
executory contracts or unexpired leases (other than as part of a plan of
reorganization) are required to be filed on or before the later of (a) 30 days
from the date of entry of the order rejecting such contract or lease and (b) the
July 15, 1996 bar date.
Approximately 8,000 claims were originally scheduled by the Debtors or
filed against the Debtors prior to the applicable claims bar date imposed by the
Bankruptcy Court. The Debtors are in the process of reconciling and resolving
proofs of claim that differ in amounts from the Debtors' records, through
negotiations with claimants and the anticipated filing of objections. The
Company believes many of these claims against various Debtors are duplicative of
claims filed against other Debtors, erroneously filed or otherwise not
allowable. The additional liability arising from this reconciliation process, if
any, is not subject to reasonable estimation. A plan of reorganization
ultimately approved by the Company's impaired prepetition creditors and
confirmed by the Bankruptcy Court may materially change the amounts and terms of
prepetition liabilities (see Note D).
Described below are certain of the more significant claims and adversary
proceedings in the Bankruptcy Cases. For a discussion of other aspects of the
Bankruptcy Cases, including the plan of reorganization filed by the Debtors on
March 21, 1997, see Notes A, B, C, D, E, I and L.
Claims Arising from Tax Audit. In early 1996, the IRS commenced the IRS
Audit. In July 1996, the IRS reported to the Debtors that it had made only
limited progress in its audit and thus could not, in advance of the claims bar
date, estimate accurately the amounts of outstanding tax liabilities for the
periods being audited. As a result, the IRS reported on its proofs of claim high
estimates of the outstanding tax liabilities for the periods being audited. The
Debtors believe that their actual outstanding tax liabilities for such periods
are far lower than those set forth on the proofs of claim filed by the IRS (see
Note F).
Settlement With MetLife Capital Corporation. On or about May 13, 1996,
MetLife filed a motion for relief from the automatic stay in the Reorganization
Cases, pursuant to section 362 of the Bankruptcy Code, to permit MetLife to
foreclose upon its liens on the POS Equipment. See Note D for a description of
the MetLife Agreement.
Wells and Union Claims; Litigation and Partial Settlement. Since the
Petition Date, the Debtors have engaged in a series of disputes with Wells and
Union (collectively, the "Banks") regarding the treatment of the Banks' claims.
In December 1995, the Debtors and the Banks engaged in extensive negotiations
regarding the scope of the Banks' security interests in certain of the Debtors'
assets, including, among other things, inventory that was purchased prepetition
under commercial letters of credit and certain cash accounts. On December 28,
1995, in partial resolution of these issues and in connection with its approval
of the DIP Facility, the Bankruptcy Court entered its Amended Stipulation for
Order (1) Clarifying Order Approving Centralized Cash Management Systems, Etc.,
(2) Providing Adequate Protection for Alleged Collateral of Wells Fargo Bank, as
Agent, to the Extent of Valid Liens and (3) Establishing Schedule for Resolution
of Disputes (the "Amended Wells/Union Stipulation"). The Amended Wells/Union
Stipulation sets forth the parties' agreement regarding: (a) the extent of the
Banks' security interest in the Debtors' inventory; (b) the ability of the
Debtors to use the deposits in certain bank accounts, receipts from credit card
purchases of merchandise and proceeds of certain other collateral of the Banks
and Wells, as agent for the Banks; and (c) certain other matters.
Two adversary proceedings involving obligations under the Wells/Union
credit agreement were commenced in the early months of the Reorganization Cases.
On January 24, 1996, Wells, individually and as agent for itself and Union,
commenced an adversary proceeding the Bankruptcy Court, Adversary Proceeding
39
<PAGE> 42
THE CLOTHESTIME, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
No. 96-1100, (the "Tax Refund Litigation") seeking a judicial determination and
declaration regarding the nature, extent, validity and priority of the Banks'
alleged lien on the Debtors' then-prospective entitlement to receive corporate
income tax refunds in excess of $9 million (collectively, the "Tax Refund") in
respect of the Debtors' 1995 fiscal year. Soon after the inception of this
adversary proceeding, Wells also filed a motion for a temporary restraining
order and preliminary injunction to prevent the Debtors from dissipating the Tax
Refund during the pendency of such adversary proceeding.
Wells also asserted liens on certain of the Debtors' credit card
receivables in transit as of the Petition Date (the "Receivables") and a deposit
account holding approximately $2.5 million in cash (the "Deposit Account"). On
January 5, 1996, the Debtors commenced Adversary Proceeding No. 96-1017 (the
"Credit Card Litigation") against Wells, seeking a judicial determination and
declaration that Wells did not hold a valid and perfected security interest in
either the Receivables or the Deposit Account or, alternatively, that the
security interests held by Wells in such property, if any, could be avoided.
On August 28, 1996, the Bankruptcy Court approved the compromise and
settlement of the Tax Refund Litigation and the Credit Card Litigation
(collectively, the "Adversary Proceedings") and certain related disputes between
the Debtors and the Banks, pursuant to a settlement agreement (the "Settlement
Agreement"). The Settlement Agreement provides for the resolution of all claims
and controversies relating to the Banks' alleged security interests in the
following disputed collateral: (a) refunds of Federal, state and local income
taxes in the amount of $9,452,726, representing tax refunds from the Internal
Revenue Service in the amount of $9,450,146, from the State of Illinois in the
amount of $2,280 and from the City of New York in the amount of $300
(collectively, the "Tax Refund"); (b) certain funds held on deposit in
segregated accounts pursuant to the terms of the parties' Amended Stipulation
for Order (i) Clarifying Order Approving Centralized Cash Management Systems,
etc., (ii) Providing Adequate Protection for Alleged Collateral of Wells Fargo
Bank, as Agent, to the Extent of Valid Liens and (iii) Establishing Schedule for
Resolution of Disputes, dated December 27, 1995; (c) the Debtors' prepetition
credit card accounts receivable; and (d) fee and expense retainers paid by the
Debtors to professionals prior to the commencement of the Reorganization Cases
(the collateral described in clauses (a), (b), (c) and (d) above are referred to
herein as the "Disputed Collateral"). The Settlement Agreement also fixes the
allowed amount of the Banks' prepetition claims under the credit facilities
evidenced by the Credit Agreement, dated as of February 28, 1995 between Stores,
as borrower, the other Debtors, as Guarantors, and the Banks (the "Bank Claims")
at $26,306,481, subject to increase for prepetition legal fees and expenses and
certain contingent claims on account of letters of credit. Such amount has been
and will be reduced by certain payments, including payments made pursuant to the
Settlement Agreement. On or about September 5, 1996, pursuant to the terms of
the Settlement Agreement and on account of the Banks' alleged security interests
in the Disputed Collateral other than the Tax Refunds, the Banks (a) applied
$3,100,000 of the funds on deposit in certain segregated accounts held by the
Debtors to reduce the Bank Claims (the "Initial Payment"), (b) released the
remainder of all funds (approximately $6,500,000) on deposit in such accounts to
the Debtors and (c) released the Banks' security interests in all Disputed
Collateral other than the Tax Refund. In addition, on September 5, 1996, to
secure its obligation to make a remaining payment (the "Remaining Payment"), the
Debtors deposited the sum of $3,126,363 into a segregated account (the
"Segregated Account").
In consideration for the transactions described above, the Banks: (a) have
released the balance of the Tax Refund to the Debtors and (b) have released
their alleged security interests in the Tax Refund. In addition, under the terms
of the Settlement Agreement, the Adversary Proceedings have been dismissed.
The payments by the Debtors to Wells and the dismissals of the Adversary
Proceedings contemplated by the Wells/Union Settlement Agreement have been
completed. The Debtors and Wells currently are engaged in ongoing negotiations
regarding all outstanding issues with respect to the appropriate treatment of
the Banks' prepetition Claims arising under the Wells/Union Credit Agreement
(see Note L).
40
<PAGE> 43
THE CLOTHESTIME, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's borrowings from Union were secured by a lien on certain
limited partnership interests that were then owned by Clothestime to take
advantage of the Federal and California tax benefits available to investors in
such partnerships. Following the Petition Date, after examining its tax
position, the Company determined that it would not be able to utilize the
credits and other benefits generated by these partnerships. Accordingly, the
Debtors obtained Bankruptcy Court approval of the sale of such limited
partnership interests for aggregate consideration of $1,550,000. Of the net
proceeds of the sale, $1,229,443 was paid to Union in full satisfaction of its
secured loan. The remaining net proceeds were paid into a segregated Wells
account, pending further order of the Bankruptcy Court (see Notes D and L).
Other Litigation. The Company is also subject to other legal proceedings
and claims. Although occasional adverse decisions (or settlements) may occur,
the Company believes that the final disposition of such matters will not have a
material adverse effect on the financial position, results of operations or
liquidity of the Company.
NOTE L -- SUBSEQUENT EVENTS (UNAUDITED)
Wells and Union Claims. On April 2, 1997, the Bankruptcy Court granted the
motion of Wells, individually and as agent for itself and Union, seeking relief
from the automatic stay established under section 362 of the Bankruptcy Code and
authorized the Banks to execute upon their security interests in (a) a New York
State Dormitory Authority Revenue Bond in the face amount of $2.0 million and
interest thereon and (b) restricted cash in the amount of $253,916 (plus accrued
interest) (the "Restricted Cash"), consisting of the excess net proceeds of the
Debtors' sale of certain limited partnership interests (see Note D). It is
anticipated that Wells, as agent, will liquidate the bond and apply the proceeds
thereof and the Restricted Cash to reduce the Debtors' obligations to the Banks
under the revolving credit facility.
On April 14, 1997, Stores agreed to sell an office/warehouse building and
underlying real property to an unaffiliated third party for approximately $2.7
million. The closing of the sale is subject to a number of conditions, including
approval of the Bankruptcy Court. The Debtors anticipate that they will also
seek an order authorizing the payment of the net proceeds to Wells in full
payment of its secured note payable and to the Banks to reduce the revolving
credit facility debt.
Extension of Time for Lease Assumptions/Rejections. On March 31, 1997 the
Debtors filed a motion with the Bankruptcy Court seeking to (a) assume the
Objection Leases for two store locations, (b) reject the Objection Leases for
three store locations and (c) extend through and including the date of
confirmation of a plan or plans of reorganization the period within which the
Debtors may elect to assume or reject the 24 remaining Objection Leases.
Store Closing Program. The Debtors intend to file a motion with the
Bankruptcy Court on or before June 10, 1997 seeking approval to close
approximately 75 additional stores that are underperforming or unprofitable or
are located in markets in which the Debtors do not intend to operate in the
future.
41
<PAGE> 44
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
INFORMATION WITH RESPECT TO NON-EMPLOYEE DIRECTORS
The following table sets forth information regarding the members of the
Board of Directors who are not employees of the Company, including age, present
position with the Company, period served as a director and other business
experience during the past five years.
<TABLE>
<CAPTION>
DIRECTOR PRINCIPAL OCCUPATION AND OTHER
NAME AGE SINCE INFORMATION CONCERNING DIRECTOR
- ------------------------------- --- -------- -------------------------------------------
<S> <C> <C> <C>
Herman D. Epstein.............. 68 1992 Mr. Epstein serves as Chairman of the
Compensation Committee and a member of the
Audit Committee of the Board of Directors.
Mr. Epstein has been the Chairman of the
Board of HDE Associates, a realty
investment company, since September 1988.
In addition, Mr. Epstein serves as a
consultant to Elite, Inc., a private
transportation firm, a position which he
has held since October 1988. Mr. Epstein
served as Vice Chairman, Director and Chief
Merchandising Executive of Lerner Stores,
Inc. from October 1983 to November 1986 and
as a consultant with Lerner Stores, Inc.
from December 1986 to January 1988. From
July 1988 to December 1992, Mr. Epstein
served as a consultant to the Company.
George Foos.................... 75 1987 Mr. Foos serves as Chairman of the Audit
Committee and a member of the Compensation
Committee of the Board of Directors. Mr.
Foos has been Chairman and President of
George Foos & Associates, a management
consulting firm, since April 1983. Mr. Foos
also serves as Chairman of the Board of
Great Western Value Centers, a real estate
development company. He has served in that
position since 1984. Mr. Foos served as
Chairman of the Board of Metropolitan Real
Estate Group, a real estate development
company, from 1984 to 1990, and a
consultant and a director of Alcott and
Andrews, a chain of retail clothing stores
serving upscale career women from 1983 to
1989. From 1976 to 1983, Mr. Foos was
Chairman of the Board and Chief Executive
Officer of Emporium Capwell, San Francisco,
California, a chain of department stores.
</TABLE>
42
<PAGE> 45
INFORMATION WITH RESPECT TO DIRECTORS WHO ARE ALSO EXECUTIVE OFFICERS
The following table sets forth information regarding members of the Board
of Directors who also are employees of the Company, including age, present
position with the Company, period served as a director and other business
experience during the past five years.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION AND OTHER
DIRECTOR INFORMATION CONCERNING DIRECTOR/EXECUTIVE
NAME AGE SINCE OFFICER
- ------------------------------- --- -------- -------------------------------------------
<S> <C> <C> <C>
David A. Sejpal................ 39 1995 Mr. Sejpal has been Chairman of the Board
and Chief Executive Officer, President and
Chief Operating Officer of the Company
since January 1997. In addition, Mr. Sejpal
served as a Vice President of the Company
from June 1991 to January 1997, and Chief
Financial Officer of the Company from
December 1990 to February 1997. Mr. Sejpal
also served as the Company's Treasurer from
May 1991 to February 1997 and Secretary
from April 1995 to February 1997. In
addition, Mr. Sejpal serves as a director,
Chairman of the Board and Chief Executive
Officer, President and Chief Operating
Officer of Stores and MRJ, positions he has
held since January 1997 and from December
1993 to January 1997 held the positions of
Vice President, Chief Financial Officer,
Treasurer and Assistant Secretary of MRJ.
Mr. Sejpal served as Corporate Controller
of the Company from September 1988 to
December 1990 and Director of Finance from
December 1986 to September 1988.
Douglas L. Pereira............. 48 1997 Mr. Pereira has been the Senior Vice
President, Chief Financial Officer,
Secretary and Treasurer of the Company
since February 1997. In addition, Mr.
Pereira has served as Chief Financial
Officer and Treasurer of Stores since
December 1993. Mr. Pereira assumed the
additional officer positions of Vice
President and Secretary of Stores and the
positions of Vice President, Chief
Financial Officer, Treasurer and Secretary
of MRJ in January 1997. Mr. Pereira also
served as Corporate Controller of the
Company from December 1990 to January 1997,
and Assistant Controller of the Company
from June 1988 to December 1990.
Robert Klausner................ 55 1997 Mr. Klausner has been the Vice President,
Store Operations of the Company since
February 1997. Mr. Klausner also served as
Director of Store Operations of the Company
from December 1995 to January 1997.
</TABLE>
43
<PAGE> 46
INFORMATION WITH RESPECT TO EXECUTIVE OFFICER WHO IS NOT A DIRECTOR
The following table sets forth similar information regarding the only
executive officer who is not a Director of the Company.
<TABLE>
<CAPTION>
YEAR
COMMENCED
SERVICE
WITH THE
NAME AGE COMPANY POSITION
- ------------------------------------- --- --------- -----------------------------------
<S> <C> <C> <C>
Barry Herman......................... 60 1997 Mr. Herman has been Vice President,
General Merchandise Manager of the
Company since February 1997. Prior
thereto, Mr. Herman served as Vice
President, General Merchandise
Manager of Sycamore Stores Inc., a
retail clothing chain, from May
1993 to September 1995, and Vice
President, General Merchandise
Manager of Fashion Bar Inc., a
retail clothing chain, from January
1979 to June 1992.
</TABLE>
There are no arrangements or understandings pursuant to which any of the
persons listed in the table above were selected as executive officers.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file with the U.S.
Securities and Exchange Commission (the "SEC") initial reports of ownership and
reports of changes in ownership of common stock and other equity securities of
the Company. Officers, directors and greater than ten-percent stockholders are
required by SEC regulations to furnish the Company with copies of all Section
16(a) forms they file.
To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company and written representations that no other
reports were required during the fiscal year ended January 25, 1997, its
officers, directors and greater than ten percent beneficial owners complied with
all Section 16(a) filing requirements.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
The following table discloses compensation received for the three fiscal
years ended January 25, 1997 ("Fiscal 1996"), January 27, 1996 ("Fiscal 1995")
and January 28, 1995 ("Fiscal 1994"), respectively, by the two individuals who
served as the Company's Chief Executive Officer during Fiscal 1996, and two
individuals who would have been among the four most highly-paid executive
officers, other than the Chief
44
<PAGE> 47
Executive Officer, but for the fact that they were not serving as executive
officers at the end of Fiscal 1996 (collectively, the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------- AWARDS
OTHER ---------------- ALL
ANNUAL SECURITIES OTHER
COMPENSATION UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($)(1) OPTIONS/SARS(#) ($)(2)
- --------------------------------- ---- --------- -------- ------------ ---------------- ------------
<S> <C> <C> <C> <C> <C> <C>
David A. Sejpal.................. 1996 $ 250,000 $ -0- $ 33,279 -0- $1,444
Chairman of the Board 1995 250,000 50,000 5,878 -0- 1,444
and Chief Executive Officer, 1994 227,076 -0- 32,418 100,000 1,203
President and Chief Operating
Officer, Chief Financial
Officer, Treasurer and
Secretary
John Ortega II................... 1996 446,693 0- 59,794 -0- 2,160
Chairman of the Board 1995 470,962 -0- 59,794 -0- 2,160
and Chief Executive Officer(3) 1994 470,962 -0- 60,482 -0- 2,160
Norman Abramson.................. 1996 357,364 -0- 13,992 -0- 4,639
President and Chief 1995 386,826 -0- 13,992 200,000 4,639
Operating Officer(4) 1994 386,826 -0- 11,103 -0- 4,657
Charles Castaneda................ 1996 112,572 500 -0- -0- -0-
Vice President--Merchandise 1995 138,019 10,000 34,800 10,000 -0-
Planning and Control(5) 1994 60,110 -0- 6,995 25,000 -0-
</TABLE>
- ---------------
(1) The amounts disclosed in this column include:
(a) With respect to Mr. Sejpal, the Fiscal 1996 and 1994 amounts reflect
tax gross-up payments relating to term and universal life insurance and
long term disability insurance in the amounts of $5,878 and $4,475,
respectively, and payments relating to perquisites in the amounts of
$27,401 and $27,943, respectively. The amounts attributable to
perquisites include a non-accountable automobile allowance in the
amount of $8,400 for each of Fiscal 1996 and 1994 and premiums for
supplemental executive health insurance in the amount of $14,472 for
each of Fiscal 1996 and 1994; the remaining perquisites and the related
amounts do not meet the disclosure threshold established by the SEC.
The Fiscal 1995 amount reflects tax gross-up payments relating to term
and universal life insurance and long term disability insurance;
perquisites provided to Mr. Sejpal in Fiscal 1995 under various Company
programs do not meet the disclosure threshold established by the SEC.
(b) With respect to Mr. Ortega, the Fiscal 1996, 1995 and 1994 amounts
reflect tax gross-up payments relating to term and universal life
insurance and long term disability insurance in the amounts of $8,671,
$8,671 and $7,717, respectively, and payments relating to perquisites
in the amounts of $51,123, $51,123 and $52,765, respectively. The
amounts attributable to perquisites include a non-accountable
automobile allowance in the amount of $30,000 for each of Fiscal 1996,
1995 and 1994, and premiums for supplemental executive health insurance
in the amount of $14,472 for each of Fiscal 1996, 1995 and 1994; the
remaining perquisites and the related amounts do not meet the
disclosure threshold established by the SEC.
(c) With respect to Mr. Abramson, the Fiscal 1996, 1995 and 1994 amounts
reflect tax gross-up payments relating to term and universal life
insurance and long term disability insurance. Perquisites provided to
Mr. Abramson in each of Fiscal 1996, 1995 and 1994 under various
Company programs do not meet the disclosure threshold established by
the SEC.
(Footnotes continued on the next page)
45
<PAGE> 48
(Footnotes continued from the preceding page)
(d) With respect to Mr. Castaneda, perquisites provided to Mr. Castaneda in
Fiscal 1996 under various Company programs do not meet the disclosure
threshold established by the SEC. The Fiscal 1995 amount reflects
perquisites, including payments for moving expenses in the amount of
$29,608; the remaining perquisites and the related amounts do not meet
the disclosure threshold established by the SEC. The Fiscal 1994 amount
reflects perquisites consisting entirely of payments for moving
expenses in the amount of $6,995.
(2) The Fiscal 1996 amounts disclosed in this column include payment by the
Company in Fiscal 1996 of premiums for term life insurance on behalf of
Messrs. Sejpal, Ortega and Abramson in the amounts of $1,444, $2,160 and
$4,639, respectively.
(3) Mr. Ortega ceased to be Chairman of the Board and Chief Executive Officer
and an employee of the Company on January 17, 1997.
(4) Mr. Abramson ceased to be President and Chief Operating Officer and an
employee of the Company on January 17, 1997.
(5) Mr. Castaneda ceased to be Vice President-Merchandise Planning and Control
and an employee of the Company on October 4, 1996.
STOCK OPTIONS
During Fiscal 1995, no options were granted to, and no options were
exercised by, any of the Named Executive Officers of the Company. The following
table includes the number of shares covered by both exercisable and
unexercisable stock options as of January 25, 1997 for the Named Executive
Officers. Also reported are the values for "in-the-money" options which
represent the positive spread between the exercise price of any existing stock
options and the year-end price of the common stock.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
NUMBER OF OPTIONS/SARS AT OPTIONS/SARS AT
SHARES FY-END(#) FY-END($)(1)(2)
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
David A. Sejpal.............. -0- $ -0- 205,200 116,800 $ -0- $ -0-
John Ortega II............... -0- -0- 543,333 40,000 -0- -0-
Norman Abramson.............. -0- -0- 394,078 133,334 -0- -0-
Charles Castaneda............ -0- -0- -0- -0- -0- -0-
</TABLE>
- ---------------
(1) Represents the positive difference between the closing price of the common
stock on Friday, January 24, 1997 (the last stock trading day of the Fiscal
Year) and the exercise price of the options.
(2) Excludes the value of all unexercised options for which the fair market
value of the common stock on January 24, 1997 was less than the exercise
price of the options.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
ARRANGEMENTS
Pursuant to an employment agreement entered into on April 13, 1994 (the
"Agreement"), Norman Abramson, formerly President, Chief Operating Officer and a
director, was entitled to certain compensation and benefits during the term of
the Agreement. The initial term of the Agreement expired May 30, 1995; however,
on such date and on May 30, 1996, the term of the Agreement was automatically
extended for additional periods of one year. The Agreement provided for certain
termination benefits to be provided to Mr. Abramson if the Company gave written
notice of its intent not to extend the term of the Agreement for an additional
term of one year, or otherwise gave notice of termination without cause. The
Agreement also provided for certain additional benefits to be provided to Mr.
Abramson if either the Company elected to terminate Mr. Abramson without cause
within 90 days before or one year after a change in control (as defined in the
Agreement) or Mr. Abramson elected to resign with good reason (as defined in the
Agreement) within
46
<PAGE> 49
one year after a change in control. The Agreement also contained certain
non-compete and protection of proprietary information provisions.
Pursuant to a Severance Agreement dated as of October 10, 1994 (the
"Severance Agreement"), David A. Sejpal, Chairman of the Board and Chief
Executive Officer, President and Chief Operating Officer and a director, is
entitled to a severance payment if terminated without cause equal to eight
months of prorated base salary. Such severance amount shall increase by one
additional month of prorated base salary (to a maximum of twelve months'
prorated base salary) for each full twelve-month period of service after October
10, 1994. Notwithstanding the foregoing, the Severance Agreement (i) may be
terminated by the Company at any time upon written notice for cause; (ii) shall
automatically terminate upon Mr. Sejpal's death; and (iii) shall be terminated
if Mr. Sejpal elects to terminate his employment with the Company. However, if
Mr. Sejpal elects to terminate his employment with good reason (as defined in
the Severance Agreement) or within one year after a change in control (as
defined in the Severance Agreement), the Company shall pay an amount equal to
the above severance benefit to Mr. Sejpal. The Agreement also contains certain
non-compete and protection of proprietary information provisions.
On June 28, 1996, the Creditors' Committee filed a motion (the
"Compensation Motion") seeking an order requiring the Debtors to reduce by 25.0%
the annual base compensation of John Ortega II, who then was the Company's
Chairman of the Board and Chief Executive Officer, and Norman Abramson, who then
was the Company's President and Chief Operating Officer. Thereafter, the
Debtors, the Creditors' Committee, Messrs. Ortega and Abramson and David A.
Sejpal, who then was the Company's Vice President and Chief Financial Officer,
entered into negotiations regarding, and, with the approval of the Compensation
Committee of the Company's board of directors, entered into a compromise and
settlement of, the subject matter of the Compensation Motion.
Under the terms of the compromise and settlement (as modified by a
stipulation and agreed order entered by the Bankruptcy Court on November 12,
1996), effective as of August 1, 1996, the annual base compensation paid to each
of Messrs. Ortega and Abramson was reduced by 12.5%, such reduction to remain
effective during the remaining pendency of the Reorganization Cases. In
addition, Messrs. Ortega, Abramson and Sejpal were made eligible to receive
certain incentive payments based on the Debtors' financial performance for the
second half of Fiscal 1996. The compromise and settlement also provides that, if
Mr. Sejpal's employment is terminated other than for "cause" (as defined in his
Severance Agreement with the Company) or if he terminates his employment for
"good reason" within one year after a "change in control" (as defined in such
Severance Agreement and including the conversion of any of the Reorganization
Cases to a case under chapter 7 of the Bankruptcy Code or the confirmation of a
plan of reorganization providing for the liquidation of the Company or Stores),
he will be entitled to a severance payment in an amount equal to 12 months of
his base compensation in effect on July 31, 1996 and a lump sum payment in lieu
of benefits. In addition, Mr. Sejpal agreed to remain employed with the Debtors
until at least the earlier of (a) 60 days after the date of any conversion of
any of the Reorganization Cases to a case under chapter 7 of the Bankruptcy Code
or the date of the confirmation of a plan of reorganization providing for the
liquidation of the Company or Stores and (b) the date on which the Debtors (or
any successor chapter 11 or chapter 7 trustee of the Debtors) and the Creditors'
Committee notify Mr. Sejpal that his services are no longer required. Finally,
the Debtors and the Creditors' Committee released Mr. Sejpal from any and all
claims arising from or related to an incentive payment in the amount of $50,000
paid by the Debtors to Mr. Sejpal prior to the Petition Date.
On January 17, 1997, the Creditors' Committee entered into letter
agreements with each of Mr. Ortega and Mr. Abramson (the "Letter Agreements"),
whereby the parties agreed, in the interests of resolving the Reorganization
Cases, that: (a) Messrs. Ortega and Abramson would resign immediately from their
respective positions as officers, directors and employees of the Company and
certain of its affiliates; and (b) in connection with and as consideration for
such resignations, all claims by and against Messrs. Ortega and Abramson would
be compromised and settled pursuant to the terms and subject to the conditions
set forth in such Letter Agreements; including the payment of severance
compensation to Messrs. Ortega and Abramson in the amount of $290,765 and
$378,007, respectively, which amounts shall be payable on the respective dates
when final non-appealable orders are entered by the Bankruptcy Court approving
the terms of the compromise
47
<PAGE> 50
and settlement of the claims. On January 17, 1997, Messrs. Ortega and Abramson
submitted to the Board of Directors of the Company their resignations from their
respective positions as officers, directors and employees of the Company and
each of its affiliates. On the same date, the Company's Board of Directors
elected Mr. Sejpal as the Chairman of the Board of Directors, President, Chief
Executive Officer and Chief Operating Officer of the Company.
On March 31, 1997, the Debtors and the Creditors' Committee filed a joint
motion seeking Bankruptcy Court approval of the compromise and settlement of the
claims by and against Mr. Abramson described in the immediately preceding
paragraph. The Debtors, the Creditors' Committee and Mr. Ortega have been
negotiating the compromise and settlement of the claims by and against Mr.
Ortega that are described immediately above.
In addition to the agreements with Messrs. Abramson, Ortega and Sejpal,
certain of the Company's employee benefit plans contain termination or change of
control provisions.
COMPENSATION OF DIRECTORS
Directors who are also employees of the Company are not paid any fees or
remuneration, as such, for service on the Board or on any Board Committee.
Cash Compensation. In Fiscal 1996, each non-employee director received a
monthly retainer of $1,500. In addition, each non-employee director received
$1,500 for each Board meeting that he attended and $750 for each telephonic
Board meeting in which he participated. Each non-employee director also received
$1,000 for each committee meeting that he attended in person as a member, $2,000
for each committee meeting that he attended in person and chaired and $750 for
each telephonic committee meeting in which he participated.
Non-Employee Directors Nonqualified Stock Option Plan. Each non-employee
director is eligible to receive stock options under the Company's Nonqualified
Stock Option Plan for Non-Employee Directors (the "Plan"), a non-discretionary
formula stock option plan. Each director who is a non-employee director who
holds office immediately after the Company's annual meeting of stockholders
receives an option to purchase 10,000 shares of common stock, subject to the
limitation that the aggregate number of shares of common stock for which options
may be granted to any non-employee director under the Plan shall not exceed an
amount which when added to all prior option grants (whether or not exercised)
relating to the common stock granted to such non-employee director during the
lifetime of his service to the Company (whether under the Plan or under another
Company employee benefit plan) equals 60,000 shares. The price per share at
which an option may be exercised is the fair market value per share on the date
the option is granted and each option granted shall vest pro rata over a
three-year period. Upon the occurrence of any event or series of events in
connection with a tender offer, merger, consolidation, sale, reorganization,
dissolution or other event or series of events which, in the opinion of the
Board of Directors, will or is likely to, if carried out, result in a change of
control of the Company or if during a period of two consecutive years,
individuals who at the beginning of such period constituted the directors of the
Company cease for any reason to constitute a majority thereof (subject to
certain exceptions set forth in the Plan), the options shall, notwithstanding
the three-year vesting period, become immediately exercisable in full.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table contains certain information, as of April 11, 1997,
regarding all persons who, to the knowledge of the Company, were the beneficial
owners of more than 5% of the outstanding shares of common stock, each of the
directors of the Company, each of the Named Executive Officers and all directors
and executive officers as a group. The persons named hold sole voting and
investment power with respect to the
48
<PAGE> 51
shares shown opposite their respective names, unless otherwise indicated. The
information with respect to each person specified is as supplied or confirmed by
such person or based upon statements filed with the SEC.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL PERCENT OF
NAME OWNERSHIP(1)(2) CLASS(1)(2)
- --------------------------------------------------------------- ----------------- -----------
<S> <C> <C>
Class I Director:
George Foos(3)............................................... 55,000 *
Class II Directors:
Herman D. Epstein(4)......................................... 37,499 *
Douglas L. Pereira(3)........................................ 44,300 *
Class III Directors:
David A. Sejpal(3)........................................... 221,600 1.5%
Robert Klausner(3)........................................... 11,400 *
John Ortega(5)(6)(7)........................................... 2,345,093 16.1%
Norman Abramson(3)(8).......................................... 394,078 2.7%
Charles Castaneda(9)........................................... 0 0%
All directors and executive officers as a group (6
persons)(10)................................................. 369,799 2.54%
</TABLE>
- ---------------
* less than 1%.
(1) Subject to applicable community property and similar statutes.
(2) Includes (a) shares beneficially owned, whether directly or indirectly,
individually or together with associates, and (b) shares of which
beneficial ownership may be acquired within 60 days of April 11, 1997 by
exercise of stock options ("Stock Option Shares").
(3) All Stock Option Shares.
(4) Includes 19,999 Stock Option Shares.
(5) The mailing address of such stockholder is 2102 East Balboa Boulevard,
Balboa, California 92661.
(6) Includes 343,333 Stock Option Shares.
(7) Mr. Ortega ceased to be an executive officer and an employee of the Company
on January 17, 1997.
(8) Mr. Abramson ceased to be an executive officer and an employee of the
Company on January 17, 1997.
(9) Mr. Castaneda ceased to be an executive officer and employee of the Company
on October 4, 1996.
(10) Includes 352,299 Stock Option Shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In March 1988, the Company entered into a lease (the "Lease") with a
partnership (the "Partnership") comprised of certain former affiliates of the
Company and John Ortega II (a principal stockholder and former director and
executive officer of the Company), respecting certain parcels of real property
which include the Company's headquarters and distribution/warehouse facility
(the "Headquarters Building"). The Lease was scheduled to expire in November
1998. Rent for the first year was 52 cents per square foot per month (an initial
annual rent of $682,956) plus insurance, taxes, maintenance and other incidental
costs. In subsequent years, the monthly rental adjusted with the Consumer Price
Index; however, the minimum monthly rent in no event was less than 104% or more
than 108% of the minimum rent in effect immediately preceding the adjustment. In
August 1996, the Company, through MRJ, entered into an Assumption and First
Amendment to Lease with certain former affiliates of the Company (which did not
include Mr. Ortega), as successors-in-interest to the Partnership (the
"Lessor"), pursuant to which the Lease was amended (the "Amended Lease") to,
among other things, extend the term and decrease the rent. See "Item 1.
Business -- Developments During the Reorganization Cases -- Chapter 11
Proceedings," herein. In Fiscal 1996, pursuant to the Lease, the Company paid
rent to the Partnership in the amount of $272,409 from January 28, 1996 through
May 15, 1996, and pursuant to the Amended Lease, the Company paid rent to the
Lessor in the amount of $372,618 from May 15, 1996 through January 25, 1997.
49
<PAGE> 52
In the opinion of management, the terms of the Lease and the Amended Lease
were fair and reasonable and as favorable to the Company as that which could
have been obtained from an unrelated third party at the time of their execution.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial schedules and exhibits filed as part of this report:
(1) FINANCIAL STATEMENT SCHEDULES. Schedules are omitted since they
are not applicable, not required or the information required to be set
forth therein is included in the financial statements or in the notes
thereto.
(2) EXHIBITS. The Exhibits listed below are filed with the SEC as
part of this annual report on Form 10-K. The Company will furnish a copy of
any exhibit upon request, but a reasonable fee will be charged to cover the
Company's expense in furnishing such exhibit.
<TABLE>
<CAPTION>
EXHIBIT
NO.
- -------
<S> <C>
3.1 Certificate of Incorporation of The Clothestime, Inc., a Stock corporation,
certified by the Delaware Secretary of State on April 30, 1991, previously filed as
Exhibit 3.1 to the Company's Current Report on Form 8-K dated June 20, 1991, filed
with the Commission on August 5, 1991 (File No. 0-12203) (the June 20, 1991 Current
Report"), which is incorporated herein by reference.
3.2 Bylaws of The Clothestime, Inc., as currently in effect, previously filed as
Exhibit 3.2 to the June 20, 1991 Current Report, which is incorporated herein by
reference.
4.1 Rights Agreement, dated as of March 27, 1992, by and between The Clothestime, Inc.
and Harris Trust Company of California, previously filed as Exhibit 4.1 to the
Company's Current Report on Form 8-K dated March 27, 1992 filed with the Commission
on March 30, 1992 (File No. 0-12203), which is incorporated herein by reference.
Material Contracts Relating to Management Compensation Plans or Arrangements
10.1 The Clothestime, Inc. 1983-84 Stock Option Plan, previously filed as Exhibit 4.1 to
the Company's Post-Effective Amendment No. 2 to Registration Statement No. 2-90248
on Form S-8, filed with the Commission on October 24, 1991, which is incorporated
herein by reference.
10.2 The Clothestime, Inc. 1984-85 Stock Option Plans previously filed as Exhibit 4.1 to
the Company's Post-Effective Amendment No. 1 to Registration Statement No. 2-92111
on Form S-8, filed with the Commission on October 24, 1991, which is incorporated
herein by reference.
10.3 The Clothestime, Inc. 1985-86 Stock Option Plan, previously filed as Exhibit 4.1 to
the Company's Post-Effective Amendment No. 1 to Registration Statement No. 33-3304
on Form S-8, filed with the Commission on October 24, 1991, which is incorporated
herein by reference.
10.4 The Clothestime, Inc. 1987-88 Stock Option Plan, as amended and restated,
previously filed as Exhibit 10.4 to the Company's Annual Report on Form 10-K for
the fiscal year ended January 29, 1994 (File No. 0-12203) (the "1993 Annual
Report"), which is incorporated herein by reference.
10.5 The Clothestime, Inc. Founders' Stock Option Plan, as amended and restated,
previously filed as Exhibit 10.5 to the 1993 Annual Report, which is incorporated
herein by reference.
10.6 The Clothestime, Inc. Second Founders' Stock Option Plan, as amended and restated,
previously filed as Exhibit 10.6 to the 1993 Annual Report, which is incorporated
herein by reference.
</TABLE>
50
<PAGE> 53
<TABLE>
<CAPTION>
EXHIBIT
NO.
- -------
<S> <C>
10.7 The Clothestime, Inc. 1991 Stock Option Plan, as amended and restated, previously
filed as Exhibit 4.1 to the Company's Registration Statement No. 33-81432 on Form
S-8, filed with the Commission on July 12, 1994, which is incorporated herein by
reference.
10.8 The Clothestime, Inc. Nonqualified Stock Option Plan for Non-Employee Directors, as
amended, previously filed as Exhibit 10.8 to the Company's Annual Report on Form
10-K for the fiscal year ended January 28, 1995 (File No. 0-12203) (the "1994
Annual Report"), which is incorporated herein by reference.
10.9 The Clothestime, Inc. Associates Savings and Investment Plan, as amended and
restated, previously filed as Exhibit 10.18 to the 1993 Annual Report, which is
incorporated herein by reference.
10.10 The Executive Medical Reimbursement Program, previously filed as Exhibit 10.16 to
the 1991 Annual Report, which is incorporated herein by reference.
10.11 Employment Agreement dated April 13, 1994 between the Company and Norman Abramson,
previously filed as Exhibit 10.20 to the 1993 Annual Report, which is incorporated
herein by reference.
10.12 Severance Agreement dated October 10, 1994 between the Company and David A. Sejpal,
previously filed as Exhibit 10.16 to the 1994 Annual Report, which is incorporated
herein by reference.
10.13 Settlement and Release Agreement dated January 6, 1995, as amended, between the
Company and Raymond A. DeAngelo, previously filed as Exhibit 10.17 to the 1994
Annual Report, which is incorporated herein by reference.
10.14 Letter Agreement of Resignation dated January 17, 1997 by and between the
Creditors' Committee and John Ortega II.
10.15 Letter Agreement of Resignation dated January 17, 1997 by and between the
Creditors' Committee and Norman Abramson.
10.16 Employment Agreement dated as of February 13, 1997 by and between the Company and
Barry Herman.
Other Material Contracts
10.17 Standard Industrial Lease-Net dated March 25, 1988, between the Company and
DeAngelo Ortega Partnership No. 8 (included as part of this lease are the following
related documents: Addendum to Lease dated March 25, 1988, between the Company and
DeAngelo-Ortega Partnership No. 8; and Lease Modification and Option Agreement
dated March 25, 1988, between the Company and DeAngelo-Ortega Partnership No. 8),
previously filed as Exhibit 10.17 to the Company's Annual Report on Form 10-K for
the fiscal year ended January 30, 1988, filed with the Commission on April 28, 1988
(File No. 0-12203) (the "1987 Annual Report"), which is incorporated herein by
reference (5325 East Hunter Avenue, Anaheim, California).
10.18 First Amendment to Lease Modification and Option Agreement, dated September 20,
1989, between the Company and DeAngelo-Ortega Partnership No. 8, previously filed
as Exhibit 10.15 to the Company's Annual Report on Form 10-K for the fiscal year
ended January 27, 1990, filed with the Commission on April 27, 1990 (File No.
0-12203) (the "1989 Annual Report"), which is incorporated herein by reference.
10.19 Second Amendment to Lease Modification and Option Agreement, dated June 28, 1990,
between the Company and DeAngelo-Ortega Partnership No. 8, previously filed as
Exhibit 10.12 to the Company's Annual Report on Form 10-K for the fiscal year ended
January 26, 1991 (File No. 0-12203), which is incorporated herein by reference.
</TABLE>
51
<PAGE> 54
<TABLE>
<CAPTION>
EXHIBIT
NO.
- -------
<S> <C>
10.20 Assumption of First Amendment to Lease, dated August 1, 1996 by and among Raymond
DeAngelo, August DeAngelo and Michael P. DeAngelo, collectively, as Lessor, and MRJ
Industries, Inc., as Lessee, previously filed as Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended October 26, 1996,
filed with the Commission on December 16, 1996 (File No. 0-12203) (the "1996 Third
Quarter 10-Q"), which is incorporated herein by reference.
10.21 Indemnification Agreement dated June 20, 1991 between the Company and Norman
Abramson, previously filed as Exhibit 10.23 to the 1991 Annual Report, which is
incorporated herein by reference.
10.22 Indemnification Agreement dated June 24, 1988 between the Company and Eric J.
Boden, previously filed as Exhibit No. 10.18 to the Company's Annual Report on Form
10-K for the fiscal year ended January 28, 1989, filed with the Commission on April
26, 1989 (File No. 0-12203) (the "1988 Annual Report"), which is incorporated
herein by reference.
10.23 Indemnification Agreement dated June 20, 1991 between the Company and Harvey A.
Bookstein, previously filed as Exhibit 10.25 to the 1991 Annual Report, which is
incorporated herein by reference.
10.24 Indemnification Agreement dated June 24, 1988 between the Company and P. Bruce
Cumming, previously filed as Exhibit No. 10.20 to the 1988 Annual Report, which is
incorporated herein by reference.
10.25 Indemnification Agreement dated June 20, 1991 between the Company and Jeffrey R.
Dake, previously filed as Exhibit 10.27 to the 1991 Annual Report, which is
incorporated herein by reference.
10.26 Indemnification Agreement dated June 20, 1991 between the Company and August
DeAngelo, previously filed as Exhibit 10.28 to the 1991 Annual Report, which is
incorporated herein by reference.
10.27 Indemnification Agreement dated June 20, 1991 between the Company and Michael P.
DeAngelo, previously filed as Exhibit 10.29 to the 1991 Annual Report, which is
incorporated herein by reference.
10.28 Indemnification Agreement dated June 20, 1991 between the Company and Raymond A.
DeAngelo, previously filed as Exhibit 10.30 to the 1991 Annual Report, which is
incorporated herein by reference.
10.29 Indemnification Agreement dated December 19, 1992 between the Company and Herman D.
Epstein, previously filed as Exhibit 10.34 to the 1993 Annual Report, which is
incorporated herein by reference.
10.30 Indemnification Agreement dated June 20, 1991 between the Company and Mallory
Factor, previously filed as Exhibit 10.31 to the 1991 Annual Report, which is
incorporated herein by reference.
10.31 Indemnification Agreement dated June 20, 1991 between the Company and George Foos,
previously filed as Exhibit 10.32 to the 1991 Annual Report, which is incorporated
herein by reference.
10.32 Indemnification Agreement dated July 15, 1991 between the Company and Barry
Grosser, previously filed as Exhibit 10.33 to the 1991 Annual Report, which is
incorporated herein by reference.
10.33 Indemnification Agreement dated June 20, 1991 between the Company and John Ortega
II, previously filed as Exhibit 10.35 to the 1991 Annual Report, which is
incorporated herein by reference.
</TABLE>
52
<PAGE> 55
<TABLE>
<CAPTION>
EXHIBIT
NO.
- -------
<S> <C>
10.34 Indemnification Agreement dated June 20, 1991 between the Company and Douglas L.
Pereira, previously filed as Exhibit 10.36 to the 1991 Annual Report, which is
incorporated herein by reference.
10.35 Indemnification Agreement dated June 20, 1991 between the Company and David A.
Sejpal, previously filed as Exhibit 10.37 to the 1991 Annual Report, which is
incorporated herein by reference.
10.36 Indemnification Agreement dated as of March 1, 1995 between the Company and Lynne
Sperling, previously filed as Exhibit No. 10.41 to the 1994 Annual Report, which is
incorporated herein by reference.
10.37 Indemnification Agreement dated September 22, 1995 between the Company and Charles
Castaneda, previously filed as Exhibit 10.38 to the Company's Annual Report on Form
10-K for the fiscal year ended January 27, 1996 (File No. 0-12203) (the "1995
Annual Report"), which is incorporated herein by reference.
10.38 Amended and Restated Indemnification Agreement dated January 17, 1997 between the
Company and Douglas L. Pereira.
10.39 Indemnification Agreement dated January 17, 1997 between the Company and Robert
Klausner.
10.40 Indemnification Agreement dated January 17, 1997 between the Company and Barry
Herman.
10.41 Indemnification Agreement dated January 17, 1997 between the Company and Sona A.
McGrath.
10.42 Master Lease Purchase Agreement, dated April 29, 1993 between Metlife Capital
Corporation, as Lessor, and the Company, as Lessee relating to Point of Sale
Equipment and Scanners, previously filed as Exhibit 10.44 to the 1993 Annual
Report, which is incorporated herein by reference.
10.43 Lease Agreement, dated December 11, 1990, between Matrix Funding Corporation, who
subsequently assigned all of its right, title and interest under the Lease to
General Electric Capital Corporation, as Lessor, and the Company, as Lessee,
together with (i) Schedule No. 1 to Lease Agreement, dated December 11, 1990 and
amended March 6, 1992 and August 19, 1993, and related Sale and Leaseback Agreement
dated December 11, 1990; (ii) Schedule No. 2 to Lease Agreement, dated March 22,
1991 and amended March 6, 1992 and August 19, 1993, and related Sale and Leaseback
Agreement dated March 22, 1991; (iii) Schedule No. 3 to Lease Agreement, dated
March 16, 1992 and amended March 16, 1992 and August 19, 1993 and related Sale and
Leaseback Agreement; and (iv) Schedule No. 4 dated August 20, 1993, and related
Sale and Leaseback Agreement, relating to Point of Sale Equipment and Scanners and
IBM 'LIC' DiskArray Subsystems with 970 ME Disk Drives, previously filed as Exhibit
10.45 to the 1993 Annual Report, which is incorporated herein by reference.
10.44 Credit Agreement dated February 28, 1995 between Clothestime Stores, Inc., Wells
Fargo Bank, N.A. and Union Bank, previously filed as Exhibit 10.45 to the 1994
Annual Report, which is incorporated herein by reference.
10.45 Waiver and Amendment Agreement dated April 27, 1995 by and among the Company, each
of the subsidiaries of the Company, Wells Fargo Bank, N.A. and Union Bank,
previously filed as Exhibit 10.46 to the 1994 Annual Report, which is incorporated
herein by reference.
10.46 Security Agreement dated February 28, 1995 between the Company and Wells Fargo
Bank, N.A., previously filed as Exhibit 10.47 to the 1994 Annual Report, which is
incorporated herein by reference. A Schedule attached to the previously filed
Exhibit 10.47 identifies additional parties to separate Security Agreements dated
February 28, 1995 with Wells Fargo Bank, N.A., each of which is substantially
identical in all material respects to the Security Agreement filed as Exhibit
10.47.
</TABLE>
53
<PAGE> 56
<TABLE>
<CAPTION>
EXHIBIT
NO.
- -------
<S> <C>
10.47 Guaranty dated February 28, 1995 between the Company and Wells Fargo Bank, N.A.,
previously filed as Exhibit 10.48 to the 1994 Annual Report, which is incorporated
herein by reference. A Schedule attached to the previously filed Exhibit 10.48
identifies additional parties to separate Guaranties dated February 28, 1995 with
Wells Fargo Bank, N.A., each of which is substantially identical in all material
respects to the Guaranty filed as Exhibit 10.48.
10.48 Pledge Agreement dated February 28, 1995 between Clothestime Stores, Inc. and Wells
Fargo Bank, N.A., previously filed as Exhibit 10.49 to the 1994 Annual Report,
which is incorporated herein by reference. A Schedule attached to the previously
filed Exhibit 10.49 identifies additional parties to separate Pledge Agreements
dated February 28, 1995 with Wells Fargo Bank, N.A., each of which is substantially
identical in all material respects to the Pledge Agreement filed as Exhibit 10.49.
10.49 Warrant Agreement dated February 28, 1995 between the Company and Wells Fargo Bank,
N.A., previously filed as Exhibit 10.50 to the 1994 Annual Report, which is
incorporated herein by reference.
10.50 Warrant Agreement dated February 28, 1995 between the Company and Union Bank,
previously filed as Exhibit 10.51 to the 1994 Annual Report, which is incorporated
herein by reference.
10.51 Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing dated
February 28, 1995 between Clothestime Stores, Inc., American Securities Company and
Wells Fargo Bank, N.A., previously filed as Exhibit 10.52 to the 1994 Annual
Report, which is incorporated herein by reference.
10.52 $1.4 Million Loan Agreement dated February 28, 1995 between Clothestime Stores,
Inc. and Wells Fargo Bank, N.A., previously filed as Exhibit 10.53 to the 1994
Annual Report, which is incorporated herein by reference.
10.53 Guaranty dated February 28, 1995 between the Company and Wells Fargo Bank, N.A.,
previously filed as Exhibit 10.54 to the 1994 Annual Report, which is incorporated
herein by reference. A Schedule attached to the previously filed Exhibit 10.54
identifies additional parties to separate Guaranties dated February 28, 1995 with
Wells Fargo Bank, N.A., each of which is substantially identical in all material
respects to the Guaranty filed as Exhibit 10.54.
10.54 Deed of Trust with Assignment of Rents dated as of February 28, 1995 between
Clothestime Stores, Inc., American Securities Company and Wells Fargo Bank, N.A.,
previously filed as Exhibit 10.55 to the 1994 Annual Report, which is incorporated
herein by reference.
10.55 Master Lease Agreement, dated November 16, 1994, as amended, between Clothestime
Stores, Inc. and USL Capital Corporation, previously filed as Exhibit 10.57 to the
1994 Annual Report, which is incorporated herein by reference.
10.56 Guaranty, dated November 17, 1994, between the Company and USL Capital Corporation,
previously filed as Exhibit 10.58 to the 1994 Annual Report, which is incorporated
herein by reference.
10.57 Financing Agreement, dated December 28, 1995, by and among The CIT Group/Business
Credit, Inc., as lender, and Clothestime Stores, Inc., as borrower, and the
Company, MRJ Industries, Inc., Clothestime Investment, Inc., Clothestime
International, Inc. and Clothestime Acquisition Corporation, as guarantors,
previously filed as Exhibit 10.55 to the 1995 Annual Report, which is incorporated
herein by reference.
10.58 Guaranty, dated December 28, 1995, made by the Company, MRJ Industries, Inc.,
Clothestime Investment, Inc., Clothestime International, Inc. and Clothestime
Acquisition Corporation in favor of The CIT Group/Business Credit, Inc., previously
filed as Exhibit 10.56 to the 1995 Annual Report, which is incorporated herein by
reference.
</TABLE>
54
<PAGE> 57
<TABLE>
<CAPTION>
EXHIBIT
NO.
- -------
<S> <C>
10.59 Amendment to Financing Agreement, dated as of August 1, 1996, by and between CIT
Group/Business Credit, Inc., as Lender, and Clothestime Stores, Inc., as Borrower,
previously filed as Exhibit 10.1 to the 1996 Third Quarter 10-Q, which is
incorporated herein by reference.
10.60 Amendment to Financing Agreement, dated as of October 1, 1996, by and between The
CIT Group/Business Credit, Inc., as Lender, and Clothestime Stores, Inc., as
Borrower, previously filed as Exhibit 10.2 to the 1996 Third Quarter 10-Q, which is
incorporated herein by reference.
10.61 Agreement, dated as of November 11, 1996, by and among Financo, Inc., as financial
advisor, The Clothestime, Inc. and the Creditors' Committee for The Clothestime,
Inc., previously filed as Exhibit 10.3 to the 1996 Third Quarter 10-Q, which is
incorporated herein by reference.
10.62 Limited Waiver, dated March 7, 1997, by and between The CIT Group/Business Credit,
Inc., as Lender, and Clothestime Stores, Inc., as Borrower.
10.63 Limited Waiver, dated April 15, 1997, by and between The CIT Group/Business Credit,
Inc., as Lender, and Clothestime Stores, Inc., as Borrower.
21 Subsidiaries of The Clothestime, Inc.
23 Consent of KPMG Peat Marwick LLP, independent certified public accountants.
27 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of the fiscal
year covered by this Form 10-K.
55
<PAGE> 58
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE CLOTHESTIME, INC.
Date: April 24, 1997 By: /s/ DAVID A. SEJPAL
------------------------------------
David A. Sejpal
Chairman of the Board and Chief
Executive Officer, President and
Chief Operating Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that such person whose signature appears
below constitutes and appoints David A. Sejpal and Douglas L. Pereira, and each
of them his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this Form 10-K and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME CAPACITY DATE
- ------------------------------------------ ----------------------------------- ---------------
<C> <S> <C>
/s/ DAVID A. SEJPAL Director, Chairman of the Board and April 24, 1997
- ------------------------------------------ Chief Executive Officer, President
David A. Sejpal and Chief Operating Officer
(Principal Executive Officer)
/s/ HERMAN D. EPSTEIN Director April 24, 1997
- ------------------------------------------
Herman D. Epstein
/s/ GEORGE FOOS Director April 24, 1997
- ------------------------------------------
George Foos
/s/ DOUGLAS L. PEREIRA Director, Senior Vice President, April 24, 1997
- ------------------------------------------ Chief Financial Officer, Secretary
Douglas L. Pereira and Treasurer (Principal Financial
Officer)
/s/ ROBERT KLAUSNER Director and Vice President, Store April 24, 1997
- ------------------------------------------ Operations
Robert Klausner
/s/ SONA MCGRATH Controller (Principal Accounting April 24, 1997
- ------------------------------------------ Officer)
Sona McGrath
</TABLE>
56
<PAGE> 59
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO.
- -------
<S> <C>
3.1 Certificate of Incorporation of The Clothestime, Inc., a Stock corporation,
certified by the Delaware Secretary of State on April 30, 1991, previously filed as
Exhibit 3.1 to the Company's Current Report on Form 8-K dated June 20, 1991, filed
with the Commission on August 5, 1991 (File No. 0-12203) (the June 20, 1991 Current
Report"), which is incorporated herein by reference.
3.2 Bylaws of The Clothestime, Inc., as currently in effect, previously filed as
Exhibit 3.2 to the June 20, 1991 Current Report, which is incorporated herein by
reference.
4.1 Rights Agreement, dated as of March 27, 1992, by and between The Clothestime, Inc.
and Harris Trust Company of California, previously filed as Exhibit 4.1 to the
Company's Current Report on Form 8-K dated March 27, 1992 filed with the Commission
on March 30, 1992 (File No. 0-12203), which is incorporated herein by reference.
Material Contracts Relating to Management Compensation Plans or Arrangements
10.1 The Clothestime, Inc. 1983-84 Stock Option Plan, previously filed as Exhibit 4.1 to
the Company's Post-Effective Amendment No. 2 to Registration Statement No. 2-90248
on Form S-8, filed with the Commission on October 24, 1991, which is incorporated
herein by reference.
10.2 The Clothestime, Inc. 1984-85 Stock Option Plans previously filed as Exhibit 4.1 to
the Company's Post-Effective Amendment No. 1 to Registration Statement No. 2-92111
on Form S-8, filed with the Commission on October 24, 1991, which is incorporated
herein by reference.
10.3 The Clothestime, Inc. 1985-86 Stock Option Plan, previously filed as Exhibit 4.1 to
the Company's Post-Effective Amendment No. 1 to Registration Statement No. 33-3304
on Form S-8, filed with the Commission on October 24, 1991, which is incorporated
herein by reference.
10.4 The Clothestime, Inc. 1987-88 Stock Option Plan, as amended and restated,
previously filed as Exhibit 10.4 to the Company's Annual Report on Form 10-K for
the fiscal year ended January 29, 1994 (File No. 0-12203) (the "1993 Annual
Report"), which is incorporated herein by reference.
10.5 The Clothestime, Inc. Founders' Stock Option Plan, as amended and restated,
previously filed as Exhibit 10.5 to the 1993 Annual Report, which is incorporated
herein by reference.
10.6 The Clothestime, Inc. Second Founders' Stock Option Plan, as amended and restated,
previously filed as Exhibit 10.6 to the 1993 Annual Report, which is incorporated
herein by reference.
10.7 The Clothestime, Inc. 1991 Stock Option Plan, as amended and restated, previously
filed as Exhibit 4.1 to the Company's Registration Statement No. 33-81432 on Form
S-8, filed with the Commission on July 12, 1994, which is incorporated herein by
reference.
10.8 The Clothestime, Inc. Nonqualified Stock Option Plan for Non-Employee Directors, as
amended, previously filed as Exhibit 10.8 to the Company's Annual Report on Form
10-K for the fiscal year ended January 28, 1995 (File No. 0-12203) (the "1994
Annual Report"), which is incorporated herein by reference.
10.9 The Clothestime, Inc. Associates Savings and Investment Plan, as amended and
restated, previously filed as Exhibit 10.18 to the 1993 Annual Report, which is
incorporated herein by reference.
10.10 The Executive Medical Reimbursement Program, previously filed as Exhibit 10.16 to
the 1991 Annual Report, which is incorporated herein by reference.
10.11 Employment Agreement dated April 13, 1994 between the Company and Norman Abramson,
previously filed as Exhibit 10.20 to the 1993 Annual Report, which is incorporated
herein by reference.
</TABLE>
<PAGE> 60
<TABLE>
<CAPTION>
EXHIBIT
NO.
- -------
<S> <C>
10.12 Severance Agreement dated October 10, 1994 between the Company and David A. Sejpal,
previously filed as Exhibit 10.16 to the 1994 Annual Report, which is incorporated
herein by reference.
10.13 Settlement and Release Agreement dated January 6, 1995, as amended, between the
Company and Raymond A. DeAngelo, previously filed as Exhibit 10.17 to the 1994
Annual Report, which is incorporated herein by reference.
10.14 Letter Agreement of Resignation dated January 17, 1997 by and between the
Creditors' Committee and John Ortega II.
10.15 Letter Agreement of Resignation dated January 17, 1997 by and between the
Creditors' Committee and Norman Abramson.
10.16 Employment Agreement dated as of February 13, 1997 by and between the Company and
Barry Herman.
Other Material Contracts
10.17 Standard Industrial Lease-Net dated March 25, 1988, between the Company and
DeAngelo Ortega Partnership No. 8 (included as part of this lease are the following
related documents: Addendum to Lease dated March 25, 1988, between the Company and
DeAngelo-Ortega Partnership No. 8; and Lease Modification and Option Agreement
dated March 25, 1988, between the Company and DeAngelo-Ortega Partnership No. 8),
previously filed as Exhibit 10.17 to the Company's Annual Report on Form 10-K for
the fiscal year ended January 30, 1988, filed with the Commission on April 28, 1988
(File No. 0-12203) (the "1987 Annual Report"), which is incorporated herein by
reference (5325 East Hunter Avenue, Anaheim, California).
10.18 First Amendment to Lease Modification and Option Agreement, dated September 20,
1989, between the Company and DeAngelo-Ortega Partnership No. 8, previously filed
as Exhibit 10.15 to the Company's Annual Report on Form 10-K for the fiscal year
ended January 27, 1990, filed with the Commission on April 27, 1990 (File No.
0-12203) (the "1989 Annual Report"), which is incorporated herein by reference.
10.19 Second Amendment to Lease Modification and Option Agreement, dated June 28, 1990,
between the Company and DeAngelo-Ortega Partnership No. 8, previously filed as
Exhibit 10.12 to the Company's Annual Report on Form 10-K for the fiscal year ended
January 26, 1991 (File No. 0-12203), which is incorporated herein by reference.
10.20 Assumption of First Amendment to Lease, dated August 1, 1996 by and among Raymond
DeAngelo, August DeAngelo and Michael P. DeAngelo, collectively, as Lessor, and MRJ
Industries, Inc., as Lessee, previously filed as Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended October 26, 1996,
filed with the Commission on December 16, 1996 (File No. 0-12203) (the "1996 Third
Quarter 10-Q"), which is incorporated herein by reference.
10.21 Indemnification Agreement dated June 20, 1991 between the Company and Norman
Abramson, previously filed as Exhibit 10.23 to the 1991 Annual Report, which is
incorporated herein by reference.
10.22 Indemnification Agreement dated June 24, 1988 between the Company and Eric J.
Boden, previously filed as Exhibit No. 10.18 to the Company's Annual Report on Form
10-K for the fiscal year ended January 28, 1989, filed with the Commission on April
26, 1989 (File No. 0-12203) (the "1988 Annual Report"), which is incorporated
herein by reference.
10.23 Indemnification Agreement dated June 20, 1991 between the Company and Harvey A.
Bookstein, previously filed as Exhibit 10.25 to the 1991 Annual Report, which is
incorporated herein by reference.
</TABLE>
<PAGE> 61
<TABLE>
<CAPTION>
EXHIBIT
NO.
- -------
<S> <C>
10.24 Indemnification Agreement dated June 24, 1988 between the Company and P. Bruce
Cumming, previously filed as Exhibit No. 10.20 to the 1988 Annual Report, which is
incorporated herein by reference.
10.25 Indemnification Agreement dated June 20, 1991 between the Company and Jeffrey R.
Dake, previously filed as Exhibit 10.27 to the 1991 Annual Report, which is
incorporated herein by reference.
10.26 Indemnification Agreement dated June 20, 1991 between the Company and August
DeAngelo, previously filed as Exhibit 10.28 to the 1991 Annual Report, which is
incorporated herein by reference.
10.27 Indemnification Agreement dated June 20, 1991 between the Company and Michael P.
DeAngelo, previously filed as Exhibit 10.29 to the 1991 Annual Report, which is
incorporated herein by reference.
10.28 Indemnification Agreement dated June 20, 1991 between the Company and Raymond A.
DeAngelo, previously filed as Exhibit 10.30 to the 1991 Annual Report, which is
incorporated herein by reference.
10.29 Indemnification Agreement dated December 19, 1992 between the Company and Herman D.
Epstein, previously filed as Exhibit 10.34 to the 1993 Annual Report, which is
incorporated herein by reference.
10.30 Indemnification Agreement dated June 20, 1991 between the Company and Mallory
Factor, previously filed as Exhibit 10.31 to the 1991 Annual Report, which is
incorporated herein by reference.
10.31 Indemnification Agreement dated June 20, 1991 between the Company and George Foos,
previously filed as Exhibit 10.32 to the 1991 Annual Report, which is incorporated
herein by reference.
10.32 Indemnification Agreement dated July 15, 1991 between the Company and Barry
Grosser, previously filed as Exhibit 10.33 to the 1991 Annual Report, which is
incorporated herein by reference.
10.33 Indemnification Agreement dated June 20, 1991 between the Company and John Ortega
II, previously filed as Exhibit 10.35 to the 1991 Annual Report, which is
incorporated herein by reference.
10.34 Indemnification Agreement dated June 20, 1991 between the Company and Douglas L.
Pereira, previously filed as Exhibit 10.36 to the 1991 Annual Report, which is
incorporated herein by reference.
10.35 Indemnification Agreement dated June 20, 1991 between the Company and David A.
Sejpal, previously filed as Exhibit 10.37 to the 1991 Annual Report, which is
incorporated herein by reference.
10.36 Indemnification Agreement dated as of March 1, 1995 between the Company and Lynne
Sperling, previously filed as Exhibit No. 10.41 to the 1994 Annual Report, which is
incorporated herein by reference.
10.37 Indemnification Agreement dated September 22, 1995 between the Company and Charles
Castaneda, previously filed as Exhibit 10.38 to the Company's Annual Report on Form
10-K for the fiscal year ended January 27, 1996 (File No. 0-12203) (the "1995
Annual Report"), which is incorporated herein by reference.
10.38 Amended and Restated Indemnification Agreement dated January 17, 1997 between the
Company and Douglas L. Pereira.
10.39 Indemnification Agreement dated January 17, 1997 between the Company and Robert
Klausner.
</TABLE>
<PAGE> 62
<TABLE>
<CAPTION>
EXHIBIT
NO.
- -------
<S> <C>
10.40 Indemnification Agreement dated January 17, 1997 between the Company and Barry
Herman.
10.41 Indemnification Agreement dated January 17, 1997 between the Company and Sona A.
McGrath.
10.42 Master Lease Purchase Agreement, dated April 29, 1993 between Metlife Capital
Corporation, as Lessor, and the Company, as Lessee relating to Point of Sale
Equipment and Scanners, previously filed as Exhibit 10.44 to the 1993 Annual
Report, which is incorporated herein by reference.
10.43 Lease Agreement, dated December 11, 1990, between Matrix Funding Corporation, who
subsequently assigned all of its right, title and interest under the Lease to
General Electric Capital Corporation, as Lessor, and the Company, as Lessee,
together with (i) Schedule No. 1 to Lease Agreement, dated December 11, 1990 and
amended March 6, 1992 and August 19, 1993, and related Sale and Leaseback Agreement
dated December 11, 1990; (ii) Schedule No. 2 to Lease Agreement, dated March 22,
1991 and amended March 6, 1992 and August 19, 1993, and related Sale and Leaseback
Agreement dated March 22, 1991; (iii) Schedule No. 3 to Lease Agreement, dated
March 16, 1992 and amended March 16, 1992 and August 19, 1993 and related Sale and
Leaseback Agreement; and (iv) Schedule No. 4 dated August 20, 1993, and related
Sale and Leaseback Agreement, relating to Point of Sale Equipment and Scanners and
IBM 'LIC' DiskArray Subsystems with 970 ME Disk Drives, previously filed as Exhibit
10.45 to the 1993 Annual Report, which is incorporated herein by reference.
10.44 Credit Agreement dated February 28, 1995 between Clothestime Stores, Inc., Wells
Fargo Bank, N.A. and Union Bank, previously filed as Exhibit 10.45 to the 1994
Annual Report, which is incorporated herein by reference.
10.45 Waiver and Amendment Agreement dated April 27, 1995 by and among the Company, each
of the subsidiaries of the Company, Wells Fargo Bank, N.A. and Union Bank,
previously filed as Exhibit 10.46 to the 1994 Annual Report, which is incorporated
herein by reference.
10.46 Security Agreement dated February 28, 1995 between the Company and Wells Fargo
Bank, N.A., previously filed as Exhibit 10.47 to the 1994 Annual Report, which is
incorporated herein by reference. A Schedule attached to the previously filed
Exhibit 10.47 identifies additional parties to separate Security Agreements dated
February 28, 1995 with Wells Fargo Bank, N.A., each of which is substantially
identical in all material respects to the Security Agreement filed as Exhibit
10.47.
10.47 Guaranty dated February 28, 1995 between the Company and Wells Fargo Bank, N.A.,
previously filed as Exhibit 10.48 to the 1994 Annual Report, which is incorporated
herein by reference. A Schedule attached to the previously filed Exhibit 10.48
identifies additional parties to separate Guaranties dated February 28, 1995 with
Wells Fargo Bank, N.A., each of which is substantially identical in all material
respects to the Guaranty filed as Exhibit 10.48.
10.48 Pledge Agreement dated February 28, 1995 between Clothestime Stores, Inc. and Wells
Fargo Bank, N.A., previously filed as Exhibit 10.49 to the 1994 Annual Report,
which is incorporated herein by reference. A Schedule attached to the previously
filed Exhibit 10.49 identifies additional parties to separate Pledge Agreements
dated February 28, 1995 with Wells Fargo Bank, N.A., each of which is substantially
identical in all material respects to the Pledge Agreement filed as Exhibit 10.49.
10.49 Warrant Agreement dated February 28, 1995 between the Company and Wells Fargo Bank,
N.A., previously filed as Exhibit 10.50 to the 1994 Annual Report, which is
incorporated herein by reference.
10.50 Warrant Agreement dated February 28, 1995 between the Company and Union Bank,
previously filed as Exhibit 10.51 to the 1994 Annual Report, which is incorporated
herein by reference.
</TABLE>
<PAGE> 63
<TABLE>
<CAPTION>
EXHIBIT
NO.
- -------
<S> <C>
10.51 Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing dated
February 28, 1995 between Clothestime Stores, Inc., American Securities Company and
Wells Fargo Bank, N.A., previously filed as Exhibit 10.52 to the 1994 Annual
Report, which is incorporated herein by reference.
10.52 $1.4 Million Loan Agreement dated February 28, 1995 between Clothestime Stores,
Inc. and Wells Fargo Bank, N.A., previously filed as Exhibit 10.53 to the 1994
Annual Report, which is incorporated herein by reference.
10.53 Guaranty dated February 28, 1995 between the Company and Wells Fargo Bank, N.A.,
previously filed as Exhibit 10.54 to the 1994 Annual Report, which is incorporated
herein by reference. A Schedule attached to the previously filed Exhibit 10.54
identifies additional parties to separate Guaranties dated February 28, 1995 with
Wells Fargo Bank, N.A., each of which is substantially identical in all material
respects to the Guaranty filed as Exhibit 10.54.
10.54 Deed of Trust with Assignment of Rents dated as of February 28, 1995 between
Clothestime Stores, Inc., American Securities Company and Wells Fargo Bank, N.A.,
previously filed as Exhibit 10.55 to the 1994 Annual Report, which is incorporated
herein by reference.
10.55 Master Lease Agreement, dated November 16, 1994, as amended, between Clothestime
Stores, Inc. and USL Capital Corporation, previously filed as Exhibit 10.57 to the
1994 Annual Report, which is incorporated herein by reference.
10.56 Guaranty, dated November 17, 1994, between the Company and USL Capital Corporation,
previously filed as Exhibit 10.58 to the 1994 Annual Report, which is incorporated
herein by reference.
10.57 Financing Agreement, dated December 28, 1995, by and among The CIT Group/Business
Credit, Inc., as lender, and Clothestime Stores, Inc., as borrower, and the
Company, MRJ Industries, Inc., Clothestime Investment, Inc., Clothestime
International, Inc. and Clothestime Acquisition Corporation, as guarantors,
previously filed as Exhibit 10.55 to the 1995 Annual Report, which is incorporated
herein by reference.
10.58 Guaranty, dated December 28, 1995, made by the Company, MRJ Industries, Inc.,
Clothestime Investment, Inc., Clothestime International, Inc. and Clothestime
Acquisition Corporation in favor of The CIT Group/Business Credit, Inc., previously
filed as Exhibit 10.56 to the 1995 Annual Report, which is incorporated herein by
reference.
10.59 Amendment to Financing Agreement, dated as of August 1, 1996, by and between CIT
Group/Business Credit, Inc., as Lender, and Clothestime Stores, Inc., as Borrower,
previously filed as Exhibit 10.1 to the 1996 Third Quarter 10-Q, which is
incorporated herein by reference.
10.60 Amendment to Financing Agreement, dated as of October 1, 1996, by and between The
CIT Group/Business Credit, Inc., as Lender, and Clothestime Stores, Inc., as
Borrower, previously filed as Exhibit 10.2 to the 1996 Third Quarter 10-Q, which is
incorporated herein by reference.
10.61 Agreement, dated as of November 11, 1996, by and among Financo, Inc., as financial
advisor, The Clothestime, Inc. and the Creditors' Committee for The Clothestime,
Inc., previously filed as Exhibit 10.3 to the 1996 Third Quarter 10-Q, which is
incorporated herein by reference.
10.62 Limited Waiver, dated March 7, 1997, by and between The CIT Group/Business Credit,
Inc., as Lender, and Clothestime Stores, Inc., as Borrower.
10.63 Limited Waiver, dated April 15, 1997, by and between The CIT Group/Business Credit,
Inc., as Lender, and Clothestime Stores, Inc., as Borrower.
21 Subsidiaries of The Clothestime, Inc.
23 Consent of KPMG Peat Marwick LLP, independent certified public accountants.
27 Financial Data Schedule.
</TABLE>
<PAGE> 1
EXHIBIT 10.14
[SIEGEL, SOMMERS & SCHWARTZ L.L.P. LETTERHEAD]
January 17, 1997
John Ortega
The Clothestime, Inc.
5325 E. Hunter Avenue
Anaheim, CA 92807
Dear John:
In accordance with the discussions between you and the Official Committee of
Unsecured Creditors (the "Committee") of The Clothestime, Inc. ("Clothestime"),
the Committee has agreed to the following relative to your resignation as a
employee, officer and director of Clothestime.
1. Provided that Clothestime's Chapter 11 proceedings are not converted to
a Chapter 7 proceeding as a result of your actions or inactions, you
will receive a lump sum payment of $275,000 plus an amount equal to
two (2) weeks base salary at your base compensation immediately prior
to your resignation, in full satisfaction of any and all claims you
may have against Clothestime (including, but not limited to, such items
as severance and salary) which amount shall be payable on the date when
the Order (as defined herein) becomes a final non-appealable order. As
used herein, the term "Order" shall mean the entry of an order approving
the terms set forth in this letter by the United States Bankruptcy
Court for the Central District of California in which the Clothestime
proceedings are pending.
2. Effective immediately, you will cease working for Clothestime and will
not be permitted access to any of Clothestime's premises, subject to
reasonable, mutually satisfactory arrangements for you to retrieve your
personal property.
3. On or before 4:00 p.m. Pacific Standard Time on Friday, January 17,
1997, you will submit to counsel to Clothestime, a letter of your
immediate resignation as an employee, officer and director of
Clothestime.
<PAGE> 2
SIEGEL, SOMMERS & SCHWARTZ
Page 2
January 17, 1997
John Ortega
- -----------------
4. When the Order becomes a final non-appealable order, Clothestime and you
will exchange general releases. Notwithstanding any other provision of
this letter agreement, you will not be deemed to have waived any of your
existing rights to (a) indemnification or director or officer
liability insurance coverage with respect to actions or inactions
occurring prior to your resignation on January 17, 1997, and (b) elect
continuing benefits coverage at your sole cost under COBRA.
5. If the Order is not entered, the Committee agrees that you shall not be
deemed to have resigned your positions with Clothestime, but instead
to have been terminated without cause, as of January 17, 1997, and to
have reserved all of your rights and claims in connection with such
termination.
If this letter is in accordance with your understanding, please sign and date
below and return to me as soon as possible.
Very truly yours,
SIEGEL, SOMMERS & SCHWARTZ, L.L.P.
Counsel to the Official Committee of Unsecured
Creditors of The Clothestime, Inc.
/s/ LAWRENCE C. GOTTLIEB
-------------------------------------
LCG:da LAWRENCE C. GOTTLIEB
Above Agreed and Consented to:
/s/ JOHN ORTEGA
- ------------------------------
John Ortega
Date: 1/17/97
------------------------
<PAGE> 1
EXHIBIT 10.15
[SIEGEL, SOMMERS & SCHWARTZ, L.L.P. LETTERHEAD]
January 17, 1997
Norman Abramson
The Clothestime, Inc.
5325 E. Hunter Avenue
Anaheim, CA 92807
Dear Norman:
In accordance with the discussions between you and the Official Committee of
Unsecured Creditors (the "Committee") of The Clothestime, Inc.
("Clothestime"), the Committee has agreed to the following relative to your
resignation as an employee, officer and director of Clothestime.
1. Provided that Clothestime's Chapter 11 proceedings are not converted to a
Chapter 7 proceeding as a result of your actions or inactions, you will
receive a lump sum payment of $365,000 plus an amount equal to two (2) weeks
base salary at your base compensation immediately prior to your resignation,
in full satisfaction of any and all claims you may have against Clothestime
(including, but not limited to, such items as severance and salary) which
amount shall be payable on the date when the Order (as defined herein)
becomes a final non-appealable order. As used herein, the term "Order" shall
mean the entry of an order approving the terms set forth in this letter by
the United States Bankruptcy Court for the Central District of California in
which the Clothestime proceedings are pending.
2. Effective immediately, you will cease working for Clothestime and will not be
permitted access to any of Clothestime's premises, subject to reasonable,
mutually satisfactory arrangements for you to receive your personal
property.
3. On or before 4:00 p.m. Pacific Standard Time on Friday, January 17, 1997, you
will submit to counsel to Clothestime, a letter of your immediate resignation
as an employee, officer and director of Clothestime.
<PAGE> 2
SIEGEL, SOMMERS & SCHWARTZ
Page 2
January 17, 1997
Norman Abramson
4. When the Order becomes a final non-appealable order, Clothestime and you
will exchange general releases. Notwithstanding any other provision of this
letter agreement, you will not be deemed to have waived any of your existing
rights to (a) indemnification or director or officer liability insurance
coverage with respect to actions or inactions occurring prior to your
resignation on January 17, 1997, and (b) elect continuing benefits coverage
at your sole cost under COBRA.
5. If the Order is not entered, the Committee agrees that you shall not be
deemed to have resigned your positions with Clothestime, but instead to have
been terminated without cause, as of January 17, 1997, and to have reserved
all of your rights and claims in connection with such termination.
If this letter is in accordance with your understanding, please sign and date
below and return to me as soon as possible.
Very truly yours,
SIEGEL, SOMMERS & SCHWARTZ, L.L.P.
Counsel to the Official Committee of Unsecured
Creditors of The Clothestime, Inc.
/s/ LAWRENCE C. GOTTLIEB
--------------------------
LAWRENCE C. GOTTLIEB
LCG:da
Above Agreed and Consented to:
/s/ NORMAN ABRAMSON
- ----------------------
Norman Abramson
Date: Jan. 17, 1997
---------------
2:46 PM PST
<PAGE> 1
EXHIBIT 10.16
EMPLOYMENT AGREEMENT
--------------------
This Employment Agreement (this "Agreement") is made and entered into
as of this 13th day of February, 1997 by and between The Clothestime, Inc., a
Delaware corporation (the "Company"), and Barry Herman, an individual (the
"Employee").
RECITALS
--------
WHEREAS, the Company operates a national chain of women's clothing
stores;
WHEREAS, the Company and certain of its affiliates are the debtors and
debtors in possession in voluntary reorganization cases (collectively, the
"Bankruptcy Cases") under chapter 11 of the Bankruptcy Code, 11 U.S.C. SS
101-1330, which cases are pending in the United States Bankruptcy Court for the
Central District of California, Santa Ana Division (the "Bankruptcy Court");
and
WHEREAS, the Company desires to employ the Employee, and the Employee
desires to be employed by the Company, subject to the approval of the
Bankruptcy Court, on the terms and subject to the conditions set forth herein.
AGREEMENT
---------
NOW, THEREFORE, in consideration of the mutual promises and covenants
set forth herein, and other good and valuable consideration, the parties hereby
agree as follows:
1. Employment; Duties and Obligations.
1.1 Bankruptcy Court Approval. All duties and obligations set
forth in this Agreement are expressly conditioned upon the Bankruptcy Court's
approval of the Company's employment of the Employee pursuant to the terms and
subject to the conditions set forth in this Agreement.
1.2 Employment. Upon the terms and subject to the conditions
set forth herein, the Company hereby employs the Employee as the Vice President
and General Merchandising Manager of the Company for the term of this
Agreement, and the Employee hereby accepts such employment. Except with the
consent of the Company, the Employee's principal place of employment during the
term of this Agreement or any renewal thereof shall be located in Anaheim,
California.
1.3 Service to the Company. Subject to applicable law,
resolutions of the Company's board of directors and applicable policies of the
Company, the Employee shall have
<PAGE> 2
primary overall responsibility for the Company's merchandising functions and/or
such other functions and responsibilities as the Company's board of directors
or its designee may from time to time assign.
1.4 Services to Affiliates. The Employee acknowledges that,
if requested by the Company's board of directors, or the Executive Committee of
the board, he shall serve as a director, officer or agent of subsidiaries or
other affiliates of the Company.
1.5 Devotion of Time to the Business. The Employee shall
devote his entire professional time, energies and best efforts to the business
of the Company and its affiliates and shall not during the term of this
Agreement engage in any other business activities. This Agreement shall not be
construed as preventing the Employee from investing his assets in such form or
manner as will not require any services on the part of the Employee for or with
respect to any of the entities in which such investments are made.
Notwithstanding the foregoing, the Employee shall not directly or indirectly
acquire, hold or retain any interest in any entity engaged in any business
competing with or similar in nature to the business of the Company.
2. Term. Subject to Bankruptcy Court approval, the term of this
Agreement shall commence on February 17, 1997 and shall continue in effect for
a four-year term ending on February 16, 2001.
3. Compensation.
3.1 Base Compensation. For all services rendered by the
Employee under this Agreement, the Company (or its designee) shall pay the
Employee an annual base salary (the "Base Salary"), payable in accordance with
the regular payroll practices of the Company (but at least once a month), at
the rate of $200,000 per year.
3.2 Annual Bonus. In addition to the Base Salary, the
Employee will receive a bonus (the "Bonus") in the amount of up to $200,000, as
set forth below, if, during the 12 months immediately following the
commencement of the Employee's employment with the Company pursuant to this
Agreement, the Company achieves: (a) at least 4.7 total inventory turns,
measured at retail; and (b) average gross margin per square foot of $70.00. For
purposes of this Section 3.2, (a) inventory turns shall be measured taking into
account both in-store and warehoused inventory and (b) gross margin per square
foot shall be measured taking into account total store selling and nonselling
areas. The amount of the Bonus shall be determined based upon the actual
average gross margin per square foot achieved by the Company during the 12
months immediately following the commencement of the Employee's employment with
the Company pursuant to this Agreement, as follows:
-2-
<PAGE> 3
Average Gross Margin
Per Square Foot Bonus
-------------------- -----
At Least $70.00 $66,667
At Least $75.00 $133,333
At Least $80.00 $200,000
From and after the first anniversary of the commencement of the Employee's
employment with the Company pursuant to this Agreement, the Employee shall be
eligible to receive further annual bonuses at the discretion of, and subject to
the achievement of performance goals established by, the Company's board of
directors.
3.3 Other Benefits.
3.3.1 Moving Expenses. The Company shall reimburse
the Employee for all reasonable, documented expenses in moving his place of
residence in Cherry Hills Village, Colorado to or near Anaheim, California, as
approved and arranged by the Company.
3.3.2 Housing Expenses. The Company shall obtain for
the Employee, through September 30, 1997, at the Company's sole cost and
expense (including expenses for telephone service and other utilities),
temporary living quarters in or near Anaheim, California, in the form of an
apartment or corporate suite.
3.3.3 Airfare. The Company shall reimburse the
Employee for the cost of up to 10 coach class airline tickets, which shall be
purchased at the discounted fares available for Saturday evening stayovers, to
be used by the Employee to travel round trip to his home in Cherry Hills
Village, Colorado or, alternatively, to be used by the Employee's spouse to
travel round trip to the Employee's temporary home in California, at any time
through and including September 30, 1997.
3.3.4 Automobile Allowances. During the term of this
Agreement, the Employee shall be paid an automobile allowance of $8,400 year,
payable in accordance with the regular payroll practices of the Company (but at
least once a month).
3.3.5 Other Benefits. The Employee shall be eligible
to participate in, and be covered by, all such other employee benefits
generally provided to employees of the Company. Such benefits presently
include, but are not limited to, health, life and disability insurance, 401(k)
retirement plan, vacation and sick leave.
-3-
<PAGE> 4
3.3.6 Equity Securities. Pursuant to the terms and
conditions of a plan of reorganization in the Bankruptcy Cases, and subsequent
to the confirmation and effectiveness of such plan of reorganization, the
Employee will receive, over a period of no more than four years from and after
the effective date of such plan of reorganization, 5.0% of the issued and
outstanding common stock of the Company (the "Employee Stock"), which common
stock may be subject to customary restrictions on, among other things, transfer
and voting.
3.4 Expenses. The Company, in accordance with its stated
policies (which may be modified from time to time), shall reimburse the
Employee for all expenses incurred by the Employee in relation to the business
of the Company or any of the Company's affiliates, including, without
limitation, reasonable expenses pertaining to travel, lodging and meals. The
Employee shall provide the Company with reasonable documentation showing the
business purpose and cost of each item of expense submitted for reimbursement.
3.5 Tax Withholding. The Company shall have the right to
deduct and withhold from the compensation payable to the Employee hereunder
such amounts as may be necessary to satisfy such corporation's obligations to
federal, state and local authorities to withhold taxes from compensation
otherwise payable to the Employee.
4. Termination.
4.1 Termination for Cause. The Company may terminate this
Agreement and discharge the Employee for cause at any time upon written notice.
For purposes of this Agreement, "cause" shall mean (a) the conviction of the
Employee for a felony or any crime involving theft or fraud, (b) the Employee's
misappropriation of assets of the Company or any affiliate of the Company, (c)
any material violation by the Employee of written Company policy, (d) the
Employee's commission of clearly dishonest acts toward the Company that are
injurious to the Company's business or reputation or (e) the Employee's willful
and continued failure to perform his duties under this Agreement. The Employee
shall not be entitled to receive any further payments or other benefits under
this Agreement after the expiration of 30 days from the date of such notice,
other than benefits that have previously vested in the Employee.
4.2 Termination Upon Death. This Agreement shall
automatically terminate upon the death of the Employee, and neither the
Employee nor his estate or other legal representative shall be entitled to
receive any further payments or benefits under this Agreement, except that the
Company shall pay to the Employee's legal representative the full salary for
the month in which he dies and such legal representative or the Employee's
designated beneficiary shall be entitled to receive such benefits as may have
previously vested in the Employee in accordance with
-4-
<PAGE> 5
the terms of the Company's employee benefit plans; provided, however, that
nothing set forth in this Agreement is intended to (a) reduce, alter or increase
any benefits payable by reason of the Employee's death as provided by the terms
of any Company-sponsored employee benefit plans in which the Employee was
participating at the time of his death or (b) affect the operation of any
beneficiary designation made by the Employee pursuant to the terms of such plan
or the application of any plan provision directing who is to receive such
benefits in the absence of a valid designation.
4.3 Termination by the Company Without Cause; Severance. The
Company may terminate this Agreement at any time without cause upon written
notice to the Employee. If the Company shall give written notice of the
termination of this Agreement without cause, the Employee's term of employment
shall terminate on the effective date set forth in such notice, and the Employee
shall be entitled to receive in lieu of all compensation or damages a severance
payment in an amount equal to the sum of: (1) $200,000 and (b) if such
termination occurs prior to July 1, 1997, an additional amount equal to the base
compensation that the Employee would have received under the terms of this
Agreement absent such termination from the date of such termination through June
30, 1997.
4.4 Termination by the Employee. Except as provided in
Section 5 below, the Employee shall not be entitled, and hereby releases and
waives his entitlement, to any compensation or damages on account of any
termination by the Employee of his employment under this Agreement.
5. Termination Following Change in Control.
5.1 Severance Benefits. If the Employee elects to resign
with Good Reason (as defined below) within one year after a Change in Control
(as defined below), the Employee shall be entitled to receive in lieu of all
compensation or damages (a) a severance payment in the amount of $200,000 and
(b) such of the Employee Stock that, as of the date of the Employee's
resignation pursuant to this Section 5.1, had not yet been distributed to the
Employee pursuant to Section 3.3.6 above.
5.2 Definitions.
5.2.1 For purposes of this Section 5, "Change in
Control" shall mean:
(a) the Company is merged, consolidated or
reorganized into or with another corporation or legal entity
and, as a result of such merger, consolidation or
reorganization, less than a majority of the combined voting
power of the then-outstanding securities of such corporation or
person immediately after such action are held in the aggregate
by the holders of equity
-5-
<PAGE> 6
securities of the Company entitled to vote generally in the
election of directors of the Company ("Voting Stock")
immediately prior to such transaction;
(b) the Company sells all or substantially
all of its assets to any other corporation or other entity, less
than a majority of the combined voting power of the
then-outstanding voting securities of which are held directly or
indirectly in the aggregate by the holders of Voting Stock
immediately prior to such sale;
(c) there is a report filed on Schedule 13D
or Schedule 14D-1 (or any successor schedule, form or report),
each as prompted pursuant to the Securities Exchange Act of 1934
(the "Exchange Act"), disclosing that any person (as the term
"person" is used in Section 13(d)(3) or 14(d)(2) of the Exchange
Act) has become the beneficial owner (as the term "beneficial
owner" is defined under Rule 13d-3 or any successor rule or
regulation promulgated under the Exchange Act) of securities
representing 20% or more of the combined voting power of the
then-outstanding Voting Stock; or
(d) the Company files a report or proxy
statement with the Securities and Exchange Commission pursuant
to the Exchange Act disclosing in, or in response to, Form 8-K
or Schedule 14A (or any successor schedule, form or report or
item therein) that a Change in Control of the Company has or may
have occurred or will or may occur in the future pursuant to any
then-existing contract or transaction.
5.2.2 Notwithstanding any other provision of this
Section 5, a "Change in Control" shall not be deemed to have occurred for
purposes of this Agreement solely because:
(a) there is confirmed or becomes effective
a plan or plans of reorganization in any of the Bankruptcy
Cases, or there is consummated any transaction or series of
transactions contemplated or required by the terms of any such
plan or plans of reorganization, which transaction or series of
transactions would otherwise constitute a "Change of Control" as
defined in Section 5.2.1 above;
(b) an entity in which the Company directly
or indirectly beneficially owns 50% or more of the voting
securities of such entity (an "Affiliate"), any
Company-sponsored employee stock ownership plan or any other
employee benefit plan of the Company either files or becomes
obligated to file a report or a proxy statement under or in
response to Schedule 13D, Schedule 14D-1, Form 8-K or Schedule
14A (or any
-6-
<PAGE> 7
successor schedule, form or report or item therein) under the
Exchange Act, disclosing beneficial ownership by it of shares of
voting securities of the Company, whether in excess of 20% or
otherwise, or because the Company reports that a Change in
Control of the Company has or may have occurred or will or may
occur in the future by reason of such beneficial ownership;
(c) a person who is a holder of 5% or more of the Voting
Stock and who also is an officer of director of the Company on
the date of this Agreement acquires 20% or more of the Voting
Stock; or
(d) the Company engages in an internal reorganization,
which may include a transfer of assets to one or more
Affiliates, provided that such transaction has been approved by
at least two-thirds of the members of the board of directors of
the Company and, as a result of such transaction or
transactions, at least 80% of the combined voting power of the
then-outstanding securities of the Company or its successor are
held in the aggregate by the holders of Voting Stock immediately
prior to such transactions.
5.2.3 For purposes of this Section 5, the Employee shall be
deemed to have resigned "with Good Reason" if he does so following a Change in
Control as a result of the Company or any or its affiliates having done any or
all of the following without the Employee's express written consent: (a)
assigned the Employee different duties or made changes in his responsibilities,
title or office that constitute a substantial reduction or diminution of the
Employee's duties, responsibilities, titles or offices immediately prior to the
Change in Control; (b) reduced the Base Salary from that in effect at the time
of the Change in Control; (c) required the Employee to be based more than 25
miles from his office location in Anaheim, California; (d) other than pursuant
to a confirmed plan of reorganization in the Bankruptcy Cases, failed to
continue any plan or program for compensation, employee benefits, life
insurance, group medical disability or vacation in substantially the same form
as immediately prior to the Change in Control or otherwise made any material
reduction in the Employee's employee benefits, including, without limitation,
those described in Section 3 above; or (e) failed to obtain the assumption of
this Agreement by any successor to the Company.
5.3 Relationship to Other Termination Sections. The Employee shall not
be entitled to the benefits of this Section 5 if this Agreement and his
employment are terminated pursuant to Section 4.1, 4.2 or 4.3 above.
5.4 Company's Sole Obligations. In the event of any termination
pursuant to this Section 5, the payment of all compensation owing for services
rendered by the Employee prior to
-7-
<PAGE> 8
such termination and of the severance benefits set forth in this Section 5, as
applicable, shall constitute the sole obligations of the Company and shall be in
lieu of any damages or other compensation that the Employee may claim in
connection with this Agreement.
6. Resignation as Director and Officer. In the event of any
termination or resignation pursuant to Section 4.1, 4.3, 4.4 or 5 above, the
Employee shall be deemed to have resigned voluntarily as an officer and
director of the Company (and of any affiliates of the Company), if and to the
extent he was serving in any of such capacities at the time of termination.
7. Trade Secrets. The Employee acknowledges that, in the course
of his employment hereunder, he will have access and be made privy to the
marketing, business and financial plans and other trade secrets of the Company
and the Company's affiliates (for purposes of this Section 7 and Section 8
below, collectively and, as the case may be, each such affiliate individually,
are referred to as the "Company") and will have access to information important
to the Company's operations. The Employee recognizes that it is vital to the
Company's business that such plans and secrets not be disclosed to or used by
others. Accordingly, the Employee that he shall not disclose or use any trade
secrets of the Company, either during the term hereof or one year after any
termination of this Agreement; provided, however, that any disclosure to a
governmental agency as required by law by the Employee will not be a breach of
this Section 7.
8. Injunctive Relief. Upon any breach or threatened breach of the
provisions of Section 7 of this Agreement, the Company shall be entitled to an
injunction restraining the Employee from such breach. Nothing herein shall be
construed as prohibiting the Company from pursuing any other remedies for such
breach or threatened breach.
9. Indemnification. The parties agree that they shall enter into
an indemnification agreement substantially on the same terms and conditions as
the extant indemnification agreements between the Company and its senior
officers and directors, respectively.
10. Insurance. The Company shall purchase and keep in full force
and effect for the Employee a policy of directors' and officers' liability
insurance at coverage levels consistent with those in effect for other members
of the Company's management.
11. Authority. The individual executing this Agreement on behalf
of the Company represents and warrants to the Employee that, subject to the
approval of the Bankruptcy Court, the performance of this Agreement and
consummation of the transactions contemplated hereby have been duly authorized
by all requisite corporate action, and that he has the power and authority to
execute this Agreement.
-8-
<PAGE> 9
12. Notices. All notices, requests, demands and other communications,
required or permitted hereunder shall be in writing and shall be given by hand
delivery, telecopy, overnight courier service or United States certified or
registered mail, return receipt requested. Each such notice, request, demand or
other communication shall be effective: (a) if delivered by hand or by
overnight courier service, when delivered at the address specified in this
Section 12; (b) if given by telecopy, when such telecopy is transmitted to the
telecopy number specified in this Section 12 and confirmation is received; and
(c) if given by certified or registered mail, three days after the mailing
thereof.
Address for notices (unless and until written notice is given
of any other address):
If to the Company:
The Clothestime, Inc.
5325 East Hunter Avenue
Anaheim, California 92807
Attention: Mr. David A. Sejpal
Fax: (714) 970-9540
with a copy to:
Paul E. Harner, Esq.
Jones, Day, Reavis & Pogue
1900 Huntington Center
41 South High Street
Columbus, Ohio 43215
Fax: (614) 461-4198
If to the Employee:
Mr. Barry Herman
4070 South Hudson Way
Cherry Hills Village, Colorado 80110
13. Further Documents and Acts. Each of the parties hereto agrees to
cooperate in good faith with the other and to execute and deliver such further
instruments and perform such other acts as may be reasonably necessary or
appropriate to consummate and effectuate the transactions contemplated by this
Agreement.
14. Attorneys' Fees. In any action, litigation or proceeding between
the parties arising out of or in relation to this Agreement, the prevailing
party in such action shall be entitled to, in addition to any damages,
injunctions or other relief and without regard to whether or not such matter is
prosecuted to final judgment by a court with jurisdiction over the parties'
dispute, such party's costs and expenses, including reasonable attorneys' fees.
-9-
<PAGE> 10
15. California Law. This Agreement has been negotiated and executed in
the State of California and is to be performed in Orange County, California.
This Agreement shall be governed by and interpreted in accordance with the laws
of the State of California, including all matters of construction, validity,
performance and enforcement, without giving effect to principles of conflict of
law. Any dispute, action, litigation or other proceeding concerning this
Agreement shall be instituted, maintained, heard and decided in Orange County,
California.
16. Amendments; Waiver. This Agreement may be amended, supplemented,
modified or rescinded only through an express written instrument signed by all
the parties or their respective successors and assigns. Any party may
specifically and expressly waive in writing any portion of this Agreement or
any breach hereof, but no such waiver shall constitute a further or continuing
waiver of any prior or subsequent breach of the same or any other provision of
this Agreement. The consent by one party to any act for which such consent is
required under the terms of this Agreement shall not be deemed to imply consent
or waiver of the necessity of obtaining such consent for the same or similar
acts in the future.
17. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
18. Severability. In the event that one or more of the provisions of
this Agreement, or the application thereof in any circumstances, is held
invalid, illegal or unenforceable in any respect for any reason, the validity
and enforceability of any such provision in every other respect and of the
remaining provisions hereof shall not be in any way impaired or affected, it
being intended that all of the rights and privileges of the parties to this
Agreement shall be enforceable to the fullest extent permitted by law.
19. Entire Agreement. This Agreement contains the entire and complete
understanding between the parties concerning its subject matter, and all
representations, agreements, arrangements and understanding between or among
the parties, whether oral or written, have been fully merged herein and are
superseded hereby.
20. Remedies. All rights, remedies, undertakings, obligations,
options, covenants, conditions and agreements contained in this Agreement shall
be cumulative, and no one of them shall be exclusive of any other.
21. Successors. This Agreement shall be binding upon and inure to the
benefit of the parties and their respective heirs, legatees, legal
representatives, personal representatives, successors and assigns.
- 10 -
<PAGE> 11
22. Interpretation. The language in all parts of this Agreement
shall in all cases be construed simply according to its fair meaning and not
strictly for or against any party. Whenever the context requires, all words
used in the singular will be construed to have been used in the plural, and
vice versa, and each gender will include any other gender. The captions of the
Sections of this Agreement are for convenience only and shall not affect the
construction or interpretation of any of the provisions hereof.
23. Miscellaneous. Each provision of this Agreement to be
performed by a party hereto shall be deemed both a covenant and condition, and
shall be deemed material consideration for the other party's performance
hereunder. The recitals and all other documents referenced in this Agreement
are fully incorporated into this Agreement by reference. Time is of the
essence in the performance of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
THE COMPANY: THE CLOTHESTIME, INC., a Delaware
corporation
By: /s/ DAVID A. SEJPAL
-------------------------------
Name: David a. Sejpal
-----------------------------
Title: CEO, COB, President
----------------------------
THE EMPLOYEE: /s/ BARRY HERMAN
----------------------------------
Barry Herman
-11-
<PAGE> 1
EXHIBIT 10.38
AMENDED AND RESTATED
INDEMNIFICATION AGREEMENT
This amended and restated Indemnification Agreement ("Agreement") is
made as of this 17th of January, 1997, by and between THE CLOTHESTIME, INC., a
Delaware corporation (the "Company"), and Douglas L. Pereira ("Indemnitee").
WHEREAS, Indemnitee and the Company entered into an Indemnification
Agreement dated June 20, 1991 (the "June 20th Agreement");
WHEREAS, the Indemnitee has become a Director of the Company and one of
its subsidiaries and the parties desire to amend and restate the June 20th
Agreement;
WHEREAS, Indemnitee is currently serving as a Director and Controller of
the Company, is also serving at the request of the Company as a Director of
Clothestime Insurance Company, a Vermont Corporation ("Insurance") and as an
executive officer of the following subsidiaries of the Company: Clothestime
Acquisition Corporation, a Delaware corporation, Clothestime Investment, Inc., a
Delaware corporation, Clothestime Stores, Inc. a Delaware corporation, MRJ
Industries, Inc., a Delaware corporation, Clothestime International, Inc., a
Delaware corporation, and Insurance, and may serve in the future as an officer
of the Company, a director of one or more of the Company's subsidiaries and, at
the Company's request, in the capacities of a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise; and the parties wish Indemnitee to continue in such capacities. The
Indemnitee is willing, subject to certain conditions including, without
limitation, the execution and performance of this Agreement by the Company, to
continue in such capacities;
WHEREAS, in addition to the indemnification to which the Indemnitee is
or may be entitled under the Certificate of Incorporation of the Company (the
"Certificate") or the Bylaws of the company (the "Bylaws"), the Company has
obtained at its sole expense insurance protecting its officers and directors
including Indemnitee against certain losses arising out of actual or threatened
actions, suits or proceedings to which such persons may be made or threatened to
be made parties. However, as a result of circumstances having no relation to,
and beyond the control of, the Company and Indemnitee, there can be no assurance
of the continuation or renewal of the insurance;
WHEREAS, the Company and Indemnitee recognize the increasing difficulty
in obtaining directors' and officers' liability insurance, the significant
increases in the cost of such insurance and the general reductions in the
coverage of such insurance;
WHEREAS, the Company and Indemnitee further recognize the substantial
increase in corporate litigation in general, subjecting directors, officers,
employees and other agents to expensive litigation risks;
WHEREAS, the Company desires to attract and retain the services of
highly qualified individuals, such as Indemnitee, to serve as directors,
officers, employees and other agents of the Company and its subsidiaries; and
WHEREAS, in recognition of Indemnitee's need for substantial protection
against personal liability in order to enhance Indemnitee's continued and
effective service to the Company and its subsidiaries, and in order to induce
Indemnitee to provide services to the Company as a Director, officer or employee
and to provide services in the capacity of a director, officer, or employee and
to provide services in the capacity of a director, officer,
<PAGE> 2
employee or agent of another corporation (including, without limitation, the
Company's subsidiaries) partnership, joint venture, trust or other enterprise in
which he serves at the request of the Company, the Company wishes to provide in
this Agreement for the indemnification of and the advancing of expenses to
Indemnitee to the fullest extent (whether partial or complete) permitted by law
and as set forth in this Agreement, and, to the extent insurance is maintained,
for the coverage of Indemnitee under the Company's directors' and officers'
liability insurance policies.
NOW, THEREFORE, in consideration of the above premises and of
Indemnitee's promise to continue to serve the Company directly or, at its
request, with another enterprise, and intending to be legally bound hereby, the
parties agree as follows:
1. DEFINED TERMS AND CONSTRUCTION OF CERTAIN PHASES. As used in
this Agreement:
(a) "Board" shall mean the Board of Directors of the Company.
(b) References to the "Company" shall include, in addition to
the resulting corporation, any constituent corporation (including any
constituent of a constituent) absorbed in a consolidation or merger which, if
its separate existence had continued, would have had power and authority to
indemnify its directors, officers, employees or other agents, so that if
Indemnitee is or was a director, officer, employee or other agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, Indemnitee shall stand in
the same position under the provisions of this Agreement with respect to the
resulting or surviving corporation as Indemnitee would have with respect to such
constituent corporation if its separate existence had continued.
(c) A "Change in Control" shall be deemed to have occurred if
(i) any "person" (as such term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended), other than a trustee or other
fiduciary holding securities under an employee benefit plan of the Company, a
subsidiary of the Company, or a corporation owned directly or indirectly by the
shareholders of the Company in substantially the same proportions as their
ownership of stock of the Company, is or becomes the "Beneficial Owner" (as
defined in Rule 13d-3 under said Act), directly or indirectly, of securities of
the Company representing 40% or more of the total voting power represented by
the Company's then outstanding Voting Securities; (ii) during a two-year period,
individuals who at the beginning of such period constitute the Board and any new
director whose election or election was approved by a vote of at least
two-thirds (2/3) of the directors then still in office who either were directors
at the beginning of the period or whose election or nomination for election was
previously so approved, cease for any reason to constitute a majority thereof;
(iii) the stockholders of the Company approve a merger or consolidation of the
Company with any other corporation, other than a merger or consolidation that
would result in the Voting Securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining outstanding or by
being converted into Voting Securities of the surviving entity) at least 80% of
the total voting power represented by the Voting Securities of the Company or
such surviving entity outstanding immediately after such merger or
consolidation, or (iv) the stockholders of the Company approve a plan of
complete liquidation of the Company or an agreement for the sale or disposition
by the Company (in one transaction or a series of transactions) of all or
substantially all of the Company's assets.
2
<PAGE> 3
(d) "Independent Counsel" shall be the person or body appointed
in connection with Section 4 of this Agreement.
(e) "Other enterprises" shall include employee benefit plans.
(f) "Potential Change in Control" shall be deemed to have
occurred if (i) the Company enters into an agreement or arrangement, the
consummation of which would result in the occurrence of a Change in Control;
(ii) any person (including the Company) publicly announces an intention to take
or to consider taking actions that, if consummated, would constitute a Change in
Control; (iii) any "person" (as such term is used in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934, as amended), other than a trustee or other
fiduciary holding securities under an employee benefit plan of the Company, a
subsidiary of the Company, a corporation owned directly or indirectly by the
proportions as their ownership of stock of the Company, or a person who is a
party to an indemnification agreement (in a form similar to this Agreement) with
the Company, is or becomes the "Beneficial Owner" (as defined in Rule 13d-3
under said Act), directly or indirectly, of securities of the Company
representing 15% or more of the total voting power represented by the Company's
then outstanding Voting Securities; or (iv) the Board adopts a resolution to the
effect that, for purposes of this Agreement, a Potential Change in Control has
occurred.
(g) "Serving at the request of the Company" shall include,
without limitation, any service as a director, officer, employee or agent of the
Company or any of its subsidiaries which imposes duties on, or involves services
by, Indemnitee with respect to an employee benefit plan.
(h) "Voting Securities" shall mean any securities of the Company
that are entitled to vote generally in the election of directors.
2. INITIAL INDEMNITY.
(a) Indemnity in Third Party Proceedings. The Company shall
indemnify the Indemnitee when he was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, administrative, investigative, or criminal (other than an action
by or in the right of the Company), by reason of the fact that he is or was or
had agreed to become a director, officer, employee or agent of the Company, or
is or was serving or had agreed to serve at the request of the Company as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, or by reason of any action alleged to have
been taken or omitted in such capacities, against any and all costs, charges and
expenses (including without limitation attorneys' and others' fees and
expenses), judgments, fines and amounts paid in settlement actually and
reasonably incurred by the Indemnitee in connection therewith and any appeal
therefrom if the Indemnitee acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Company, and with
respect to any criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction or upon a plea of nolo contendere or its
equivalent shall not, of itself, create a presumption that the Indemnitee did
not satisfy the foregoing standard of conduct to the extent applicable thereto.
(b) Indemnity in Proceedings By or In the Name of the
Corporation. The Company shall indemnify the Indemnitee when he was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding by or in the right of the Company to
procure a judgment in its favor by reason of the fact that he is or was
3
<PAGE> 4
or had agreed to become a director, officer, employee or agent of the Company,
or is or was serving or had agreed to serve at the request of the Company as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against costs, charges and expenses
(including attorneys' and others' fees and expenses) actually and reasonably
incurred by him in connection with the defense or settlement thereof or any
appeal therefrom if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Company and except
that no indemnification shall be made in respect of any claim, issue or matter
as to which the Indemnitee shall have been adjudged to be liable to the Company
unless and only to the extent that the Court of Chancery or the court in which
such action, suit or proceeding was brought shall determine upon application
that, despite the adjudication of liability but in view of all the circumstances
of the case, the Indemnitee is fairly and reasonably entitled to indemnity for
such expenses which the Court Chancery or such other court shall deem proper.
(c) Indemnification of Expenses of Successful Party. To the
extent that the Indemnitee has been successful on the merits or otherwise,
including, without limitation the dismissal of an action without prejudice, in
defense of any action, suit or proceeding referred to in Sections 2(a) or 2(b)
hereof or in defense of any claim, issue or matter therein, he shall be
indemnified against costs, charges and expenses (including attorney's and
others' fees and expenses) actually and reasonably incurred by him in connection
therewith.
(d) Determination of Right on Indemnitee to Indemnification. Any
indemnification under Sections 2(a) or 2(b) (unless ordered by a court) shall be
made by the Company only as authorized in the specific case upon a determination
in accordance with Section 4 hereof or any applicable provision of the
Certificate, Bylaws, other agreement, resolution or otherwise. Such
determination shall be made (i) by the Board by a majority vote of a quorum
consisting of directors who were not parties to such action, suit or proceeding
or (ii) if such a quorum of disinterested directors is not available or so
directs, by independent legal counsel (designated in the manner provided below
in this subsection (d)) in a written opinion or (iii) by the stockholders of the
Company (the "Stockholders"). Independent legal counsel shall be designated by
vote of a majority of the disinterested directors; provided, however, that if
the Board is unable or fails to so designate, such designation shall be made by
the Indemnitee subject to the approval of the Company (which approval shall not
be unreasonably withheld). Independent legal counsel shall not be any person or
firm who, under the applicable standards professional conduct then prevailing,
would have a conflict of interest in representing either the Company or the
Indemnitee in an action to determine the Indemnitee's rights under this
Agreement. The Company agrees to pay the reasonable fees and expenses of such
independent legal counsel and to indemnify fully such counsel against costs,
charges and expenses (including attorneys' and others' fees and expenses)
actually and reasonably incurred by such counsel in connection with this
Agreement or the opinion of such counsel pursuant hereto.
(e) Advancement of Expenses. All expenses (including attorneys'
and others' fees and expenses) incurred by the Indemnitee in his capacities as a
director, officer, or employee of the Company or in his capacity as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise in which he was serving at the request of the Company,
in defending a civil or criminal action, suit or proceeding shall be paid by the
Company in advance of the final disposition of such action, suit or proceeding
in the manner prescribed by Section 4(b) hereof.
4
<PAGE> 5
3. Additional Indemnification.
(a) Right to additional Indemnification. Pursuant to Section 145
(f) of the General Corporation Law of the State of Delaware (the "GCL"), without
limiting any right which the Indemnitee may have pursuant to Section 2 hereof,
the Certificate, the Bylaws, the GCL, any policy of insurance or otherwise, but
subject to the limitations on the maximum permissible indemnity which may exist
under applicable law at the time of any request for indemnity hereunder
determined as contemplated by this Section 3(a), the Company shall indemnify the
Indemnitee against any amount which he is or becomes legally obligated to pay
relating to or arising out of any claim made against him because of any act,
failure to act or neglect or breach of duty, including any actual or alleged
error, misstatement or misleading statement, which he commits, suffers, permits
or acquiesces in while acting in his capacities as a director, an officer, an
employee or agent of the Company, or, at the request of the Company, as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, whether prior to or after the date of this
Agreement and whether or not the basis of the claim is alleged action or
inaction in an official capacities as a director, officer, employee or agent or
in any other capacities while serving as a director, officer, employee or agent
or in any other capacities while serving as a director, officer, employee or
agent of the Company. The payments which the Company is obligated to make
pursuant to this Section 3 shall include without limitation (i) damages,
judgments, settlements (in accordance with Section 6(d) of this Agreement),
fines and similar penalties, and excise taxes and penalties assessed on a person
with respect to an employee benefit plan, (ii) charges costs expenses (including
attorneys' and others' fees and related disbursements), expenses of
investigation, expenses of defense of legal actions, suits, proceedings or
claims and appeals therefrom, expenses relating to serving as a witness and
expenses of appeal, attachment or similar bonds, and (iii) any interest,
assessments, or other charges imposed thereon and any federal, state, local or
foreign taxes imposed as a result of the actual or deemed receipt of such
payments under this Agreement. Notwithstanding the foregoing, the Company shall
not be obligated under this Section 3(a) to make any payment in connection with
any claim against the Indemnitee:
(i) to the extent of any fine or similar governmental imposition
which the Company is prohibited by applicable law from paying which results in a
final, nonappealable order; or
(ii) to the extent based upon or attributable to the Indemnitee
gaining in fact a personal profit to which he was not legally entitled,
including without limitation profits made from the purchase and sale by the
Indemnitee of equity securities of the Company which are recoverable by the
Company which are recoverable by the Company pursuant to Section 16(b) of the
Securities Exchange Act of 1934, as amended, and profits arising from
transactions in publicly traded securities of the Company which were effected by
the Indemnitee in violation of Section 10(b) of the Securities Exchange Act of
1934, as amended, including Rule 10b-5 promulgated thereunder.
The determination of whether the Indemnitee shall be entitled to indemnification
under this section 3(a) shall be made in accordance with section 4(d) hereof.
(b) Advancement of Expenses Relating to Additional Indemnification.
Expenses (including without limitation attorneys' and others' fees and expenses)
incurred by Indemnitee in defending any actual or threatened civil or criminal
action, suit, proceeding or claim shall be paid by the Company in advance of the
final disposition thereof as authorized in accordance with Section 4(b) hereof.
5
<PAGE> 6
4. Certain Procedures Relating to Indemnification and Advancement of
Expenses.
(a) General. Except as otherwise permitted or required by the
GCL, for purposes of pursuing his rights to indemnification under Sections 2(a),
2(b), or 3(a) hereof, as the case may be, the Indemnitee may, but shall not be
required to, (i) submit to the Board a sworn statement of request for
indemnification substantially in the form of Exhibit 1 attached hereto and made
a part hereof (the "Indemnification Statement") averring that he is entitled to
indemnification hereunder; and (ii) present to the Company reasonable evidence
of all expenses for which payment is requested. Submission of an Indemnification
Statement to the Board shall create a presumption that the Indemnitee is
entitled to indemnification under Sections 2(a), 2(b) or 3(a) hereof, as the
case may be, and the Board shall be deemed to have determined that the
Indemnitee is entitled to such indemnification unless with in 30 calendar days
after submission of the Indemnification Statement the Board shall determine by
vote of a majority of the directors at a meeting at which a quorum is present,
based upon clear and convincing evidence (sufficient to rebut the foregoing
presumption), and the Indemnitee shall have received notice within such period
in writing of such determination that the Indemnification is not so entitled to
indemnification, which notice shall disclose with particularity the evidence in
support of the Board's determination. The foregoing notice shall be sworn to by
all persons who participated in the determination and voted to deny
indemnification. The provisions of this section 4(a) are intended to be
procedural only and shall not affect the right of the Indemnitee to
indemnification under this Agreement and any determination by the Board that the
Indemnitee is not entitled to indemnification and any failure to make the
payments requested in the Indemnification Statement shall be subject to judicial
review as provided in Section 5 hereof.
(b) Undertaking or Expense Request Regarding Advancement of
Expenses. For purposes of determining whether to authorize advancement of
expenses pursuant to Section 2(e) hereof, the Indemnitee shall submit to the
board a sworn statement of request for advancement of expenses substantially in
the form of Exhibit 2 attached hereto and made a part hereof (the
"Undertaking"), averring that (i) he has reasonably incurred or will reasonably
incur actual expenses in defending an actual civil or criminal action, suit,
proceeding or claim and (ii) he undertakes to repay such amount if it shall
ultimately be determined that he is not entitled to be indemnified by the
Company under this Agreement or otherwise. For purposes of requesting
advancement of expenses pursuant to Section 3(b) hereof, the Indemnitee (i) may,
but shall not be required to, submit an Undertaking or (ii) shall submit such
other form of request as he determines to be appropriate (an "Expense Request").
Upon receipt of an Undertaking or Expense Request, as the case may be, the Board
shall within 20 calendar days authorize immediate payment of the expenses stated
in the Undertaking or Expense Request, whereupon such payments shall immediately
be made by the Company. No security shall be required in connection with any
Undertaking or Expense Request and any Undertaking or Expense Request shall be
accepted without reference to the Indemnitee's ability to make repayment.
(c) Independent Counsel. Notwithstanding anything to the contrary
contained in Sections 2(d) or 4(a) of this Agreement, after a Change of Control
and if requested by the Indemnitee at the time of making a claim for
indemnification, (i) any determination under Section 2(a) or 2(b) (unless
ordered by a court) shall be made by Independent Counsel (as defined below), and
(ii) after the submission of an Indemnification Statement, the determination
pursuant to Section 4(a) whether an Indemnitee shall be entitled to
indemnification under Sections 2(a), 2(b) or 3(a) hereof, as the case may be,
shall be made by Independent Counsel (as defined below) instead of by the Board.
For purposes of this Section 4(c) "Independent Counsel" shall be an attorney
selected by Indemnitee and approved by the
6
<PAGE> 7
Company (which approval shall not be unreasonably withheld), (i) who has not
otherwise performed services for the Company or the Indemnitee (other than in
connection with indemnification matters) within the three years prior to the
selection of the Independent Counsel, and (ii) who shall not, under the
applicable standards of professional conduct then prevailing, have a conflict of
interest in representing either the Company or Indemnitee in an action to
determine Indemnitee's rights under this Agreement. Any determination by
Independent Counsel as to whether and to what extent the Indemnitee should be
permitted to be indemnified under applicable law shall be rendered by its
written opinion to the Company and Indemnitee. The Company agrees to pay the
reasonable fees of the Independent Counsel and to indemnify fully such counsel
against any and all expenses (including attorneys' and others' fees and
expenses), claims, liabilities, loss, and damages arising out of or relating to
this Agreement, the engagement of Independent Counsel pursuant hereto or the
opinion of such counsel pursuant hereto.
5. Indemnification Process and Appeal.
(a) Suit to Enforce Rights. If a claim for indemnification made
to the Company pursuant to Section 4 hereof is not paid in full by the Company
within 30 calendar days after a written claim has been received by the Company,
the Indemnitee may at any time thereafter bring suit against the Company to
recover the unpaid amount of the claim in any court having subject matter
jurisdiction thereof. The Company hereby consents to service of process and to
appear in any such proceeding. The remedy provided for in this Section 5 shall
be in addition to any other remedies available to Indemnitee in law or equity.
(b) Defense to Indemnification, Burden of Proof and Presumptions.
In any action brought under Section 5(a) hereof, it shall be a defense to a
claim for indemnification pursuant to Sections 2(a) or 2(b) hereof (other than
an action brought to enforce a claim for expenses incurred in defending any
proceeding in advance of its final disposition where the Undertaking, if any is
required, has not met the standards of conduct which make it permissible under
the GCL for the Company to indemnify the Indemnitee for the amount claimed, but
the burden of proving such defense shall be on the Company. It shall be a
defense to any action brought by Indemnitee against the Company to enforce this
Agreement that it is not permissible under applicable law for the Company to
indemnify Indemnitee for the amount claimed, but the burden of proving such
defense shall be on the Company. Neither the failure of the Company (including
its Board, independent legal counsel or its stockholders) or Independent counsel
to have made a determination prior to the commencement of such action by
Indemnitee that indemnification of the claimant is proper under the
circumstances because he has met the standard of conduct set forth in applicable
law, nor an actual determination by the Company (including its Board,
independent legal counsel or its stockholders) or Independent Counsel that
Indemnitee had not met such applicable standard of conduct, shall be a defense
to the action or create a presumption that Indemnitee has not met the applicable
standard of conduct.
(c) Indemnification for Expenses Incurred in Enforcing Rights. It is the
intent of the Company that the Indemnitee not be required to incur the expenses
associated with the enforcement of his rights under this Agreement by litigation
or other legal action because the cost and expense thereof would substantially
detract from the benefits intended to be extended to the Indemnitee hereunder.
Accordingly, if it should appear to the Indemnitee that the Company has failed
to comply with any of its obligations under the Agreement or in the event that
the Company or any other person takes any action to declare the Agreement void
or proceeding designed (or having the effect of being designed) to deny, or to
recover from, the Indemnitee the benefits intended to be provided to the
Indemnitee hereunder, the Company
7
<PAGE> 8
irrevocably authorizes the Indemnitee from time to time to retain counsel of his
choice, at the expense of the Company as hereafter provided, to represent the
Indemnitee in connection with the initiation or defense of any litigation or
other legal action, whether by or against the Company or any director, officer,
stockholder or other person affiliated with the Company, in any jurisdiction.
Regardless of the outcome thereof, the Company shall pay and be solely
responsible for any and all costs, charges and expenses (including without
limitation attorneys' and others' fees and (expenses) reasonably incurred by the
Indemnitee (i) as a result of the Company's failure to perform this Agreement or
any provision thereof or (ii) as a result of the Company or any other person
contesting the validity or enforceability of this Agreement or any provision
thereof as aforesaid; provided that, if and to the extent that a court of
competent jurisdiction determines (in a final judicial determination as to which
all rights of appeal therefrom have been exhausted or waived or have lapsed)
that each of the material assertions made by Indemnitee in such litigation or
other legal action was not made in good faith or was frivolous, the Company
shall not be obligated to pay any such costs, charges and expenses incurred by
Indemnitee in connection with such suit and shall be entitled to be reimbursed
by Indemnitee (who hereby agrees to reimburse the Company) for all such amounts
theretofore paid under this Section 5(c). Notwithstanding the procedure for
selection of counsel in Section 6(c) herein, in connection with the assertion of
any claim under this Section 5(c), Indemnitee from time to time may retain
counsel of his choice to represent him.
6. Notification and Defense of Proceeding.
(a) Notice/Cooperation by Indemnitee. Indemnitee shall give the
Company notice in writing as soon as practicable of any claim made against
Indemnitee for which indemnification will or could be sought under this
Agreement (for purposes of this Section 6, a "Claim"). Indemnitee shall also
provide the Company such information and cooperation as the Company from time to
time may reasonably request and as shall reasonably be within Indemnitee's power
to provide.
(b) Notice to Insurers. If at the time of the receipt of a notice
of a Claim pursuant to Section 6(a) hereof the Company has directors' and
officers' liability insurance (or a similar policy covering key employees, if
applicable) in effect, the Company shall give prompt notice of such Claim to the
insurers in accordance with the procedures set forth in the respective policies.
The Company thereafter shall take all necessary or desirable action to cause
such insurers to pay, on behalf of Indemnitee, all amounts payable as a result
of such Claim in accordance with the terms of such policies.
(c) Selection of Counsel. With respect to any litigation or other
legal action relating to a Claim as to which Indemnitee notifies the Company
(for purposes of this Section 6, a "Proceeding"), the Company will be entitled
to participate in the Proceeding at its own expense and except as otherwise
provided below, to the extent the Company so wishes, it may assume the defense
thereof with counsel selected by the Company and approved by Indemnitee, which
approval shall not be unreasonably withheld. After notice from the Company to
Indemnitee of its election to assume the defense of any Proceeding, the Company
will not be liable to Indemnitee under this Agreement or otherwise for any
expenses subsequently incurred by Indemnitee in connection with the defense of
such Proceeding other than reasonable costs of investigation or as otherwise
provided below. Indemnitee shall have the right to employ his own counsel in
such Proceeding, but all expenses related thereto incurred after notice from the
Company of its assumption of the defense shall be at Indemnitee's expense
unless: (i) the employment of counsel by Indemnitee has been authorized by the
Company; (ii) Indemnitee has reasonably determined and either the Company shall
have agreed, or disinterested counsel (as defined in this Section 6(c)) shall
have
8
<PAGE> 9
determined, that there may be a conflict of interest between Indemnitee and the
Company in the defense of the Proceeding; (iii) after a Change in Control, the
employment of counsel by Indemnitee has been approved by the Independent
Counsel; or (iv) the Company shall not in fact have employed counsel to assume
the defense of such Proceeding, in each of which case all expenses of the
Proceeding shall be borne by the Company, and Indemnitee's counsel shall have
been approved by the Company (which approval may not be unreasonably withheld)
and any carrier of an applicable insurance policy if required under the terms of
that policy or under applicable law. As used in this Section 6(c),
"disinterested counsel" shall mean counsel selected and compensated by the
Company, and approved by Indemnitee (which approval may not be unreasonably
withheld), to determine whether a conflict of interest may exist, which counsel
shall not represent the Company, Indemnitee or any other party to the Proceeding
for which indemnification is sought. Disinterested counsel shall be selected
promptly following the notice from Indemnitee to the Company of Indemnitee's
belief that a conflict of interest may exist. The company shall not be entitled
to assume the defense of any Proceeding as to which the determination provided
for in (ii) above shall have been made. Nothing herein shall limit the right of
Indemnitee to employ counsel at Indemnitee's sole expense.
(d) Settlements. Notwithstanding anything to the contrary
contained in this Agreement, the Company shall not be liable to indemnify
Indemnitee under this Agreement or otherwise for any amounts paid in settlement
of any Proceeding effected without the Company's written consent; provided,
however, that if a Change in Control has occurred, the Company shall be liable
for indemnification of Indemnitee for amounts paid in settlement if the
Independent Counsel has approved the settlement. The Company shall not settle
any Proceeding in any manner that would impose any penalty or limitation on
Indemnitee without Indemnitee's written consent. Neither the Company nor the
Indemnitee will unreasonably withhold its consent to any proposed settlement.
The Company shall not be liable to indemnify Indemnitee under this Agreement
with regard to any judicial award if the Company was not given a reasonable and
timely opportunity, at its expense, to participate in the defense of such
action; the Company's liability hereunder shall not be excused if participation
in the Proceeding by the Company was barred by this Agreement.
7. Establishment of a Trust.
Immediately upon the occurrence of a Change in Control or a Potential Change in
Control, the Company shall, upon written request by Indemnitee, create a trust
(a "Trust") for the benefit of Indemnitee and from time to time upon written
request of Indemnitee shall fund the Trust in an amount sufficient to satisfy
any and all amounts reasonably anticipated at the time of each such request to
be incurred in connection with any claim made by Indemnitee. The amount or
amounts to be deposited in the Trust pursuant to the foregoing funding
obligation shall be determined (i) prior to the occurrence of a Change in
Control or a Potential Change in Control, (a) the Board by a majority vote of a
quorum consisting of directors who were not parties to the action, suit or
proceeding serving as the basis of a claim by Indemnitee, or (b) if such a
quorum of disinterested directors is not available or so directs, by independent
legal counsel (designated in the manner provided in Section 2(d) in a written
opinion or (c) by the Stockholders, or (ii) after the occurrence of a Change in
Control or a Potential Change in Control, by Independent Counsel as defined in
Section 4(c) (for purposes of this Section 7, the "Reviewing Party"). The terms
of the Trust shall provide that upon a Change in Control (i) the Trust shall not
be revoked or the principal thereof invaded without the written consent of
Indemnitee, (ii) the trustee of the Trust (the "Trustee") shall advance within
20 business days of the request by Indemnitee, any and all expenses to
Indemnitee (and Indemnitee hereby agrees to reimburse the Trust under the same
circumstances for which Indemnitee would be required to reimburse the Company
under Section 4(b) of this Agreement), (iii) the Trust shall continue
9
<PAGE> 10
to be funded by the Company in accordance with the funding obligation set forth
above, (iv) the Trustee shall promptly pay to Indemnitee all amounts for which
Indemnitee shall be entitled to indemnification pursuant to this Agreement or
otherwise, and (v) all unexpended funds in the Trust shall revert to the Company
upon a final determination by the Reviewing Party or a court of competent
jurisdiction, as the case may be, that Indemnitee has been fully indemnified
under the terms of this Agreement. The Trustee shall be chosen by Indemnitee.
Nothing in this Section 7 shall relieve the Company of any of its obligations
under this Agreement. All income earned on the assets held in the Trust shall be
reported as income by the Company for federal, state, local and foreign tax
purposes. The Company shall pay all costs of establishing and maintaining the
Trust and shall indemnify the Trustee against any and all expenses (including
attorneys' fees), claims, liabilities, loss and damages arising out of or
relating to this Agreement or the establishment and maintenance of the Trust.
8. Exceptions.
Any other provision herein to the contrary notwithstanding, the Company shall
not be obligated pursuant to the terms of this Agreement:
(a) Claims Initiated by Indemnitee. To indemnify Indemnitee for
any amounts or to advance expenses to Indemnitee with respect to any litigation
or other legal action initiated or brought voluntarily (and not by way defense
or counterclaim) by Indemnitee against the Company or any agent of the Company
unless (i) the Company has joined in or the Board has consented to the
initiation of such litigation or other legal action, (ii) the litigation or
other legal action is brought to establish or enforce a right to indemnification
under Section 5 of this Agreement, or (iii) the litigation or other legal action
is instituted after a Change of Control and Independent Counsel has approved its
initiation; or
(b) No Duplication of Payments. To make any payment in connection
with any claim made against Indemnitee to the extent Indemnitee has otherwise
actually received payment (under any insurance policy, by law or otherwise) of
the amounts otherwise indemnifiable hereunder.
9. Scope; Nonexclusivity.
(a) Scope. In accordance with Section 145(f) of the GCL, the
parties hereto intend that this Agreement shall provide for indemnification in
excess of that expressly permitted by statute, including, without limitation,
any indemnification provided by the Certificate, Bylaws, vote of its
stockholders or disinterested directors or applicable law. To the extent that a
change in applicable law (whether by statue, rule or judicial decision) permits
greater indemnification by agreement than would be afforded currently under the
Certificate, Bylaws, applicable law or this Agreement, it is the intent of the
parties that Indemnitee enjoy by this Agreement the greater benefits so afforded
by such change.
(b) Nonexclusivity. Consistent with Section 145(f) of the GCL,
the indemnification provided by this Agreement shall not be deemed exclusive of
any rights to which Indemnitee may be entitled under the Certificate, Bylaws,
any agreement, any vote of stockholders or disinterested directors, or
otherwise, both as to actions in Indemnitee's official capacities and as to
actions in another capacities while holding such office, and shall continue
after Indemnitee has ceased to be a director, officer, employee or agent.
10
<PAGE> 11
10. Mutual Acknowledgment.
Both the Company and Indemnitee acknowledge that in certain instances, federal
or state law or applicable public policy may prohibit the Company from
indemnifying its directors, officers, employees or other agents under this
Agreement or otherwise. Indemnitee understands and acknowledges that the Company
has undertaken or may be required in the future to undertake with the U.S.
Securities and Exchange Commission or applicable state securities agencies to
submit the question of indemnification to a court in certain circumstances for a
determination of the Company's right under public policy to indemnify
Indemnitee.
11. Directors' and Officers' Liability Insurance.
The Company shall, from time to time, make the good faith determination whether
or not it is practical for the Company to obtain and maintain a policy or
policies of insurance with reputable insurance companies providing the officers
and directors of the Company with coverage for losses from wrongful acts, or to
ensure the Company's performance of its indemnification obligations under this
Agreement. Among other considerations, the Company will weigh the costs of
obtaining such insurance coverage against the protection afforded by such
coverage. To the extent the Company maintains an insurance policy or policies
providing directors' and officers' liability insurance (or such other similar
insurance policy covering key employees, if applicable), Indemnitee shall be
covered by such policy or policies, in accordance with its or their terms, to
the maximum extent of the coverage available for any Company director or
officer. Notwithstanding the foregoing, the Company shall have no obligation to
obtain or maintain such insurance if the Company determines in good faith that
such insurance is not reasonably available, if the premium costs for such
insurance are disproportionate to the amount of coverage provided, if the
coverage provided by such insurance is limited by exclusions so as to provide an
insufficient benefit, or if Indemnitee is covered by similar insurance
maintained by a subsidiary or parent Company.
12. Effectiveness of Agreement.
This Amended and Restated Agreement shall be effective as of June 20, 1991, the
effective date of the June 20th Agreement, and may apply to acts or omissions of
Indemnitee which occurred prior to such effective date if Indemnitee was a
director, officer, employee or agent of the Company, or was serving at the
request of the Company as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, at the time
such act or omission occurred. This Amended and Restated Agreement supersedes
and replaces the Indemnification Agreement, dated as of June 10, 1988 (the
"California Indemnification Agreement"), between The Clothestime, Inc., a
California corporation and a predecessor to the Company
("Clothestime-California"), and the Indemnitee, and the Company hereby assumes
all of the obligations, responsibilities and liabilities of
Clothestime-California under the California Indemnification Agreement.
13. Period of Limitation.
No legal action shall be brought and no cause of action shall be asserted by or
on behalf of the Company or any affiliate of the Company against Indemnitee,
Indemnitee's spouse, heirs, executors, or personal or legal representatives
after the expiration of two years from the date of accrual of such cause of
action, or such longer period as may be required by state law under the
circumstances (i.e., a minimum limitation period that expressly may not be
altered by agreement among the parties). Any claim or cause of action of the
Company or any of its affiliates shall be extinguished and deemed released
unless asserted by the timely filing of a
11
<PAGE> 12
legal action within such period; provided, however, if any shorter period of
limitation is otherwise applicable to any such cause of action, the shorter
period shall govern.
14. Ratification of Acts.
None of the provisions contained in this Agreement is intended to constitute, or
shall be construed in any manner as constituting, a ratification by the Company
(or by any of its directors, officers or other agents) of any action or inaction
on the part of Indemnitee.
15. Continued Employment.
No provision contained herein shall be construed as conferring upon Indemnitee
any right with respect to continuance of performance of services for the
Company, nor shall any such provisions interfere in any way with the right of
the Company to terminate Indemnitee's services as an officer, employee or other
agent at any time with or without cause.
16. Successors and Assigns.
This agreement shall be binding upon, inure to the benefit of and be enforceable
by the parties hereto and their respective successors (including any direct or
indirect successor by purchase, merger, consolidation or otherwise to all or
substantially all of the business and/or assets of the Company), assigns,
spouses, heirs and personal and personal and legal representatives. The Company
shall require and cause any successor (whether direct or indirect by purchase,
merger, consolidation or otherwise) to all, substantially all, or a substantial
part, of the business and/or assets of the Company, by written agreement in form
and substance satisfactory to Indemnitee, expressly to assume and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform if no such succession had taken place.
Nothing in this Section 16 shall be construed to limit the protections afforded
Indemnitee under this Agreement which would occur upon a Change in Control or a
Potential Change in Control. The indemnification provided under this Agreement
shall continue as to Indemnitee for any action taken or not taken while serving
in an indemnified capacities even though Indemnitee may have ceased to serve in
such capacities at the time of any litigation or other legal action relating to
events for which a claim for indemnification is made by Indemnitee hereunder.
17. Notice.
All notices, requests, demands and other communications under this Agreement
shall be in writing and shall be deemed duly given (i) if delivered by hand and
receipted for by the party addressed, on the date of such receipt, or (ii) if
mailed by domestic certified or registered mail with postage prepaid, on the
third business day after the date postmarked. Addresses for notice to either
party are as shown on the signature page of this Agreement, or as subsequently
modified by written notice.
18. Choice of Law.
This Agreement shall be governed by, and its provisions construed in accordance
with, the laws of the State of Delaware, including without limitation, all
matters of formation, construction, validity, performance and enforcement and
without giving effect to the principals of conflicts of laws.
12
<PAGE> 13
19. Severability.
Nothing in this Agreement is intended to require or shall be construed as
requiring the Company to do or fail to do any act in violation of applicable
law. The Company's inability, pursuant to court order, to perform its
obligations under this Agreement shall not constitute a breach of this
Agreement. The provisions of this Agreement shall be severable as provided in
this Section 19. If this Agreement or any portion hereof shall be invalidated or
held unlawful or unenforceable on any ground by any court of competent
jurisdiction, then the Company shall nevertheless indemnify Indemnitee to the
full extent permitted by any applicable portion of this Agreement that shall not
have been invalidated or held unlawful or unenforceable, the provision(s) so
held to be invalid, unenforceable or otherwise illegal shall be reformed to the
extent (and only to the extent) necessary to make it enforceable, valid and
legal and the balance of this Agreement shall be enforceable in accordance with
its terms. Furthermore, to the fullest extent possible, the provisions of this
Agreement (including, without limitation, each portion of this Agreement
containing any provision held to be invalid, void, or otherwise unenforceable,
that is not itself invalid, void or unenforceable) shall be construed so as to
give effect to the intent manifested by the provision held invalid, void or
unenforceable.
20. Amendment and Waiver.
No supplement, modification or amendment of this Agreement shall be binding
unless executed in writing by both of the parties hereto. No waiver of any of
the provisions of this Agreement shall be deemed or shall constitute a waiver of
any other provision hereof (whether or not similar), nor shall such waiver
constitute a continuing waiver. Except as specifically provided herein, no
failure to exercise or any delay in exercising any right or remedy hereunder
shall constitute a waiver thereof.
21. Subrogation.
In the event of payment under this Agreement, the Company shall be subrogated to
the extent of such payment to all of the rights of recovery of Indemnitee, that
may be necessary to secure such rights, including the execution of such
documents necessary to enable the Company effectively to bring suit to enforce
such rights.
22. Future Agreements.
The Company shall not adopt any amendment to its Certificate or Bylaws the
effect of which would be to deny, diminish or encumber Indemnitee's rights to
indemnity pursuant to the Certificate, the Bylaws, the GCL or any other
applicable law as applied to any act or failure to act occurring in whole or in
part prior to the date (the "Effective Date") upon which the amendment was
approved by the Board or the stockholders, as the case may be. In the event that
the Company shall adopt any amendment to its Certificate or Bylaws the effect of
which is to so deny, diminish or encumber Indemnitee's rights to indemnity, such
amendment shall apply only to acts or failures to act occurring entirely after
the Effective Date thereof unless the Indemnitee shall have voted in favor of
such adoption as a director or holder of record of the Company's Voting
Securities, as the case may be.
23. Counterparts.
This Agreement may be executed in counterparts, each of which shall be deemed an
original but all of which counterparts taken together shall constitute one and
the same document.
13
<PAGE> 14
24. Headings.
Section headings herein are for reference purposes only and shall not affect the
meaning or interpretation of any provision of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
THE CLOTHESTIME, INC.
By: /S/DAVID A. SEPJPAL
------------------------------
David A. Sejpal
Chairman of the Board and
Chief Executive Officer
Address: 5325 E. Hunter Avenue
Anaheim, California 92807
AGREED TO AND ACCEPTED:
INDEMNITEE;
DOUGLAS L. PEREIRA
/S/DOUGLAS L. PEREIRA
- --------------------------------
(Signature)
750 South Quail Circle
- --------------------------------
Anaheim, California 92807
- --------------------------------
(Address)
14
<PAGE> 15
EXHIBIT 1
INDEMNIFICATION STATEMENT
STATE OF _____________ )
) SS
COUNTY OF ____________ )
I, ____________________, BEING FIRST DULY SWORN, DO DEPOSE AND SAY AS FOLLOWS:
1. THIS INDEMNIFICATION STATEMENT IS SUBMITTED PURSUANT TO THE
INDEMNIFICATION AGREEMENT, DATED AS OF __________________________, 199__,
BETWEEN THE CLOTHESTIME, INC. (THE "COMPANY"), A DELAWARE CORPORATION, AND
THE UNDERSIGNED.
2. I AM REQUESTING INDEMNIFICATION AGAINST CHARGES, COSTS, EXPENSES
(INCLUDING ATTORNEYS' AND OTHERS' FEES AND EXPENSES), JUDGMENTS, FINES AND
AMOUNTS PAID IN SETTLEMENT, ALL OF WHICH HAVE BEEN OR WILL BE INCURRED BY
ME IN CONNECTION WITH AN ACTUAL OR THREATENED ACTION, SUIT, PROCEEDING OR
CLAIM TO WHICH I AM A PARTY OR AM THREATENED TO BE MADE A PARTY.
3. WITH RESPECT TO ALL MATTERS RELATED TO ANY SUCH ACTION, SUIT, PROCEEDING
OR CLAIM, I AM ENTITLED TO BE INDEMNIFIED AS HEREIN CONTEMPLATED PURSUANT
TO THE AFORESAID INDEMNIFICATION AGREEMENT.
4. WITHOUT LIMITING ANY OTHER RIGHTS WHICH I HAVE OR MAY HAVE, I
AM REQUESTING INDEMNIFICATION AGAINST LIABILITIES WHICH HAVE OR MAY ARISE
OUT OF
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SUBSCRIBED AND SWORN TO BEFORE ME, A NOTARY PUBLIC IN AND FOR SAID COUNTY
AND STATE, THIS _________ DAY OF ____________________, 19 ___.
----------------------------------
NOTARY PUBLIC
(SEAL)
MY COMMISSION EXPIRES THE ______ DAY OF ___________________, 19 ___.
15
<PAGE> 16
EXHIBIT 2
INDEMNIFICATION STATEMENT
STATE OF _____________ )
) SS
COUNTY OF ____________ )
I, __________________, BEING FIRST DULY SWORN TO DEPOSE AND SAY AS FOLLOWS:
1. THIS UNDERTAKING IS SUBMITTED PURSUANT TO THE INDEMNIFICATION
AGREEMENT, DATED AS OF _________________, 19 __, BETWEEN THE CLOTHESTIME,
INC. (THE "COMPANY"), A DELAWARE CORPORATION AND THE UNDERSIGNED.
2. I AM REQUESTING ADVANCEMENT OF CERTAIN COSTS, CHARGES AND EXPENSES WHICH I
HAVE INCURRED OR WILL INCUR IN DEFENDING AN ACTUAL OR PENDING CIVIL OR
CRIMINAL ACTION, SUIT, PROCEEDING OR CLAIM.
3. I HEREBY UNDERTAKE TO REPAY THIS ADVANCEMENT OF EXPENSES IF IT SHALL
ULTIMATELY BE DETERMINED THAT I AM NOT ENTITLED TO BE INDEMNIFIED BY THE
COMPANY UNDER THE AFORESAID AGREEMENT OR OTHERWISE.
4. THE COSTS, CHARGES AND EXPENSES FOR WHICH ADVANCEMENT IS REQUESTED
ARE, IN GENERAL, ALL EXPENSES RELATED TO
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SUBSCRIBED AND SWORN TO BEFORE ME, A NOTARY PUBLIC IN AND FOR SAID COUNTY
AND STATE, THIS _________ DAY OF ____________________, 19 ___.
----------------------------------
NOTARY PUBLIC
(SEAL)
MY COMMISSION EXPIRES THE ______ DAY OF ___________________, 19 ___.
16
<PAGE> 1
EXHIBIT 10.39
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is made as of this 17th of
January, 1997, by and between THE CLOTHESTIME, INC., a Delaware corporation (the
"Company"), and Robert Klausner ("Indemnitee").
WHEREAS, Indemnitee is currently serving as a Director and employee of
the Company and as Director of Store Operations for Clothestime Stores, Inc.,
one of the Company's principal subsidiaries, and the parties wish Indemnitee to
continue in such capacities. The Indemnitee is willing, subject to certain
conditions including, without limitation, the execution and performance of this
Agreement by the Company, to continue in such capacities;
WHEREAS, in addition to the indemnification to which the Indemnitee is
or may be entitled under the Certificate of Incorporation of the Company (the
"Certificate") or the Bylaws of the company (the "Bylaws"), the Company has
obtained at its sole expense insurance protecting its officers and directors
including Indemnitee against certain losses arising out of actual or threatened
actions, suits or proceedings to which such persons may be made or threatened to
be made parties. However, as a result of circumstances having no relation to,
and beyond the control of, the Company and Indemnitee, there can be no assurance
of the continuation or renewal of the insurance;
WHEREAS, the Company and Indemnitee recognize the increasing difficulty
in obtaining directors' and officers' liability insurance, the significant
increases in the cost of such insurance and the general reductions in the
coverage of such insurance;
WHEREAS, the Company and Indemnitee further recognize the substantial
increase in corporate litigation in general, subjecting directors, officers,
employees and other agents to expensive litigation risks;
WHEREAS, the Company desires to attract and retain the services of
highly qualified individuals, such as Indemnitee, to serve as directors,
officers, employees and other agents of the Company and its subsidiaries; and
WHEREAS, in recognition of Indemnitee's need for substantial protection
against personal liability in order to enhance Indemnitee's continued and
effective service to the Company and its subsidiaries, and in order to induce
Indemnitee to provide services to the Company as a Director, officer, or
employee and to provide services in the capacity of a director, officer,
employee, or agent of another corporation (including, without limitation, the
Company's subsidiaries), partnership, joint venture, trust or other enterprise
in which he serves at the request of the Company, the Company wishes to provide
in this Agreement for the indemnification of and the advancing of expenses to
Indemnitee to the fullest extent (whether partial or complete) permitted by law
and as set forth in this Agreement, and, to the extent insurance is maintained,
for the coverage of Indemnitee under the Company's directors' and officers'
liability insurance policies.
<PAGE> 2
NOW, THEREFORE, in consideration of the above premises and of
Indemnitee's promise to continue to serve the Company directly or, at its
request, with another enterprise, and intending to be legally bound hereby, the
parties agree as follows:
1. DEFINED TERMS AND CONSTRUCTION OF CERTAIN PHASES. As used in
this Agreement:
(a) "Board" shall mean the Board of Directors of the Company.
(b) References to the "Company" shall include, in addition to the
resulting corporation, any constituent corporation (including any constituent of
a constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers, employees or other agents, so that if Indemnitee is or was
a director, officer, employee or other agent of such constituent corporation, or
is or was serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, Indemnitee shall stand in the same position under the
provisions of this Agreement with respect to the resulting or surviving
corporation as Indemnitee would have with respect to such constituent
corporation if its separate existence had continued.
(c) A "Change in Control" shall be deemed to have occurred if (i)
any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended), other than a trustee or other fiduciary
holding securities under an employee benefit plan of the Company, a subsidiary
of the Company, or a corporation owned directly or indirectly by the
shareholders of the Company in substantially the same proportions as their
ownership of stock of the Company, is or becomes the "Beneficial Owner" (as
defined in Rule 13d-3 under said Act), directly or indirectly, of securities of
the Company representing 40% or more of the total voting power represented by
the Company's then outstanding Voting Securities; (ii) during a two-year period,
individuals who at the beginning of such period constitute the Board and any new
director whose election or election was approved by a vote of at least
two-thirds (2/3) of the directors then still in office who either were directors
at the beginning of the period or whose election or nomination for election was
previously so approved, cease for any reason to constitute a majority thereof;
(iii) the stockholders of the Company approve a merger or consolidation of the
Company with any other corporation, other than a merger or consolidation that
would result in the Voting Securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining outstanding or by
being converted into Voting Securities of the surviving entity) at least 80% of
the total voting power represented by the Voting Securities of the Company or
such surviving entity outstanding immediately after such merger or
consolidation, or (iv) the stockholders of the Company approve a plan of
complete liquidation of the Company or an agreement for the sale or disposition
by the Company (in one transaction or a series of transactions) of all or
substantially all of the Company's assets.
(d) "Independent Counsel" shall be the person or body appointed
in connection with Section 4 of this Agreement.
(e) "Other enterprises" shall include employee benefit plans.
2
<PAGE> 3
(f) "Potential Change in Control" shall be deemed to have
occurred if (i) the Company enters into an agreement or arrangement, the
consummation of which would result in the occurrence of a Change in Control;
(ii) any person (including the Company) publicly announces an intention to take
or to consider taking actions that, if consummated, would constitute a Change in
Control; (iii) any "person" (as such term is used in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934, as amended), other than a trustee or other
fiduciary holding securities under an employee benefit plan of the Company, a
subsidiary of the Company, a corporation owned directly or indirectly by the
proportions as their ownership of stock of the Company, or a person who is a
party to an indemnification agreement (in a form similar to this Agreement) with
the Company, is or becomes the "Beneficial Owner" (as defined in Rule 13d-3
under said Act), directly or indirectly, of securities of the Company
representing 15% or more of the total voting power represented by the Company's
then outstanding Voting Securities; or (iv) the Board adopts a resolution to the
effect that, for purposes of this Agreement, a Potential Change in Control has
occurred.
(g) "Serving at the request of the Company" shall include,
without limitation, any service as a director, officer, employee or agent of the
Company or any of its subsidiaries which imposes duties on, or involves services
by, Indemnitee with respect to an employee benefit plan.
(h) "Voting Securities" shall mean any securities of the Company
that are entitled to vote generally in the election of directors.
2. INITIAL INDEMNITY.
(a) Indemnity in Third Party Proceedings. The Company shall
indemnify the Indemnitee when he was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, administrative, investigative, or criminal (other than an action
by or in the right of the Company), by reason of the fact that he is or was or
had agreed to become a director, officer, employee or agent of the Company, or
is or was serving or had agreed to serve at the request of the Company as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, or by reason of any action alleged to have
been taken or omitted in such capacities, against any and all costs, charges and
expenses (including without limitation attorneys' and others' fees and
expenses), judgments, fines and amounts paid in settlement actually and
reasonably incurred by the Indemnitee in connection therewith and any appeal
therefrom if the Indemnitee acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Company, and with
respect to any criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction or upon a plea of nolo contendere or its
equivalent shall not, of itself, create a presumption that the Indemnitee did
not satisfy the foregoing standard of conduct to the extent applicable thereto.
(b) Indemnity in Proceedings By or In the Name of the
Corporation. The Company shall indemnify the Indemnitee when he was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding by or in the right of the Company to
procure a judgment in its favor by reason of the fact that he is or was or had
agreed to become a director, officer, employee or agent of the Company, or is or
was
3
<PAGE> 4
serving or had agreed to serve at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise against costs, charges and expenses (including
attorneys' and others' fees and expenses) actually and reasonably incurred by
him in connection with the defense or settlement thereof or any appeal therefrom
if he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Company and except that no indemnification
shall be made in respect of any claim, issue or matter as to which the
Indemnitee shall have been adjudged to be liable to the Company unless and only
to the extent that the Court of Chancery or the court in which such action, suit
or proceeding was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case, the
Indemnitee is fairly and reasonably entitled to indemnity for such expenses
which the Court Chancery or such other court shall deem proper.
(c) Indemnification of Expenses of Successful Party. To the
extent that the Indemnitee has been successful on the merits or otherwise,
including, without limitation the dismissal of an action without prejudice, in
defense of any action, suit or proceeding referred to in Sections 2(a) or 2(b)
hereof or in defense of any claim, issue or matter therein, he shall be
indemnified against costs, charges and expenses (including attorney's and
others' fees and expenses) actually and reasonably incurred by him in connection
therewith.
(d) Determination of Right on Indemnitee to Indemnification. Any
indemnification under Sections 2(a) or 2(b) (unless ordered by a court) shall be
made by the Company only as authorized in the specific case upon a determination
in accordance with Section 4 hereof or any applicable provision of the
Certificate, Bylaws, other agreement, resolution or otherwise. Such
determination shall be made (i) by the Board by a majority vote of a quorum
consisting of directors who were not parties to such action, suit or proceeding
or (ii) if such a quorum of disinterested directors is not available or so
directs, by independent legal counsel (designated in the manner provided below
in this subsection (d)) in a written opinion or (iii) by the stockholders of the
Company (the "Stockholders"). Independent legal counsel shall be designated by
vote of a majority of the disinterested directors; provided, however, that if
the Board is unable or fails to so designate, such designation shall be made by
the Indemnitee subject to the approval of the Company (which approval shall not
be unreasonably withheld). Independent legal counsel shall not be any person or
firm who, under the applicable standards professional conduct then prevailing,
would have a conflict of interest in representing either the Company or the
Indemnitee in an action to determine the Indemnitee's rights under this
Agreement. The Company agrees to pay the reasonable fees and expenses of such
independent legal counsel and to indemnify fully such counsel against costs,
charges and expenses (including attorneys' and others' fees and expenses)
actually and reasonably incurred by such counsel in connection with this
Agreement or the opinion of such counsel pursuant hereto.
(e) Advancement of Expenses. All expenses (including attorneys'
and others' fees and expenses) incurred by the Indemnitee in his capacities as a
director, officer, or employee of the Company or in his capacity as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise in which he was serving at the request of the Company
in defending a civil or criminal action, suit or proceeding shall be paid by the
Company in advance of the final disposition of such action, suit or proceeding
in the manner prescribed by Section 4(b) hereof.
4
<PAGE> 5
3. Additional Indemnification.
(a) Right to additional Indemnification. Pursuant to Section 145
(f) of the General Corporation Law of the State of Delaware (the "GCL"), without
limiting any right which the Indemnitee may have pursuant to Section 2 hereof,
the Certificate, the Bylaws, the GCL, any policy of insurance or otherwise, but
subject to the limitations on the maximum permissible indemnity which may exist
under applicable law at the time of any request for indemnity hereunder
determined as contemplated by this Section 3(a), the Company shall indemnify the
Indemnitee against any amount which he is or becomes legally obligated to pay
relating to or arising out of any claim made against him because of any act,
failure to act or neglect or breach of duty, including any actual or alleged
error, misstatement or misleading statement, which he commits, suffers, permits
or acquiesces in while acting in his capacities as a director, an officer, an
employee or agent of the Company, or, at the request of the Company, as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, whether prior to or after the date of this
Agreement and whether or not the basis of the claim is alleged action or
inaction in an official capacities as a director, officer, employee or agent or
in any other capacities while serving as a director, officer, employee or agent
or in any other capacities while serving as a director, officer, employee or
agent of the Company. The payments which the Company is obligated to make
pursuant to this Section 3 shall include without limitation (i) damages,
judgments, settlements (in accordance with Section 6(d) of this Agreement),
fines and similar penalties, and excise taxes and penalties assessed on a person
with respect to an employee benefit plan, (ii) charges costs expenses (including
attorneys' and others' fees and related disbursements), expenses of
investigation, expenses of defense of legal actions, suits, proceedings or
claims and appeals therefrom, expenses relating to serving as a witness and
expenses of appeal, attachment or similar bonds, and (iii) any interest,
assessments, or other charges imposed thereon and any federal, state, local or
foreign taxes imposed as a result of the actual or deemed receipt of such
payments under this Agreement. Notwithstanding the foregoing, the Company shall
not be obligated under this Section 3(a) to make any payment in connection with
any claim against the Indemnitee:
(i) to the extent of any fine or similar governmental imposition
which the Company is prohibited by applicable law from paying which results in a
final, nonappealable order; or
(ii) to the extent based upon or attributable to the Indemnitee
gaining in fact a personal profit to which he was not legally entitled,
including without limitation profits made from the purchase and sale by the
Indemnitee of equity securities of the Company which are recoverable by the
Company which are recoverable by the Company pursuant to Section 16(b) of the
Securities Exchange Act of 1934, as amended, and profits arising from
transactions in publicly traded securities of the Company which were effected by
the Indemnitee in violation of Section 10(b) of the Securities Exchange Act of
1934, as amended, including Rule 10b-5 promulgated thereunder.
The determination of whether the Indemnitee shall be entitled to indemnification
under this section 3(a) shall be made in accordance with section 4(d) hereof.
5
<PAGE> 6
(b) Advancement of Expenses Relating to Additional
Indemnification. Expenses (including without limitation attorneys' and others'
fees and expenses) incurred by Indemnitee in defending any ctual or threatened
civil or criminal action, suit, proceeding or claim shall be paid by the Company
in advance of the final disposition thereof as authorized in accordance with
Section 4(b) hereof.
4. Certain Procedures Relating to Indemnification and Advancement of
Expenses.
(a) General. Except as otherwise permitted or required by the
GCL, for purposes of pursuing his rights to indemnification under Sections 2(a),
2(b), or 3(a) hereof, as the case may be, the Indemnitee may, but shall not be
required to, (i) submit to the Board a sworn statement of request for
indemnification substantially in the form of Exhibit 1 attached hereto and made
a part hereof (the "Indemnification Statement") averring that he is entitled to
indemnification hereunder; and (ii) present to the Company reasonable evidence
of all expenses for which payment is requested. Submission of an Indemnification
Statement to the Board shall create a presumption that the Indemnitee is
entitled to indemnification under Sections 2(a), 2(b) or 3(a) hereof, as the
case may be, and the Board shall be deemed to have determined that the
Indemnitee is entitled to such indemnification unless with in 30 calendar days
after submission of the Indemnification Statement the Board shall determine by
vote of a majority of the directors at a meeting at which a quorum is present,
based upon clear and convincing evidence (sufficient to rebut the foregoing
presumption), and the Indemnitee shall have received notice within such period
in writing of such determination that the Indemnification is not so entitled to
indemnification, which notice shall disclose with particularity the evidence in
support of the Board's determination. The foregoing notice shall be sworn to by
all persons who participated in the determination and voted to deny
indemnification. The provisions of this section 4(a) are intended to be
procedural only and shall not affect the right of the Indemnitee to
indemnification under this Agreement and any determination by the Board that the
Indemnitee is not entitled to indemnification and any failure to make the
payments requested in the Indemnification Statement shall be subject to judicial
review as provided in Section 5 hereof.
(b) Undertaking or Expense Request Regarding Advancement of
Expenses. For purposes of determining whether to authorize advancement of
expenses pursuant to Section 2(e) hereof, the Indemnitee shall submit to the
board a sworn statement of request for advancement of expenses substantially in
the form of Exhibit 2 attached hereto and made a part hereof (the
"Undertaking"), averring that (i) he has reasonably incurred or will reasonably
incur actual expenses in defending an actual civil or criminal action, suit,
proceeding or claim and (ii) he undertakes to repay such amount if it shall
ultimately be determined that he is not entitled to be indemnified by the
Company under this Agreement or otherwise. For purposes of requesting
advancement of expenses pursuant to Section 3(b) hereof, the Indemnitee (i) may,
but shall not be required to, submit an Undertaking or (ii) shall submit such
other form of request as he determines to be appropriate (an "Expense Request").
Upon receipt of an Undertaking or Expense Request, as the case may be, the Board
shall within 20 calendar days authorize immediate payment of the expenses stated
in the Undertaking or Expense Request, whereupon such payments shall immediately
be made by the Company. No security shall be required in connection with any
Undertaking or Expense Request and any Undertaking or Expense Request shall be
accepted without reference to the Indemnitee's ability to make repayment.
6
<PAGE> 7
(c) Independent Counsel. Notwithstanding anything to the contrary
contained in Sections 2(d) or 4(a) of this Agreement, after a Change of Control
and if requested by the Indemnitee at the time of making a claim for
indemnification, (i) any determination under Section 2(a) or 2(b) (unless
ordered by a court) shall be made by Independent Counsel (as defined below), and
(ii) after the submission of an Indemnification Statement, the determination
pursuant to Section 4(a) whether an Indemnitee shall be entitled to
indemnification under Sections 2(a), 2(b) or 3(a) hereof, as the case may be,
shall be made by Independent Counsel (as defined below) instead of by the Board.
For purposes of this Section 4(c) "Independent Counsel" shall be an attorney
selected by Indemnitee and approved by the Company (which approval shall not be
unreasonably withheld), (i) who has not otherwise performed services for the
Company or the Indemnitee (other than in connection with indemnification
matters) within the three years prior to the selection of the Independent
Counsel, and (ii) who shall not, under the applicable standards of professional
conduct then prevailing, have a conflict of interest in representing either the
Company or Indemnitee in an action to determine Indemnitee's rights under this
Agreement. Any determination by Independent Counsel as to whether and to what
extent the Indemnitee should be permitted to be indemnified under applicable law
shall be rendered by its written opinion to the Company and Indemnitee. The
Company agrees to pay the reasonable fees of the Independent Counsel and to
indemnify fully such counsel against any and all expenses (including attorneys'
and others' fees and expenses), claims, liabilities, loss, and damages arising
out of or relating to this Agreement, the engagement of Independent Counsel
pursuant hereto or the opinion of such counsel pursuant hereto.
5. Indemnification Process and Appeal.
(a) Suit to Enforce Rights. If a claim for indemnification made
to the Company pursuant to Section 4 hereof is not paid in full by the Company
within 30 calendar days after a written claim has been received by the Company,
the Indemnitee may at any time thereafter bring suit against the Company to
recover the unpaid amount of the claim in any court having subject matter
jurisdiction thereof. The Company hereby consents to service of process and to
appear in any such proceeding. The remedy provided for in this Section 5 shall
be in addition to any other remedies available to Indemnitee in law or equity.
(b) Defense to Indemnification, Burden of Proof and Presumptions.
In any action brought under Section 5(a) hereof, it shall be a defense to a
claim for indemnification pursuant to Sections 2(a) or 2(b) hereof (other than
an action brought to enforce a claim for expenses incurred in defending any
proceeding in advance of its final disposition where the Undertaking, if any is
required, has not met the standards of conduct which make it permissible under
the GCL for the Company to indemnify the Indemnitee for the amount claimed, but
the burden of proving such defense shall be on the Company. It shall be a
defense to any action brought by Indemnitee against the Company to enforce this
Agreement that it is not permissible under applicable law for the Company to
indemnify Indemnitee for the amount claimed, but the burden of proving such
defense shall be on the Company. Neither the failure of the Company (including
its Board, independent legal counsel or its stockholders) or Independent counsel
to have made a determination prior to the commencement of such action by
Indemnitee that indemnification of the claimant is proper under the
circumstances because he has met the standard of conduct set forth in applicable
law, nor an actual determination by the Company (including its Board,
independent legal counsel or its stockholders) or Independent Counsel that
Indemnitee had not met such applicable standard of conduct, shall
7
<PAGE> 8
be a defense to the action or create a presumption that Indemnitee has
not met the applicable standard of conduct.
(c) Indemnification for Expenses Incurred in Enforcing Rights. It
is the intent of the Company that the Indemnitee not be required to incur the
expenses associated with the enforcement of his rights under this Agreement by
litigation or other legal action because the cost and expense thereof would
substantially detract from the benefits intended to be extended to the
Indemnitee hereunder. Accordingly, if it should appear to the Indemnitee that
the Company has failed to comply with any of its obligations under the Agreement
or in the event that the Company or any other person takes any action to declare
the Agreement void or proceeding designed (or having the effect of being
designed) to deny, or to recover from, the Indemnitee the benefits intended to
be provided to the Indemnitee hereunder, the Company irrevocably authorizes the
Indemnitee from time to time to retain counsel of his choice, at the expense of
the Company as hereafter provided, to represent the Indemnitee in connection
with the initiation or defense of any litigation or other legal action, whether
by or against the Company or any director, officer, stockholder or other person
affiliated with the Company, in any jurisdiction. Regardless of the outcome
thereof, the Company shall pay and be solely responsible for any and all costs,
charges and expenses (including without limitation attorneys' and others' fees
and (expenses) reasonably incurred by the Indemnitee (i) as a result of the
Company's failure to perform this Agreement or any provision thereof or (ii) as
a result of the Company or any other person contesting the validity or
enforceability of this Agreement or any provision thereof as aforesaid; provided
that, if and to the extent that a court of competent jurisdiction determines (in
a final judicial determination as to which all rights of appeal therefrom have
been exhausted or waived or have lapsed) that each of the material assertions
made by Indemnitee in such litigation or other legal action was not made in good
faith or was frivolous, the Company shall not be obligated to pay any such
costs, charges and expenses incurred by Indemnitee in connection with such suit
and shall be entitled to be reimbursed by Indemnitee (who hereby agrees to
reimburse the Company) for all such amounts theretofore paid under this Section
5(c). Notwithstanding the procedure for selection of counsel in Section 6(c)
herein, in connection with the assertion of any claim under this Section 5(c),
Indemnitee from time to time may retain counsel of his choice to represent him.
6. Notification and Defense of Proceeding.
(a) Notice/Cooperation by Indemnitee. Indemnitee shall give the
Company notice in writing as soon as practicable of any claim made against
Indemnitee for which indemnification will or could be sought under this
Agreement (for purposes of this Section 6, a "Claim"). Indemnitee shall also
provide the Company such information and cooperation as the Company from time to
time may reasonably request and as shall reasonably be within Indemnitee's power
to provide.
(b) Notice to Insurers. If at the time of the receipt of a notice
of a Claim pursuant to Section 6(a) hereof the Company has directors' and
officers' liability insurance (or a similar policy covering key employees, if
applicable) in effect, the Company shall give prompt notice of such Claim to the
insurers in accordance with the procedures set forth in the respective policies.
The Company thereafter shall take all necessary or desirable action to cause
such insurers to pay, on behalf of Indemnitee, all amounts payable as a result
of such Claim in accordance with the terms of such policies.
8
<PAGE> 9
(c) Selection of Counsel. With respect to any litigation or other
legal action relating to a Claim as to which Indemnitee notifies the Company
(for purposes of this Section 6, a "Proceeding"), the Company will be entitled
to participate in the Proceeding at its own expense and except as otherwise
provided below, to the extent the Company so wishes, it may assume the defense
thereof with counsel selected by the Company and approved by Indemnitee, which
approval shall not be unreasonably withheld. After notice from the Company to
Indemnitee of its election to assume the defense of any Proceeding, the Company
will not be liable to Indemnitee under this Agreement or otherwise for any
expenses subsequently incurred by Indemnitee in connection with the defense of
such Proceeding other than reasonable costs of investigation or as otherwise
provided below. Indemnitee shall have the right to employ his own counsel in
such Proceeding, but all expenses related thereto incurred after notice from the
Company of its assumption of the defense shall be at Indemnitee's expense
unless: (i) the employment of counsel by Indemnitee has been authorized by the
Company; (ii) Indemnitee has reasonably determined and either the Company shall
have agreed, or disinterested counsel (as defined in this Section 6(c)) shall
have determined, that there may be a conflict of interest between Indemnitee and
the Company in the defense of the Proceeding; (iii) after a Change in Control,
the employment of counsel by Indemnitee has been approved by the Independent
Counsel; or (iv) the Company shall not in fact have employed counsel to assume
the defense of such Proceeding, in each of which case all expenses of the
Proceeding shall be borne by the Company, and Indemnitee's counsel shall have
been approved by the Company (which approval may not be unreasonably withheld)
and any carrier of an applicable insurance policy if required under the terms of
that policy or under applicable law. As used in this Section 6(c),
"disinterested counsel" shall mean counsel selected and compensated by the
Company, and approved by Indemnitee (which approval may not be unreasonably
withheld), to determine whether a conflict of interest may exist, which counsel
shall not represent the Company, Indemnitee or any other party to the Proceeding
for which indemnification is sought. Disinterested counsel shall be selected
promptly following the notice from Indemnitee to the Company of Indemnitee's
belief that a conflict of interest may exist. The company shall not be entitled
to assume the defense of any Proceeding as to which the determination provided
for in (ii) above shall have been made. Nothing herein shall limit the right of
Indemnitee to employ counsel at Indemnitee's sole expense.
(d) Settlements. Notwithstanding anything to the contrary
contained in this Agreement, the Company shall not be liable to indemnify
Indemnitee under this Agreement or otherwise for any amounts paid in settlement
of any Proceeding effected without the Company's written consent; provided,
however, that if a Change in Control has occurred, the Company shall be liable
for indemnification of Indemnitee for amounts paid in settlement if the
Independent Counsel has approved the settlement. The Company shall not settle
any Proceeding in any manner that would impose any penalty or limitation on
Indemnitee without Indemnitee's written consent. Neither the Company nor the
Indemnitee will unreasonably withhold its consent to any proposed settlement.
The Company shall not be liable to indemnify Indemnitee under this Agreement
with regard to any judicial award if the Company was not given a reasonable and
timely opportunity, at its expense, to participate in the defense of such
action; the Company's liability hereunder shall not be excused if participation
in the Proceeding by the Company was barred by this Agreement.
9
<PAGE> 10
7. Establishment of a Trust.
Immediately upon the occurrence of a Change in Control or a Potential Change in
Control, the Company shall, upon written request by Indemnitee, create a trust
(a "Trust") for the benefit of Indemnitee and from time to time upon written
request of Indemnitee shall fund the Trust in an amount sufficient to satisfy
any and all amounts reasonably anticipated at the time of each such request to
be incurred in connection with any claim made by Indemnitee. The amount or
amounts to be deposited in the Trust pursuant to the foregoing funding
obligation shall be determined (i) prior to the occurrence of a Change in
Control or a Potential Change in Control, (a) the Board by a majority vote of a
quorum consisting of directors who were not parties to the action, suit or
proceeding serving as the basis of a claim by Indemnitee, or (b) if such a
quorum of disinterested directors is not available or so directs, by independent
legal counsel (designated in the manner provided in Section 2(d) in a written
opinion or (c) by the Stockholders, or (ii) after the occurrence of a Change in
Control or a Potential Change in Control, by Independent Counsel as defined in
Section 4(c) (for purposes of this Section 7, the "Reviewing Party"). The terms
of the Trust shall provide that upon a Change in Control (i) the Trust shall not
be revoked or the principal thereof invaded without the written consent of
Indemnitee, (ii) the trustee of the Trust (the "Trustee") shall advance within
20 business days of the request by Indemnitee, any and all expenses to
Indemnitee (and Indemnitee hereby agrees to reimburse the Trust under the same
circumstances for which Indemnitee would be required to reimburse the Company
under Section 4(b) of this Agreement), (iii) the Trust shall continue to be
funded by the Company in accordance with the funding obligation set forth above,
(iv) the Trustee shall promptly pay to Indemnitee all amounts for which
Indemnitee shall be entitled to indemnification pursuant to this Agreement or
otherwise, and (v) all unexpended funds in the Trust shall revert to the Company
upon a final determination by the Reviewing Party or a court of competent
jurisdiction, as the case may be, that Indemnitee has been fully indemnified
under the terms of this Agreement. The Trustee shall be chosen by Indemnitee.
Nothing in this Section 7 shall relieve the Company of any of its obligations
under this Agreement. All income earned on the assets held in the Trust shall be
reported as income by the Company for federal, state, local and foreign tax
purposes. The Company shall pay all costs of establishing and maintaining the
Trust and shall indemnify the Trustee against any and all expenses (including
attorneys' fees), claims, liabilities, loss and damages arising out of or
relating to this Agreement or the establishment and maintenance of the Trust.
8. Exceptions.
Any other provision herein to the contrary notwithstanding, the Company shall
not be obligated pursuant to the terms of this Agreement:
(a) Claims Initiated by Indemnitee. To indemnify Indemnitee for
any amounts or to advance expenses to Indemnitee with respect to any litigation
or other legal action initiated or brought voluntarily (and not by way defense
or counterclaim) by Indemnitee against the Company or any agent of the Company
unless (i) the Company has joined in or the Board has consented to the
initiation of such litigation or other legal action, (ii) the litigation or
other legal action is brought to establish or enforce a right to indemnification
under Section 5 of this Agreement, or (iii) the litigation or other legal action
is instituted after a Change of Control and Independent Counsel has approved its
initiation; or
10
<PAGE> 11
(b) No Duplication of Payments. To make any payment in connection
with any claim made against Indemnitee to the extent Indemnitee has otherwise
actually received payment (under any insurance policy, by law or otherwise) of
the amounts otherwise indemnifiable hereunder.
9. Scope; Nonexclusivity.
(a) Scope. In accordance with Section 145(f) of the GCL, the
parties hereto intend that this Agreement shall provide for indemnification in
excess of that expressly permitted by statute, including, without limitation,
any indemnification provided by the Certificate, Bylaws, vote of its
stockholders or disinterested directors or applicable law. To the extent that a
change in applicable law (whether by statue, rule or judicial decision) permits
greater indemnification by agreement than would be afforded currently under the
Certificate, Bylaws, applicable law or this Agreement, it is the intent of the
parties that Indemnitee enjoy by this Agreement the greater benefits so afforded
by such change.
(b) Nonexclusivity. Consistent with Section 145(f) of the GCL,
the indemnification provided by this Agreement shall not be deemed exclusive of
any rights to which Indemnitee may be entitled under the Certificate, Bylaws,
any agreement, any vote of stockholders or disinterested directors, or
otherwise, both as to actions in Indemnitee's official capacities and as to
actions in another capacities while holding such office, and shall continue
after Indemnitee has ceased to be a director, officer, employee or agent.
10. Mutual Acknowledgment.
Both the Company and Indemnitee acknowledge that in certain instances, federal
or state law or applicable public policy may prohibit the Company from
indemnifying its directors, officers, employees or other agents under this
Agreement or otherwise. Indemnitee understands and acknowledges that the Company
has undertaken or may be required in the future to undertake with the U.S.
Securities and Exchange Commission or applicable state securities agencies to
submit the question of indemnification to a court in certain circumstances for a
determination of the Company's right under public policy to indemnify
Indemnitee.
11. Directors' and Officers' Liability Insurance.
The Company shall, from time to time, make the good faith determination whether
or not it is practical for the Company to obtain and maintain a policy or
policies of insurance with reputable insurance companies providing the officers
and directors of the Company with coverage for losses from wrongful acts, or to
ensure the Company's performance of its indemnification obligations under this
Agreement. Among other considerations, the Company will weigh the costs of
obtaining such insurance coverage against the protection afforded by such
coverage. To the extent the Company maintains an insurance policy or policies
providing directors' and officers' liability insurance (or such other similar
insurance policy covering key employees, if applicable), Indemnitee shall be
covered by such policy or policies, in accordance with its or their terms, to
the maximum extent of the coverage available for any Company director or
officer. Notwithstanding the foregoing, the Company shall have no obligation to
obtain or maintain such insurance if the Company determines in good faith that
such insurance is not reasonably available, if the premium costs for such
insurance are disproportionate to the amount of coverage provided, if the
coverage provided by such insurance is limited by
11
<PAGE> 12
exclusions so as to provide an insufficient benefit, or if Indemnitee is covered
by similar insurance maintained by a subsidiary or parent Company.
12. Effectiveness of Agreement.
This Agreement shall be effective as of the date set forth on the first page and
may apply to acts or omissions of Indemnitee which occurred prior to such date
if Indemnitee was a director, officer, employee or agent of the Company, or was
serving at the request of the Company as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other enterprise,
at the time such act or omission occurred.
13. Period of Limitation.
No legal action shall be brought and no cause of action shall be asserted by or
on behalf of the Company or any affiliate of the Company against Indemnitee,
Indemnitee's spouse, heirs, executors, or personal or legal representatives
after the expiration of two years from the date of accrual of such cause of
action, or such longer period as may be required by state law under the
circumstances (i.e., a minimum limitation period that expressly may not be
altered by agreement among the parties). Any claim or cause of action of the
Company or any of its affiliates shall be extinguished and deemed released
unless asserted by the timely filing of a legal action within such period;
provided, however, if any shorter period of limitation is otherwise applicable
to any such cause of action, the shorter period shall govern.
14. Ratification of Acts.
None of the provisions contained in this Agreement is intended to constitute, or
shall be construed in any manner as constituting, a ratification by the Company
(or by any of its directors, officers or other agents) of any action or inaction
on the part of Indemnitee.
15. Continued Employment.
No provision contained herein shall be construed as conferring upon Indemnitee
any right with respect to continuance of performance of services for the
Company, nor shall any such provisions interfere in any way with the right of
the Company to terminate Indemnitee's services as an officer, employee or other
agent at any time with or without cause.
16. Successors and Assigns.
This agreement shall be binding upon, inure to the benefit of and be enforceable
by the parties hereto and their respective successors (including any direct or
indirect successor by purchase, merger, consolidation or otherwise to all or
substantially all of the business and/or assets of the Company), assigns,
spouses, heirs and personal and personal and legal representatives. The Company
shall require and cause any successor (whether direct or indirect by purchase,
merger, consolidation or otherwise) to all, substantially all, or a substantial
part, of the business and/or assets of the Company, by written agreement in form
and substance satisfactory to Indemnitee, expressly to assume and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform if no such succession had taken place.
Nothing in this Section 16 shall be construed to limit the protections afforded
Indemnitee under this Agreement which would occur upon a Change in Control or a
Potential
12
<PAGE> 13
Change in Control. The indemnification provided under this Agreement shall
continue as to Indemnitee for any action taken or not taken while serving in an
indemnified capacities even though Indemnitee may have ceased to serve in such
capacities at the time of any litigation or other legal action relating to
events for which a claim for indemnification is made by Indemnitee hereunder.
17. Notice.
All notices, requests, demands and other communications under this Agreement
shall be in writing and shall be deemed duly given (i) if delivered by hand and
receipted for by the party addressed, on the date of such receipt, or (ii) if
mailed by domestic certified or registered mail with postage prepaid, on the
third business day after the date postmarked. Addresses for notice to either
party are as shown on the signature page of this Agreement, or as subsequently
modified by written notice.
18. Choice of Law.
This Agreement shall be governed by, and its provisions construed in accordance
with, the laws of the State of Delaware, including without limitation, all
matters of formation, construction, validity, performance and enforcement and
without giving effect to the principals of conflicts of laws.
19. Severability.
Nothing in this Agreement is intended to require or shall be construed as
requiring the Company to do or fail to do any act in violation of applicable
law. The Company's inability, pursuant to court order, to perform its
obligations under this Agreement shall not constitute a breach of this
Agreement. The provisions of this Agreement shall be severable as provided in
this Section 19. If this Agreement or any portion hereof shall be invalidated or
held unlawful or unenforceable on any ground by any court of competent
jurisdiction, then the Company shall nevertheless indemnify Indemnitee to the
full extent permitted by any applicable portion of this Agreement that shall not
have been invalidated or held unlawful or unenforceable, the provision(s) so
held to be invalid, unenforceable or otherwise illegal shall be reformed to the
extent (and only to the extent) necessary to make it enforceable, valid and
legal and the balance of this Agreement shall be enforceable in accordance with
its terms. Furthermore, to the fullest extent possible, the provisions of this
Agreement (including, without limitation, each portion of this Agreement
containing any provision held to be invalid, void, or otherwise unenforceable,
that is not itself invalid, void or unenforceable) shall be construed so as to
give effect to the intent manifested by the provision held invalid, void or
unenforceable.
13
<PAGE> 14
20. Amendment and Waiver.
No supplement, modification or amendment of this Agreement shall be binding
unless executed in writing by both of the parties hereto. No waiver of any of
the provisions of this Agreement shall be deemed or shall constitute a waiver of
any other provision hereof (whether or not similar), nor shall such waiver
constitute a continuing waiver. Except as specifically provided herein, no
failure to exercise or any delay in exercising any right or remedy hereunder
shall constitute a waiver thereof.
21. Subrogation.
In the event of payment under this Agreement, the Company shall be subrogated to
the extent of such payment to all of the rights of recovery of Indemnitee, that
may be necessary to secure such rights, including the execution of such
documents necessary to enable the Company effectively to bring suit to enforce
such rights.
22. Future Agreements.
The Company shall not adopt any amendment to its Certificate or Bylaws the
effect of which would be to deny, diminish or encumber Indemnitee's rights to
indemnity pursuant to the Certificate, the Bylaws, the GCL or any other
applicable law as applied to any act or failure to act occurring in whole or in
part prior to the date (the "Effective Date") upon which the amendment was
approved by the Board or the stockholders, as the case may be. In the event that
the Company shall adopt any amendment to its Certificate or Bylaws the effect of
which is to so deny, diminish or encumber Indemnitee's rights to indemnity, such
amendment shall apply only to acts or failures to act occurring entirely after
the Effective Date thereof unless the Indemnitee shall have voted in favor of
such adoption as a director or holder of record of the Company's Voting
Securities, as the case may be.
23. Counterparts.
This Agreement may be executed in counterparts, each of which shall be deemed an
original but all of which counterparts taken together shall constitute one and
the same document.
14
<PAGE> 15
24. Headings.
Section headings herein are for reference purposes only and shall not affect the
meaning or interpretation of any provision of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
THE CLOTHESTIME, INC.
By: /s/ DAVID A. SEJPAL
------------------------------
David A. Sejpal
Chairman of the Board and
Chief Executive Officer
Address: 5325 E. Hunter Avenue
Anaheim, California 92807
AGREED TO AND ACCEPTED:
INDEMNITEE;
Robert Klausner
/s/ ROBERT KLAUSNER
- -------------------------------
(Signature)
18663 Cumnock Place
- -------------------------------
Northridge, California 91326
- -------------------------------
(Address)
15
<PAGE> 16
EXHIBIT 1
INDEMNIFICATION STATEMENT
STATE OF _____________ )
) SS
COUNTY OF ____________ )
I, ____________________, BEING FIRST DULY SWORN, DO DEPOSE AND SAY AS FOLLOWS:
1. THIS INDEMNIFICATION STATEMENT IS SUBMITTED PURSUANT TO THE
INDEMNIFICATION AGREEMENT, DATED AS OF __________________________, 199__,
BETWEEN THE CLOTHESTIME, INC. (THE "COMPANY"), A DELAWARE CORPORATION, AND
THE UNDERSIGNED.
2. I AM REQUESTING INDEMNIFICATION AGAINST CHARGES, COSTS, EXPENSES
(INCLUDING ATTORNEYS' AND OTHERS' FEES AND EXPENSES), JUDGMENTS, FINES AND
AMOUNTS PAID IN SETTLEMENT, ALL OF WHICH HAVE BEEN OR WILL BE INCURRED BY
ME IN CONNECTION WITH AN ACTUAL OR THREATENED ACTION, SUIT, PROCEEDING OR
CLAIM TO WHICH I AM A PARTY OR AM THREATENED TO BE MADE A PARTY.
3. WITH RESPECT TO ALL MATTERS RELATED TO ANY SUCH ACTION, SUIT, PROCEEDING
OR CLAIM, I AM ENTITLED TO BE INDEMNIFIED AS HEREIN CONTEMPLATED PURSUANT
TO THE AFORESAID INDEMNIFICATION AGREEMENT.
4. WITHOUT LIMITING ANY OTHER RIGHTS WHICH I HAVE OR MAY HAVE, I AM
REQUESTING INDEMNIFICATION AGAINST LIABILITIES WHICH HAVE OR MAY ARISE OUT
OF
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SUBSCRIBED AND SWORN TO BEFORE ME, A NOTARY PUBLIC IN AND FOR SAID COUNTY
AND STATE, THIS _________ DAY OF ____________________, 19 ___.
----------------------------------
NOTARY PUBLIC
(SEAL)
MY COMMISSION EXPIRES THE ______ DAY OF ___________________, 19 ___.
16
<PAGE> 17
EXHIBIT 2
INDEMNIFICATION STATEMENT
STATE OF _____________ )
) SS
COUNTY OF ____________ )
I, __________________, BEING FIRST DULY SWORN TO DEPOSE AND SAY AS FOLLOWS:
1. THIS UNDERTAKING IS SUBMITTED PURSUANT TO THE INDEMNIFICATION
AGREEMENT, DATED AS OF _________________, 19 __, BETWEEN THE CLOTHESTIME,
INC. (THE "COMPANY"), A DELAWARE CORPORATION AND THE UNDERSIGNED.
2. I AM REQUESTING ADVANCEMENT OF CERTAIN COSTS, CHARGES AND EXPENSES WHICH I
HAVE INCURRED OR WILL INCUR IN DEFENDING AN ACTUAL OR PENDING CIVIL OR
CRIMINAL ACTION, SUIT, PROCEEDING OR CLAIM.
3. I HEREBY UNDERTAKE TO REPAY THIS ADVANCEMENT OF EXPENSES IF IT SHALL
ULTIMATELY BE DETERMINED THAT I AM NOT ENTITLED TO BE INDEMNIFIED BY THE
COMPANY UNDER THE AFORESAID AGREEMENT OR OTHERWISE.
4. THE COSTS, CHARGES AND EXPENSES FOR WHICH ADVANCEMENT IS REQUESTED ARE, IN
GENERAL, ALL EXPENSES RELATED TO
--------------------------------------------------------------------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------
SUBSCRIBED AND SWORN TO BEFORE ME, A NOTARY PUBLIC IN AND FOR SAID COUNTY
AND STATE, THIS _________ DAY OF ____________________, 19 ___.
----------------------------------
NOTARY PUBLIC
(SEAL)
MY COMMISSION EXPIRES THE ______ DAY OF ___________________, 19 ___.
17
<PAGE> 1
EXHIBIT 10.40
INDEMNIFICATION
AGREEMENT
This Indemnification Agreement ("Agreement") is made as of this 17th of
January, 1997, by and between THE CLOTHESTIME, INC., a Delaware corporation (the
"Company"), and Barry Herman ("Indemnitee").
WHEREAS, Indemnitee is currently serving as an officer of the Company
and the parties wish Indemnitee to continue in such capacity. The Indemnitee is
willing, subject to certain conditions including, without limitation, the
execution and performance of this Agreement by the Company, to continue in that
capacity;
WHEREAS, in addition to the indemnification to which the Indemnitee is
or may be entitled under the Certificate of Incorporation of the Company (the
"Certificate") or the Bylaws of the Company (the "Bylaws"), the Company has
obtained at its sole expense insurance protecting its officers and directors
including Indemnitee against certain losses arising out of actual or threatened
actions, suits or proceedings to which such persons may be made or threatened to
be made parties. However, as a result of circumstances having no relation to,
and beyond the control of, the Company and Indemnitee, there can be no assurance
of the continuation or renewal of the insurance;
WHEREAS, the Company and Indemnitee recognize the increasing difficulty
in obtaining directors' and officers' liability insurance, the significant
increases in the cost of such insurance and the general reductions in the
coverage of such insurance;
WHEREAS, the Company and Indemnitee further recognize the substantial
increase in corporate litigation in general, subjecting directors, officers,
employees and other agents to expensive litigation risks;
WHEREAS, the Company desires to attract and retain the services of
highly qualified individuals, such as Indemnitee, to serve as directors,
officers, employees and other agents of the Company and its subsidiaries; and
WHEREAS, in recognition of Indemnitee's need for substantial protection
against personal liability in order to enhance Indemnitee's continued and
effective service to the Company, and in order to induce Indemnitee to provide
services to the Company as an officer or employee and to provide services in the
capacity of a director, officer, employee or agent of another corporation
(including, without limitation, the Company's subsidiaries), partnership, joint
venture, trust or other enterprise in which he serves at the request of the
Company, the Company wishes to provide in this Agreement for the indemnification
of and the advancing of expenses to Indemnitee to the fullest extent (whether
partial or complete) permitted by law and as set forth in this Agreement, and,
to the extent insurance is maintained, for the coverage of Indemnitee under the
Company's directors' and officers' liability insurance policies.
<PAGE> 2
NOW, THEREFORE, in consideration of the above premises and of
Indemnitee's promise to continue to serve the Company directly or, at its
request, with another enterprise, and intending to be legally bound hereby, the
parties agree as follows:
1. DEFINED TERMS AND CONSTRUCTION OF CERTAIN PHASES. As used in
this Agreement:
(a) "Board" shall mean the Board of Directors of the Company.
(b) References to the "Company" shall include, in addition to the
resulting corporation, any constituent corporation (including any constituent of
a constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers, employees or other agents, so that if Indemnitee is or was
a director, officer, employee or other agent of such constituent corporation, or
is or was serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, Indemnitee shall stand in the same position under the
provisions of this Agreement with respect to the resulting or surviving
corporation as Indemnitee would have with respect to such constituent
corporation if its separate existence had continued.
(c) A "Change in Control" shall be deemed to have occurred if (i)
any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended), other than a trustee or other fiduciary
holding securities under an employee benefit plan of the Company, a subsidiary
of the Company, or a corporation owned directly or indirectly by the
shareholders of the Company in substantially the same proportions as their
ownership of stock of the Company, is or becomes the "Beneficial Owner" (as
defined in Rule 13d-3 under said Act), directly or indirectly, of securities of
the Company representing 40% or more of the total voting power represented by
the Company's then outstanding Voting Securities; (ii) during a two-year period,
individuals who at the beginning of such period constitute the Board and any new
director whose election or election was approved by a vote of at least
two-thirds (2/3) of the directors then still in office who either were directors
at the beginning of the period or whose election or nomination for election was
previously so approved, cease for any reason to constitute a majority thereof;
(iii) the stockholders of the Company approve a merger or consolidation of the
Company with any other corporation, other than a merger or consolidation that
would result in the Voting Securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining outstanding or by
being converted into Voting Securities of the surviving entity) at least 80% of
the total voting power represented by the Voting Securities of the Company or
such surviving entity outstanding immediately after such merger or
consolidation, or (iv) the stockholders of the Company approve a plan of
complete liquidation of the Company or an agreement for the sale or disposition
by the Company (in one transaction or a series of transactions) of all or
substantially all of the Company's assets.
(d) "Independent Counsel" shall be the person or body appointed
in connection with Section 4 of this Agreement.
(e) "Other enterprises" shall include employee benefit plans.
2
<PAGE> 3
(f) "Potential Change in Control" shall be deemed to have
occurred if (i) the Company enters into an agreement or arrangement, the
consummation of which would result in the occurrence of a Change in Control;
(ii) any person (including the Company) publicly announces an intention to take
or to consider taking actions that, if consummated, would constitute a Change in
Control; (iii) any "person" (as such term is used in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934, as amended), other than a trustee or other
fiduciary holding securities under an employee benefit plan of the Company, a
subsidiary of the Company, a corporation owned directly or indirectly by the
proportions as their ownership of stock of the Company, or a person who is a
party to an indemnification agreement (in a form similar to this Agreement) with
the Company, is or becomes the "Beneficial Owner" (as defined in Rule 13d-3
under said Act), directly or indirectly, of securities of the Company
representing 15% or more of the total voting power represented by the Company's
then outstanding Voting Securities; or (iv) the Board adopts a resolution to the
effect that, for purposes of this Agreement, a Potential Change in Control has
occurred.
(g) "Serving at the request of the Company" shall include,
without limitation, any service as a director, officer, employee or agent of the
Company or any of its subsidiaries, which imposes duties on, or involves
services by, Indemnitee with respect to an employee benefit plan.
(h) "Voting Securities" shall mean any securities of the Company
that are entitled to vote generally in the election of directors.
2. INITIAL INDEMNITY.
(a) Indemnity in Third Party Proceedings. The Company shall
indemnify the Indemnitee when he was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, administrative, investigative, or criminal (other than an action
by or in the right of the Company), by reason of the fact that he is or was or
had agreed to become a director, officer, employee or agent of the Company, or
is or was serving or had agreed to serve at the request of the Company as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, or by reason of any action alleged to have
been taken or omitted in such capacity, against any and all costs, charges and
expenses (including without limitation attorneys' and others' fees and
expenses), judgments, fines and amounts paid in settlement actually and
reasonably incurred by the Indemnitee in connection therewith and any appeal
therefrom if the Indemnitee acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Company, and with
respect to any criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction or upon a plea of nolo contendere or its
equivalent shall not, of itself, create a presumption that the Indemnitee did
not satisfy the foregoing standard of conduct to the extent applicable thereto.
(b) Indemnity in Proceedings By or In the Name of the
Corporation. The Company shall indemnify the Indemnitee when he was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding by or in the right of the Company to
procure a judgment in its favor by reason of the fact that he is or was or had
agreed to become a director, officer, employee or agent of the Company, or is or
was serving or had agreed to serve at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise against costs,
3
<PAGE> 4
charges and expenses (including attorneys' and others' fees and expenses)
actually and reasonably incurred by him in connection with the defense or
settlement thereof or any appeal therefrom if he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the Company and except that no indemnification shall be made in respect of any
claim, issue or matter as to which the Indemnitee shall have been adjudged to be
liable to the Company unless and only to the extent that the Court of Chancery
or the court in which such action, suit or proceeding was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, the Indemnitee is fairly and
reasonably entitled to indemnity for such expenses which the Court Chancery or
such other court shall deem proper.
(c) Indemnification of Expenses of Successful Party. To the
extent that the Indemnitee has been successful on the merits or otherwise,
including, without limitation the dismissal of an action without prejudice, in
defense of any action, suit or proceeding referred to in Sections 2(a) or 2(b)
hereof or in defense of any claim, issue or matter therein, he shall be
indemnified against costs, charges and expenses (including attorney's and
others' fees and expenses) actually and reasonably incurred by his in connection
therewith.
(d) Determination of Right on Indemnitee to Indemnification. Any
indemnification under Sections 2(a) or 2(b) (unless ordered by a court) shall be
made by the Company only as authorized in the specific case upon a determination
in accordance with Section 4 hereof or any applicable provision of the
Certificate, Bylaws, other agreement, resolution or otherwise. Such
determination shall be made (i) by the Board by a majority vote of a quorum
consisting of directors who were not parties to such action, suit or proceeding
or (ii) if such a quorum of disinterested directors is not available or so
directs, by independent legal counsel (designated in the manner provided below
in this subsection (d)) in a written opinion or (iii) by the stockholders of the
Company (the "Stockholders"). Independent legal counsel shall be designated by
vote of a majority of the disinterested directors; provided, however, that if
the Board is unable or fails to so designate, such designation shall be made by
the Indemnitee subject to the approval of the Company (which approval shall not
be unreasonably withheld). Independent legal counsel shall not be any person or
firm who, under the applicable standards professional conduct then prevailing,
would have a conflict of interest in representing either the Company or the
Indemnitee in an action to determine the Indemnitee's rights under this
Agreement. The Company agrees to pay the reasonable fees and expenses of such
independent legal counsel and to indemnify fully such counsel against costs,
charges and expenses (including attorneys' and others' fees and expenses)
actually and reasonably incurred by such counsel in connection with this
Agreement or the opinion of such counsel pursuant hereto.
(e) Advancement of Expenses. All expenses (including attorneys'
and others' fees and expenses) incurred by the Indemnitee in his capacity as a
director, officer, or employee of the Company, or in his capacity as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise in which he was serving at the request of the Company,
in defending a civil or criminal action, suit or proceeding shall be paid by the
Company in advance of the final disposition of such action, suit or proceeding
in the manner prescribed by Section 4(b) hereof.
4
<PAGE> 5
3. Additional Indemnification.
(a) Right to additional Indemnification. Pursuant to Section 145
(f) of the General Corporation Law of the State of Delaware (the "GCL"), without
limiting any right which the Indemnitee may have pursuant to Section 2 hereof,
the Certificate, the Bylaws, the GCL, any policy of insurance or otherwise, but
subject to the limitations on the maximum permissible indemnity which may exist
under applicable law at the time of any request for indemnity hereunder
determined as contemplated by this Section 3(a), the Company shall indemnify the
Indemnitee against any amount which he is or becomes legally obligated to pay
relating to or arising out of any claim made against him because of any act,
failure to act or neglect or breach of duty, including any actual or alleged
error, misstatement or misleading statement, which he commits, suffers, permits
or acquiesces in while acting in his capacity as a director, an officer, an
employee or agent of the Company, or, at the request of the Company, as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, whether prior to or after the date of this
Agreement and whether or not the basis of the claim is alleged action or
inaction in an official capacity as a director, officer, employee or agent or in
any other capacity while serving as a director, officer, employee or agent or in
any other capacity while serving as a director, officer, employee or agent of
the Company. The payments which the Company is obligated to make pursuant to
this Section 3 shall include without limitation (i) damages, judgments,
settlements (in accordance with Section 6(d) of this Agreement), fines and
similar penalties, and excise taxes and penalties assessed on a person with
respect to an employee benefit plan, (ii) charges costs expenses (including
attorneys' and others' fees and related disbursements), expenses of
investigation, expenses of defense of legal actions, suits, proceedings or
claims and appeals therefrom, expenses relating to serving as a witness and
expenses of appeal, attachment or similar bonds, and (iii) any interest,
assessments, or other charges imposed thereon and any federal, state, local or
foreign taxes imposed as a result of the actual or deemed receipt of such
payments under this Agreement. Notwithstanding the foregoing, the Company shall
not be obligated under this Section 3(a) to make any payment in connection with
any claim against the Indemnitee:
(i) to the extent of any fine or similar governmental imposition
which the Company is prohibited by applicable law from paying which results in a
final, nonappealable order; or
(ii) to the extent based upon or attributable to the Indemnitee
gaining in fact a personal profit to which he was not legally entitled,
including without limitation profits made from the purchase and sale by the
Indemnitee of equity securities of the Company which are recoverable by the
Company which are recoverable by the Company pursuant to Section 16(b) of the
Securities Exchange Act of 1934, as amended, and profits arising from
transactions in publicly traded securities of the Company which were effected by
the Indemnitee in violation of Section 10(b) of the Securities Exchange Act of
1934, as amended, including Rule 10b-5 promulgated thereunder.
The determination of whether the Indemnitee shall be entitled to indemnification
under this section 3(a) shall be made in accordance with section 4(d) hereof.
5
<PAGE> 6
(b) Advancement of Expenses Relating to Additional Indemnification.
Expenses (including without limitation attorneys' and others' fees and expenses)
incurred by Indemnitee in defending any actual or threatened civil or criminal
action, suit, proceeding or claim shall be paid by the Company in advance of the
final disposition thereof as authorized in accordance with Section 4(b) hereof.
4. Certain Procedures Relating to Indemnification and Advancement of
Expenses.
(a) General. Except as otherwise permitted or required by the
GCL, for purposes of pursuing his rights to indemnification under Sections 2(a),
2(b), or 3(a) hereof, as the case may be, the Indemnitee may, but shall not be
required to, (i) submit to the Board a sworn statement of request for
indemnification substantially in the form of Exhibit 1 attached hereto and made
a part hereof (the "Indemnification Statement") averring that he is entitled to
indemnification hereunder; and (ii) present to the Company reasonable evidence
of all expenses for which payment is requested. Submission of an Indemnification
Statement to the Board shall create a presumption that the Indemnitee is
entitled to indemnification under Sections 2(a), 2(b) or 3(a) hereof, as the
case may be, and the Board shall be deemed to have determined that the
Indemnitee is entitled to such indemnification unless with in 30 calendar days
after submission of the Indemnification Statement the Board shall determine by
vote of a majority of the directors at a meeting at which a quorum is present,
based upon clear and convincing evidence (sufficient to rebut the foregoing
presumption), and the Indemnitee shall have received notice within such period
in writing of such determination that the Indemnification is not so entitled to
indemnification, which notice shall disclose with particularity the evidence in
support of the Board's determination. The foregoing notice shall be sworn to by
all persons who participated in the determination and voted to deny
indemnification. The provisions of this section 4(a) are intended to be
procedural only and shall not affect the right of the Indemnitee to
indemnification under this Agreement and any determination by the Board that the
Indemnitee is not entitled to indemnification and any failure to make the
payments requested in the Indemnification Statement shall be subject to judicial
review as provided in Section 5 hereof.
(b) Undertaking or Expense Request Regarding Advancement of
Expenses. For purposes of determining whether to authorize advancement of
expenses pursuant to Section 2(e) hereof, the Indemnitee shall submit to the
board a sworn statement of request for advancement of expenses substantially in
the form of Exhibit 2 attached hereto and made a part hereof (the
"Undertaking"), averring that (i) he has reasonably incurred or will reasonably
incur actual expenses in defending an actual civil or criminal action, suit,
proceeding or claim and (ii) he undertakes to repay such amount if it shall
ultimately be determined that he is not entitled to be indemnified by the
Company under this Agreement or otherwise. For purposes of requesting
advancement of expenses pursuant to Section 3(b) hereof, the Indemnitee (i) may,
but shall not be required to, submit an Undertaking or (ii) shall submit such
other form of request as he determines to be appropriate (an "Expense Request").
Upon receipt of an Undertaking or Expense Request, as the case may be, the Board
shall within 20 calendar days authorize immediate payment of the expenses stated
in the Undertaking or Expense Request, whereupon such payments shall immediately
be made by the Company. No security shall be required in connection with any
Undertaking or Expense Request and any Undertaking or Expense Request shall be
accepted without reference to the Indemnitee's ability to make repayment.
6
<PAGE> 7
(c) Independent Counsel. Notwithstanding anything to the contrary
contained in Sections 2(d) or 4(a) of this Agreement, after a Change of Control
and if requested by the Indemnitee at the time of making a claim for
indemnification, (i) any determination under Section 2(a) or 2(b) (unless
ordered by a court) shall be made by Independent Counsel (as defined below), and
(ii) after the submission of an Indemnification Statement, the determination
pursuant to Section 4(a) whether an Indemnitee shall be entitled to
indemnification under Sections 2(a), 2(b) or 3(a) hereof, as the case may be,
shall be made by Independent Counsel (as defined below) instead of by the Board.
For purposes of this Section 4(c) "Independent Counsel" shall be an attorney
selected by Indemnitee and approved by the Company (which approval shall not be
unreasonably withheld), (i) who has not otherwise performed services for the
Company or the Indemnitee (other than in connection with indemnification
matters) within the three years prior to the selection of the Independent
Counsel, and (ii) who shall not, under the applicable standards of professional
conduct then prevailing, have a conflict of interest in representing either the
Company or Indemnitee in an action to determine Indemnitee's rights under this
Agreement. Any determination by Independent Counsel as to whether and to what
extent the Indemnitee should be permitted to be indemnified under applicable law
shall be rendered by its written opinion to the Company and Indemnitee. The
Company agrees to pay the reasonable fees of the Independent Counsel and to
indemnify fully such counsel against any and all expenses (including attorneys'
and others' fees and expenses), claims, liabilities, loss, and damages arising
out of or relating to this Agreement, the engagement of Independent Counsel
pursuant hereto or the opinion of such counsel pursuant hereto.
5. Indemnification Process and Appeal.
(a) Suit to Enforce Rights. If a claim for indemnification made
to the Company pursuant to Section 4 hereof is not paid in full by the Company
within 30 calendar days after a written claim has been received by the Company,
the Indemnitee may at any time thereafter bring suit against the Company to
recover the unpaid amount of the claim in any court having subject matter
jurisdiction thereof. The Company hereby consents to service of process and to
appear in any such proceeding. The remedy provided for in this Section 5 shall
be in addition to any other remedies available to Indemnitee in law or equity.
(b) Defense to Indemnification, Burden of Proof and Presumptions.
In any action brought under Section 5(a) hereof, it shall be a defense to a
claim for indemnification pursuant to Sections 2(a) or 2(b) hereof (other than
an action brought to enforce a claim for expenses incurred in defending any
proceeding in advance of its final disposition where the Undertaking, if any is
required, has not met the standards of conduct which make it permissible under
the GCL for the Company to indemnify the Indemnitee for the amount claimed, but
the burden of proving such defense shall be on the Company. It shall be a
defense to any action brought by Indemnitee against the Company to enforce this
Agreement that it is not permissible under applicable law for the Company to
indemnify Indemnitee for the amount claimed, but the burden of proving such
defense shall be on the Company. Neither the failure of the Company (including
its Board, independent legal counsel or its stockholders) or Independent counsel
to have made a determination prior to the commencement of such action by
Indemnitee that indemnification of the claimant is proper under the
circumstances because he has met the standard of conduct set forth in applicable
law, nor an actual determination by the Company (including its Board,
independent legal counsel or its stockholders) or Independent Counsel that
Indemnitee had not met such applicable standard of conduct, shall be a defense
to the action or create a presumption that Indemnitee has not met the applicable
standard of conduct.
7
<PAGE> 8
(c) Indemnification for Expenses Incurred in Enforcing Rights. It
is the intent of the Company that the Indemnitee not be required to incur the
expenses associated with the enforcement of his rights under this Agreement by
litigation or other legal action because the cost and expense thereof would
substantially detract from the benefits intended to be extended to the
Indemnitee hereunder. Accordingly, if it should appear to the Indemnitee that
the Company has failed to comply with any of its obligations under the Agreement
or in the event that the Company or any other person takes any action to declare
the Agreement void or proceeding designed (or having the effect of being
designed) to deny, or to recover from, the Indemnitee the benefits intended to
be provided to the Indemnitee hereunder, the Company irrevocably authorizes the
Indemnitee from time to time to retain counsel of his choice, at the expense of
the Company as hereafter provided, to represent the Indemnitee in connection
with the initiation or defense of any litigation or other legal action, whether
by or against the Company or any director, officer, stockholder or other person
affiliated with the Company, in any jurisdiction. Regardless of the outcome
thereof, the Company shall pay and be solely responsible for any and all costs,
charges and expenses (including without limitation attorneys' and others' fees
and (expenses) reasonably incurred by the Indemnitee (i) as a result of the
Company's failure to perform this Agreement or any provision thereof or (ii) as
a result of the Company or any other person contesting the validity or
enforceability of this Agreement or any provision thereof as aforesaid; provided
that, if and to the extent that a court of competent jurisdiction determines (in
a final judicial determination as to which all rights of appeal therefrom have
been exhausted or waived or have lapsed) that each of the material assertions
made by Indemnitee in such litigation or other legal action was not made in good
faith or was frivolous, the Company shall not be obligated to pay any such
costs, charges and expenses incurred by Indemnitee in connection with such suit
and shall be entitled to be reimbursed by Indemnitee (who hereby agrees to
reimburse the Company) for all such amounts theretofore paid under this Section
5(c). Notwithstanding the procedure for selection of counsel in Section 6(c)
herein, in connection with the assertion of any claim under this Section 5(c),
Indemnitee from time to time may retain counsel of his choice to represent him.
6. Notification and Defense of Proceeding.
(a) Notice/Cooperation by Indemnitee. Indemnitee shall give the
Company notice in writing as soon as practicable of any claim made against
Indemnitee for which indemnification will or could be sought under this
Agreement (for purposes of this Section 6, a "Claim"). Indemnitee shall also
provide the Company such information and cooperation as the Company from time to
time may reasonably request and as shall reasonably be within Indemnitee's power
to provide.
(b) Notice to Insurers. If at the time of the receipt of a notice
of a Claim pursuant to Section 6(a) hereof the Company has directors' and
officers' liability insurance (or a similar policy covering key employees, if
applicable) in effect, the Company shall give prompt notice of such Claim to the
insurers in accordance with the procedures set forth in the respective policies.
The Company thereafter shall take all necessary or desirable action to cause
such insurers to pay, on behalf of Indemnitee, all amounts payable as a result
of such Claim in accordance with the terms of such policies.
(c) Selection of Counsel. With respect to any litigation or other
legal action relating to a Claim as to which Indemnitee notifies the Company
(for purposes of this Section 6, a "Proceeding"), the Company will be entitled
to participate in the Proceeding at its own expense and except as otherwise
provided below, to the extent the Company so wishes, it may assume the defense
thereof with counsel selected by the Company and approved by
8
<PAGE> 9
Indemnitee, which approval shall not be unreasonably withheld. After notice from
the Company to Indemnitee of its election to assume the defense of any
Proceeding, the Company will not be liable to Indemnitee under this Agreement or
otherwise for any expenses subsequently incurred by Indemnitee in connection
with the defense of such Proceeding other than reasonable costs of investigation
or as otherwise provided below. Indemnitee shall have the right to employ his
own counsel in such Proceeding, but all expenses related thereto incurred after
notice from the Company of its assumption of the defense shall be at
Indemnitee's expense unless: (i) the employment of counsel by Indemnitee has
been authorized by the Company; (ii) Indemnitee has reasonably determined and
either the Company shall have agreed, or disinterested counsel (as defined in
this Section 6(c)) shall have determined, that there may be a conflict of
interest between Indemnitee and the Company in the defense of the Proceeding;
(iii) after a Change in Control, the employment of counsel by Indemnitee has
been approved by the Independent Counsel; or (iv) the Company shall not in fact
have employed counsel to assume the defense of such Proceeding, in each of which
case all expenses of the Proceeding shall be borne by the Company, and
Indemnitee's counsel shall have been approved by the Company (which approval may
not be unreasonably withheld) and any carrier of an applicable insurance policy
if required under the terms of that policy or under applicable law. As used in
this Section 6(c), "disinterested counsel" shall mean counsel selected and
compensated by the Company, and approved by Indemnitee (which approval may not
be unreasonably withheld), to determine whether a conflict of interest may
exist, which counsel shall not represent the Company, Indemnitee or any other
party to the Proceeding for which indemnification is sought. Disinterested
counsel shall be selected promptly following the notice from Indemnitee to the
Company of Indemnitee's belief that a conflict of interest may exist. The
company shall not be entitled to assume the defense of any Proceeding as to
which the determination provided for in (ii) above shall have been made. Nothing
herein shall limit the right of Indemnitee to employ counsel at Indemnitee's
sole expense.
(d) Settlements. Notwithstanding anything to the contrary
contained in this Agreement, the Company shall not be liable to indemnify
Indemnitee under this Agreement or otherwise for any amounts paid in settlement
of any Proceeding effected without the Company's written consent; provided,
however, that if a Change in Control has occurred, the Company shall be liable
for indemnification of Indemnitee for amounts paid in settlement if the
Independent Counsel has approved the settlement. The Company shall not settle
any Proceeding in any manner that would impose any penalty or limitation on
Indemnitee without Indemnitee's written consent. Neither the Company nor the
Indemnitee will unreasonably withhold its consent to any proposed settlement.
The Company shall not be liable to indemnify Indemnitee under this Agreement
with regard to any judicial award if the Company was not given a reasonable and
timely opportunity, at its expense, to participate in the defense of such
action; the Company's liability hereunder shall not be excused if participation
in the Proceeding by the Company was barred by this Agreement.
7. Establishment of a Trust.
Immediately upon the occurrence of a Change in Control or a Potential Change in
Control, the Company shall, upon written request by Indemnitee, create a trust
(a "Trust") for the benefit of Indemnitee and from time to time upon written
request of Indemnitee shall fund the Trust in an amount sufficient to satisfy
any and all amounts reasonably anticipated at the time of each such request to
be incurred in connection with any claim made by Indemnitee. The amount or
amounts to be deposited in the Trust pursuant to the foregoing funding
obligation shall be determined (i) prior to the occurrence of a Change in
Control or a Potential Change in Control, (a) the Board by a majority vote of a
quorum consisting of directors who were not parties to the
9
<PAGE> 10
action, suit or proceeding serving as the basis of a claim by Indemnitee, or (b)
if such a quorum of disinterested directors is not available or so directs, by
independent legal counsel (designated in the manner provided in Section 2(d) in
a written opinion or (c) by the Stockholders, or (ii) after the occurrence of a
Change in Control or a Potential Change in Control, by Independent Counsel as
defined in Section 4(c) (for purposes of this Section 7, the "Reviewing Party").
The terms of the Trust shall provide that upon a Change in Control (i) the Trust
shall not be revoked or the principal thereof invaded without the written
consent of Indemnitee, (ii) the trustee of the Trust (the "Trustee") shall
advance within 20 business days of the request by Indemnitee, any and all
expenses to Indemnitee (and Indemnitee hereby agrees to reimburse the Trust
under the same circumstances for which Indemnitee would be required to reimburse
the Company under Section 4(b) of this Agreement), (iii) the Trust shall
continue to be funded by the Company in accordance with the funding obligation
set forth above, (iv) the Trustee shall promptly pay to Indemnitee all amounts
for which Indemnitee shall be entitled to indemnification pursuant to this
Agreement or otherwise, and (v) all unexpended funds in the Trust shall revert
to the Company upon a final determination by the Reviewing Party or a court of
competent jurisdiction, as the case may be, that Indemnitee has been fully
indemnified under the terms of this Agreement. The Trustee shall be chosen by
Indemnitee. Nothing in this Section 7 shall relieve the Company of any of its
obligations under this Agreement. All income earned on the assets held in the
Trust shall be reported as income by the Company for federal, state, local and
foreign tax purposes. The Company shall pay all costs of establishing and
maintaining the Trust and shall indemnify the Trustee against any and all
expenses (including attorneys' fees), claims, liabilities, loss and damages
arising out of or relating to this Agreement or the establishment and
maintenance of the Trust.
8. Exceptions.
Any other provision herein to the contrary notwithstanding, the Company shall
not be obligated pursuant to the terms of this Agreement:
(a) Claims Initiated by Indemnitee. To indemnify Indemnitee for
any amounts or to advance expenses to Indemnitee with respect to any litigation
or other legal action initiated or brought voluntarily (and not by way defense
or counterclaim) by Indemnitee against the Company or any agent of the Company
unless (i) the Company has joined in or the Board has consented to the
initiation of such litigation or other legal action, (ii) the litigation or
other legal action is brought to establish or enforce a right to indemnification
under Section 5 of this Agreement, or (iii) the litigation or other legal action
is instituted after a Change of Control and Independent Counsel has approved its
initiation; or
(b) No Duplication of Payments. To make any payment in connection
with any claim made against Indemnitee to the extent Indemnitee has otherwise
actually received payment (under any insurance policy, by law or otherwise) of
the amounts otherwise indemnifiable hereunder.
9. Scope; Nonexclusivity.
(a) Scope. In accordance with Section 145(f) of the GCL, the
parties hereto intend that this Agreement shall provide for indemnification in
excess of that expressly permitted by statute, including, without limitation,
any indemnification provided by the Certificate, Bylaws, vote of its
stockholders or disinterested directors or applicable law. To the extent that a
change in applicable law (whether by statue, rule or judicial decision) permits
greater indemnification by agreement than would be afforded currently under the
Certificate,
10
<PAGE> 11
Bylaws, applicable law or this Agreement, it is the intent of the parties that
Indemnitee enjoy by this Agreement the greater benefits so afforded by such
change.
(b) Nonexclusivity. Consistent with Section 145(f) of the GCL,
the indemnification provided by this Agreement shall not be deemed exclusive of
any rights to which Indemnitee may be entitled under the Certificate, Bylaws,
any agreement, any vote of stockholders or disinterested directors, or
otherwise, both as to actions in Indemnitee's official capacity and as to
actions in another capacity while holding such office, and shall continue after
Indemnitee has ceased to be a director, officer, employee or agent.
10. Mutual Acknowledgment.
Both the Company and Indemnitee acknowledge that in certain instances, federal
or state law or applicable public policy may prohibit the Company from
indemnifying its directors, officers, employees or other agents under this
Agreement or otherwise. Indemnitee understands and acknowledges that the Company
has undertaken or may be required in the future to undertake with the U.S.
Securities and Exchange Commission or applicable state securities agencies to
submit the question of indemnification to a court in certain circumstances for a
determination of the Company's right under public policy to indemnify
Indemnitee.
11. Directors' and Officers' Liability Insurance.
The Company shall, from time to time, make the good faith determination whether
or not it is practical for the Company to obtain and maintain a policy or
policies of insurance with reputable insurance companies providing the officers
and directors of the Company with coverage for losses from wrongful acts, or to
ensure the Company's performance of its indemnification obligations under this
Agreement. Among other considerations, the Company will weigh the costs of
obtaining such insurance coverage against the protection afforded by such
coverage. To the extent the Company maintains an insurance policy or policies
providing directors' and officers' liability insurance (or such other similar
insurance policy covering key employees, if applicable), Indemnitee shall be
covered by such policy or policies, in accordance with its or their terms, to
the maximum extent of the coverage available for any Company director or
officer. Notwithstanding the foregoing, the Company shall have no obligation to
obtain or maintain such insurance if the Company determines in good faith that
such insurance is not reasonably available, if the premium costs for such
insurance are disproportionate to the amount of coverage provided, if the
coverage provided by such insurance is limited by exclusions so as to provide an
insufficient benefit, or if Indemnitee is covered by similar insurance
maintained by a subsidiary or parent Company.
12. Effectiveness of Agreement.
This Agreement shall be effective as of the date set forth on the first page and
may apply to acts or omissions of Indemnitee which occurred prior to such date
if Indemnitee was a director, officer, employee or agent of the Company, or was
serving at the request of the Company as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other enterprise,
at the time such act or omission occurred.
11
<PAGE> 12
13. Period of Limitation.
No legal action shall be brought and no cause of action shall be asserted by or
on behalf of the Company or any affiliate of the Company against Indemnitee,
Indemnitee's spouse, heirs, executors, or personal or legal representatives
after the expiration of two years from the date of accrual of such cause of
action, or such longer period as may be required by state law under the
circumstances (i.e., a minimum limitation period that expressly may not be
altered by agreement among the parties). Any claim or cause of action of the
Company or any of its affiliates shall be extinguished and deemed released
unless asserted by the timely filing of a legal action within such period;
provided, however, if any shorter period of limitation is otherwise applicable
to any such cause of action, the shorter period shall govern.
14. Ratification of Acts.
None of the provisions contained in this Agreement is intended to constitute, or
shall be construed in any manner as constituting, a ratification by the Company
(or by any of its directors, officers or other agents) of any action or inaction
on the part of Indemnitee.
15. Continued Employment.
No provision contained herein shall be construed as conferring upon Indemnitee
any right with respect to continuance of performance of services for the
Company, nor shall any such provisions interfere in any way with the right of
the Company to terminate Indemnitee's services as an officer, employee or other
agent at any time with or without cause.
16. Successors and Assigns.
This agreement shall be binding upon, inure to the benefit of and be enforceable
by the parties hereto and their respective successors (including any direct or
indirect successor by purchase, merger, consolidation or otherwise to all or
substantially all of the business and/or assets of the Company), assigns,
spouses, heirs and personal and personal and legal representatives. The Company
shall require and cause any successor (whether direct or indirect by purchase,
merger, consolidation or otherwise) to all, substantially all, or a substantial
part, of the business and/or assets of the Company, by written agreement in form
and substance satisfactory to Indemnitee, expressly to assume and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform if no such succession had taken place.
Nothing in this Section 16 shall be construed to limit the protections afforded
Indemnitee under this Agreement which would occur upon a Change in Control or a
Potential Change in Control. The indemnification provided under this Agreement
shall continue as to Indemnitee for any action taken or not taken while serving
in an indemnified capacity even though Indemnitee may have ceased to serve in
such capacity at the time of any litigation or other legal action relating to
events for which a claim for indemnification is made by Indemnitee hereunder.
17. Notice.
All notices, requests, demands and other communications under this Agreement
shall be in writing and shall be deemed duly given (i) if delivered by hand and
receipted for by the party addressed, on the date of such receipt, or (ii) if
mailed by domestic certified or registered mail with postage prepaid, on the
third business day after the date postmarked. Addresses for
12
<PAGE> 13
notice to either party are as shown on the signature page of this Agreement, or
as subsequently modified by written notice.
18. Choice of Law.
This Agreement shall be governed by, and its provisions construed in accordance
with, the laws of the State of Delaware, including without limitation, all
matters of formation, construction, validity, performance and enforcement and
without giving effect to the principals of conflicts of laws.
19. Severability.
Nothing in this Agreement is intended to require or shall be construed as
requiring the Company to do or fail to do any act in violation of applicable
law. The Company's inability, pursuant to court order, to perform its
obligations under this Agreement shall not constitute a breach of this
Agreement. The provisions of this Agreement shall be severable as provided in
this Section 19. If this Agreement or any portion hereof shall be invalidated or
held unlawful or unenforceable on any ground by any court of competent
jurisdiction, then the Company shall nevertheless indemnify Indemnitee to the
full extent permitted by any applicable portion of this Agreement that shall not
have been invalidated or held unlawful or unenforceable, the provision(s) so
held to be invalid, unenforceable or otherwise illegal shall be reformed to the
extent (and only to the extent) necessary to make it enforceable, valid and
legal and the balance of this Agreement shall be enforceable in accordance with
its terms. Furthermore, to the fullest extent possible, the provisions of this
Agreement (including, without limitation, each portion of this Agreement
containing any provision held to be invalid, void, or otherwise unenforceable,
that is not itself invalid, void or unenforceable) shall be construed so as to
give effect to the intent manifested by the provision held invalid, void or
unenforceable.
20. Amendment and Waiver.
No supplement, modification or amendment of this Agreement shall be binding
unless executed in writing by both of the parties hereto. No waiver of any of
the provisions of this Agreement shall be deemed or shall constitute a waiver of
any other provision hereof (whether or not similar), nor shall such waiver
constitute a continuing waiver. Except as specifically provided herein, no
failure to exercise or any delay in exercising any right or remedy hereunder
shall constitute a waiver thereof.
21. Subrogation.
In the event of payment under this Agreement, the Company shall be subrogated to
the extent of such payment to all of the rights of recovery of Indemnitee, that
may be necessary to secure such rights, including the execution of such
documents necessary to enable the Company effectively to bring suit to enforce
such rights.
22. Future Agreements.
The Company shall not adopt any amendment to its Certificate or Bylaws the
effect of which would be to deny, diminish or encumber Indemnitee's rights to
indemnity pursuant to the Certificate, the Bylaws, the GCL or any other
applicable law as applied to any act or failure to act occurring in whole or in
part prior to the date (the "Effective Date") upon which the
13
<PAGE> 14
amendment was approved by the Board or the stockholders, as the case may be. In
the event that the Company shall adopt any amendment to its Certificate or
Bylaws the effect of which is to so deny, diminish or encumber Indemnitee's
rights to indemnity, such amendment shall apply only to acts or failures to act
occurring entirely after the Effective Date thereof unless the Indemnitee shall
have voted in favor of such adoption as a director or holder of record of the
Company's Voting Securities, as the case may be.
23. Counterparts.
This Agreement may be executed in counterparts, each of which shall be deemed an
original but all of which counterparts taken together shall constitute one and
the same document.
24. Headings.
Section headings herein are for reference purposes only and shall not affect the
meaning or interpretation of any provision of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
THE CLOTHESTIME, INC.
By: /S/DAVID A. SEJPAL
------------------------------
David A. Sejpal
Chairman of the Board and
Chief Executive Officer
Address: 5325 E. Hunter Avenue
Anaheim, California 92807
AGREED TO AND ACCEPTED:
INDEMNITEE;
Barry Herman
- -----------------------
(Type Name)
/S/BARRY HERMAN
- -----------------------
(Signature)
245 Promontory Drive West
- --------------------------------
Newport Beach, California 92660
- ------------------------------------
(Address)
14
<PAGE> 15
EXHIBIT 1
INDEMNIFICATION STATEMENT
STATE OF _____________ )
) SS
COUNTY OF _____________ )
I, ____________________, BEING FIRST DULY SWORN, DO DEPOSE AND SAY AS FOLLOWS:
1. THIS INDEMNIFICATION STATEMENT IS SUBMITTED PURSUANT TO THE
INDEMNIFICATION AGREEMENT, DATED AS OF __________________________, 199__,
BETWEEN THE CLOTHESTIME, INC. (THE "COMPANY"), A DELAWARE CORPORATION, AND
THE UNDERSIGNED.
2. I AM REQUESTING INDEMNIFICATION AGAINST CHARGES, COSTS, EXPENSES
(INCLUDING ATTORNEYS' AND OTHERS' FEES AND EXPENSES), JUDGMENTS, FINES AND
AMOUNTS PAID IN SETTLEMENT, ALL OF WHICH HAVE BEEN OR WILL BE INCURRED BY
ME IN CONNECTION WITH AN ACTUAL OR THREATENED ACTION, SUIT, PROCEEDING OR
CLAIM TO WHICH I AM A PARTY OR AM THREATENED TO BE MADE A PARTY.
3. WITH RESPECT TO ALL MATTERS RELATED TO ANY SUCH ACTION, SUIT, PROCEEDING
OR CLAIM, I AM ENTITLED TO BE INDEMNIFIED AS HEREIN CONTEMPLATED PURSUANT
TO THE AFORESAID INDEMNIFICATION AGREEMENT.
4. WITHOUT LIMITING ANY OTHER RIGHTS WHICH I HAVE OR MAY HAVE, I
AM REQUESTING INDEMNIFICATION AGAINST LIABILITIES WHICH HAVE OR MAY ARISE
OUT OF
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SUBSCRIBED AND SWORN TO BEFORE ME, A NOTARY PUBLIC IN AND FOR SAID COUNTY
AND STATE, THIS _________ DAY OF ____________________, 19 ___.
----------------------------------
NOTARY PUBLIC
(SEAL)
MY COMMISSION EXPIRES THE ______ DAY OF ___________________, 19 ___.
15
<PAGE> 16
EXHIBIT 2
INDEMNIFICATION STATEMENT
STATE OF _____________ )
) SS
COUNTY OF ____________ )
I, __________________, BEING FIRST DULY SWORN TO DEPOSE AND SAY AS FOLLOWS:
1. THIS UNDERTAKING IS SUBMITTED PURSUANT TO THE INDEMNIFICATION
AGREEMENT, DATED AS OF _________________, 19 __, BETWEEN THE CLOTHESTIME,
INC. (THE "COMPANY"), A DELAWARE CORPORATION AND THE UNDERSIGNED.
2. I AM REQUESTING ADVANCEMENT OF CERTAIN COSTS, CHARGES AND EXPENSES WHICH I
HAVE INCURRED OR WILL INCUR IN DEFENDING AN ACTUAL OR PENDING CIVIL OR
CRIMINAL ACTION, SUIT, PROCEEDING OR CLAIM.
3. I HEREBY UNDERTAKE TO REPAY THIS ADVANCEMENT OF EXPENSES IF IT SHALL
ULTIMATELY BE DETERMINED THAT I AM NOT ENTITLED TO BE INDEMNIFIED BY THE
COMPANY UNDER THE AFORESAID AGREEMENT OR OTHERWISE.
4. THE COSTS, CHARGES AND EXPENSES FOR WHICH ADVANCEMENT IS REQUESTED
ARE, IN GENERAL, ALL EXPENSES RELATED TO
--------------------------------------------------------------------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------
SUBSCRIBED AND SWORN TO BEFORE ME, A NOTARY PUBLIC IN AND FOR SAID COUNTY
AND STATE, THIS _________ DAY OF ____________________, 19 ___.
----------------------------------
NOTARY PUBLIC
(SEAL)
MY COMMISSION EXPIRES THE ______ DAY OF ___________________, 19 ___.
16
<PAGE> 1
EXHIBIT 10.41
INDEMNIFICATION
AGREEMENT
This Indemnification Agreement ("Agreement") is made as of this 17th of
January, 1997, by and between THE CLOTHESTIME, INC., a Delaware corporation (the
"Company"), and Sona A. McGrath ("Indemnitee").
WHEREAS, Indemnitee is currently serving as an officer of the Company
and the parties wish Indemnitee to continue in such capacity. The Indemnitee is
willing, subject to certain conditions including, without limitation, the
execution and performance of this Agreement by the Company, to continue in that
capacity;
WHEREAS, in addition to the indemnification to which the Indemnitee is
or may be entitled under the Certificate of Incorporation of the Company (the
"Certificate") or the Bylaws of the Company (the "Bylaws"), the Company has
obtained at its sole expense insurance protecting its officers and directors
including Indemnitee against certain losses arising out of actual or threatened
actions, suits or proceedings to which such persons may be made or threatened to
be made parties. However, as a result of circumstances having no relation to,
and beyond the control of, the Company and Indemnitee, there can be no assurance
of the continuation or renewal of the insurance;
WHEREAS, the Company and Indemnitee recognize the increasing difficulty
in obtaining directors' and officers' liability insurance, the significant
increases in the cost of such insurance and the general reductions in the
coverage of such insurance;
WHEREAS, the Company and Indemnitee further recognize the substantial
increase in corporate litigation in general, subjecting directors, officers,
employees and other agents to expensive litigation risks;
WHEREAS, the Company desires to attract and retain the services of
highly qualified individuals, such as Indemnitee, to serve as directors,
officers, employees and other agents of the Company and its subsidiaries; and
WHEREAS, in recognition of Indemnitee's need for substantial protection
against personal liability in order to enhance Indemnitee's continued and
effective service to the Company, and in order to induce Indemnitee to provide
services to the Company as a director, officer or employee and to provide
services in the capacity of a director, officer, employee or agent of another
corporation (including, without limitation, the Company's subisdiaries),
partnership, joint venture, trust or other enterprise in which she serves at the
request of the Company, the Company wishes to provide in this Agreement for the
indemnification of and the advancing of expenses to Indemnitee to the fullest
extent (whether partial or complete) permitted by law and as set forth in this
Agreement, and, to the extent insurance is maintained, for the coverage of
Indemnitee under the Company's directors' and officers' liability insurance
policies.
<PAGE> 2
NOW, THEREFORE, in consideration of the above premises and of
Indemnitee's promise to continue to serve the Company directly or, at its
request, with another enterprise, and intending to be legally bound hereby, the
parties agree as follows:
1. DEFINED TERMS AND CONSTRUCTION OF CERTAIN PHASES. As used in
this Agreement:
(a) "Board" shall mean the Board of Directors of the Company.
(b) References to the "Company" shall include, in addition to the
resulting corporation, any constituent corporation (including any constituent of
a constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers, employees or other agents, so that if Indemnitee is or was
a director, officer, employee or other agent of such constituent corporation, or
is or was serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, Indemnitee shall stand in the same position under the
provisions of this Agreement with respect to the resulting or surviving
corporation as Indemnitee would have with respect to such constituent
corporation if its separate existence had continued.
(c) A "Change in Control" shall be deemed to have occurred if (i)
any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended), other than a trustee or other fiduciary
holding securities under an employee benefit plan of the Company, a subsidiary
of the Company, or a corporation owned directly or indirectly by the
shareholders of the Company in substantially the same proportions as their
ownership of stock of the Company, is or becomes the "Beneficial Owner" (as
defined in Rule 13d-3 under said Act), directly or indirectly, of securities of
the Company representing 40% or more of the total voting power represented by
the Company's then outstanding Voting Securities; (ii) during a two-year period,
individuals who at the beginning of such period constitute the Board and any new
director whose election or election was approved by a vote of at least
two-thirds (2/3) of the directors then still in office who either were directors
at the beginning of the period or whose election or nomination for election was
previously so approved, cease for any reason to constitute a majority thereof;
(iii) the stockholders of the Company approve a merger or consolidation of the
Company with any other corporation, other than a merger or consolidation that
would result in the Voting Securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining outstanding or by
being converted into Voting Securities of the surviving entity) at least 80% of
the total voting power represented by the Voting Securities of the Company or
such surviving entity outstanding immediately after such merger or
consolidation, or (iv) the stockholders of the Company approve a plan of
complete liquidation of the Company or an agreement for the sale or disposition
by the Company (in one transaction or a series of transactions) of all or
substantially all of the Company's assets.
(d) "Independent Counsel" shall be the person or body appointed
in connection with Section 4 of this Agreement.
(e) "Other enterprises" shall include employee benefit plans.
2
<PAGE> 3
(f) "Potential Change in Control" shall be deemed to have
occurred if (i) the Company enters into an agreement or arrangement, the
consummation of which would result in the occurrence of a Change in Control;
(ii) any person (including the Company) publicly announces an intention to take
or to consider taking actions that, if consummated, would constitute a Change in
Control; (iii) any "person" (as such term is used in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934, as amended), other than a trustee or other
fiduciary holding securities under an employee benefit plan of the Company, a
subsidiary of the Company, a corporation owned directly or indirectly by the
proportions as their ownership of stock of the Company, or a person who is a
party to an indemnification agreement (in a form similar to this Agreement) with
the Company, is or becomes the "Beneficial Owner" (as defined in Rule 13d-3
under said Act), directly or indirectly, of securities of the Company
representing 15% or more of the total voting power represented by the Company's
then outstanding Voting Securities; or (iv) the Board adopts a resolution to the
effect that, for purposes of this Agreement, a Potential Change in Control has
occurred.
(g) "Serving at the request of the Company" shall include,
without limitation, any service as a director, officer, employee or agent of the
Company or any of its subsidiaries, which imposes duties on, or involves
services by, Indemnitee with respect to an employee benefit plan.
(h) "Voting Securities" shall mean any securities of the Company
that are entitled to vote generally in the election of directors.
2. INITIAL INDEMNITY.
(a) Indemnity in Third Party Proceedings. The Company shall
indemnify the Indemnitee when she was or is a party or is threatened to be made
a party to any threatened, pending or completed action, suit or proceeding,
whether civil, administrative, investigative, or criminal (other than an action
by or in the right of the Company), by reason of the fact that she is or was or
had agreed to become a director, officer, employee or agent of the Company, or
is or was serving or had agreed to serve at the request of the Company as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, or by reason of any action alleged to have
been taken or omitted in such capacity, against any and all costs, charges and
expenses (including without limitation attorneys' and others' fees and
expenses), judgments, fines and amounts paid in settlement actually and
reasonably incurred by the Indemnitee in connection therewith and any appeal
therefrom if the Indemnitee acted in good faith and in a manner she reasonably
believed to be in or not opposed to the best interests of the Company, and with
respect to any criminal action or proceeding, had no reasonable cause to believe
her conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction or upon a plea of nolo contendere or its
equivalent shall not, of itself, create a presumption that the Indemnitee did
not satisfy the foregoing standard of conduct to the extent applicable thereto.
(b) Indemnity in Proceedings By or In the Name of the
Corporation. The Company shall indemnify the Indemnitee when she was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding by or in the right of the Company to
procure a judgment in its favor by reason of the fact that she is or was or had
agreed to become a director, officer, employee or agent of the Company, or is or
was serving or had agreed to serve at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise against costs,
3
<PAGE> 4
charges and expenses (including attorneys' and others' fees and expenses)
actually and reasonably incurred by her in connection with the defense or
settlement thereof or any appeal therefrom if she acted in good faith and in a
manner she reasonably believed to be in or not opposed to the best interests of
the Company and except that no indemnification shall be made in respect of any
claim, issue or matter as to which the Indemnitee shall have been adjudged to be
liable to the Company unless and only to the extent that the Court of Chancery
or the court in which such action, suit or proceeding was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, the Indemnitee is fairly and
reasonably entitled to indemnity for such expenses which the Court Chancery or
such other court shall deem proper.
(c) Indemnification of Expenses of Successful Party. To the
extent that the Indemnitee has been successful on the merits or otherwise,
including, without limitation the dismissal of an action without prejudice, in
defense of any action, suit or proceeding referred to in Sections 2(a) or 2(b)
hereof or in defense of any claim, issue or matter therein, she shall be
indemnified against costs, charges and expenses (including attorney's and
others' fees and expenses) actually and reasonably incurred by her in connection
therewith.
(d) Determination of Right on Indemnitee to Indemnification. Any
indemnification under Sections 2(a) or 2(b) (unless ordered by a court) shall be
made by the Company only as authorized in the specific case upon a determination
in accordance with Section 4 hereof or any applicable provision of the
Certificate, Bylaws, other agreement, resolution or otherwise. Such
determination shall be made (i) by the Board by a majority vote of a quorum
consisting of directors who were not parties to such action, suit or proceeding
or (ii) if such a quorum of disinterested directors is not available or so
directs, by independent legal counsel (designated in the manner provided below
in this subsection (d)) in a written opinion or (iii) by the stockholders of the
Company (the "Stockholders"). Independent legal counsel shall be designated by
vote of a majority of the disinterested directors; provided, however, that if
the Board is unable or fails to so designate, such designation shall be made by
the Indemnitee subject to the approval of the Company (which approval shall not
be unreasonably withheld). Independent legal counsel shall not be any person or
firm who, under the applicable standards professional conduct then prevailing,
would have a conflict of interest in representing either the Company or the
Indemnitee in an action to determine the Indemnitee's rights under this
Agreement. The Company agrees to pay the reasonable fees and expenses of such
independent legal counsel and to indemnify fully such counsel against costs,
charges and expenses (including attorneys' and others' fees and expenses)
actually and reasonably incurred by such counsel in connection with this
Agreement or the opinion of such counsel pursuant hereto.
(e) Advancement of Expenses. All expenses (including attorneys'
and others' fees and expenses) incurred by the Indemnitee in her capacity as a
director, officer, or employee of the Company, or in her capacity as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise in which she was serving at the request of the
Company, in defending a civil or criminal action, suit or proceeding shall be
paid by the Company in advance of the final disposition of such action, suit or
proceeding in the manner prescribed by Section 4(b) hereof.
4
<PAGE> 5
3. Additional Indemnification.
(a) Right to additional Indemnification. Pursuant to Section 145
(f) of the General Corporation Law of the State of Delaware (the "GCL"), without
limiting any right which the Indemnitee may have pursuant to Section 2 hereof,
the Certificate, the Bylaws, the GCL, any policy of insurance or otherwise, but
subject to the limitations on the maximum permissible indemnity which may exist
under applicable law at the time of any request for indemnity hereunder
determined as contemplated by this Section 3(a), the Company shall indemnify the
Indemnitee against any amount which she is or becomes legally obligated to pay
relating to or arising out of any claim made against her because of any act,
failure to act or neglect or breach of duty, including any actual or alleged
error, misstatement or misleading statement, which she commits, suffers, permits
or acquiesces in while acting in her capacity as a director, an officer, an
employee or agent of the Company, or, at the request of the Company, as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, whether prior to or after the date of this
Agreement and whether or not the basis of the claim is alleged action or
inaction in an official capacity as a director, officer, employee or agent or in
any other capacity while serving as a director, officer, employee or agent or in
any other capacity while serving as a director, officer, employee or agent of
the Company. The payments which the Company is obligated to make pursuant to
this Section 3 shall include without limitation (i) damages, judgments,
settlements (in accordance with Section 6(d) of this Agreement), fines and
similar penalties, and excise taxes and penalties assessed on a person with
respect to an employee benefit plan, (ii) charges costs expenses (including
attorneys' and others' fees and related disbursements), expenses of
investigation, expenses of defense of legal actions, suits, proceedings or
claims and appeals therefrom, expenses relating to serving as a witness and
expenses of appeal, attachment or similar bonds, and (iii) any interest,
assessments, or other charges imposed thereon and any federal, state, local or
foreign taxes imposed as a result of the actual or deemed receipt of such
payments under this Agreement. Notwithstanding the foregoing, the Company shall
not be obligated under this Section 3(a) to make any payment in connection with
any claim against the Indemnitee:
(i) to the extent of any fine or similar governmental imposition
which the Company is prohibited by applicable law from paying which results in a
final, nonappealable order; or
(ii) to the extent based upon or attributable to the Indemnitee
gaining in fact a personal profit to which she was not legally entitled,
including without limitation profits made from the purchase and sale by the
Indemnitee of equity securities of the Company which are recoverable by the
Company which are recoverable by the Company pursuant to Section 16(b) of the
Securities Exchange Act of 1934, as amended, and profits arising from
transactions in publicly traded securities of the Company which were effected by
the Indemnitee in violation of Section 10(b) of the Securities Exchange Act of
1934, as amended, including Rule 10b-5 promulgated thereunder.
The determination of whether the Indemnitee shall be entitled to indemnification
under this section 3(a) shall be made in accordance with section 4(d) hereof.
5
<PAGE> 6
(b) Advancement of Expenses Relating to Additional Indemnification.
Expenses (including without limitation attorneys' and others' fees and expenses)
incurred by Indemnitee in defending any actual or threatened civil or criminal
action, suit, proceeding or claim shall be paid by the Company in advance of the
final disposition thereof as authorized in accordance with Section 4(b) hereof.
4. Certain Procedures Relating to Indemnification and Advancement of
Expenses.
(a) General. Except as otherwise permitted or required by the
GCL, for purposes of pursuing her rights to indemnification under Sections 2(a),
2(b), or 3(a) hereof, as the case may be, the Indemnitee may, but shall not be
required to, (i) submit to the Board a sworn statement of request for
indemnification substantially in the form of Exhibit 1 attached hereto and made
a part hereof (the "Indemnification Statement") averring that she is entitled to
indemnification hereunder; and (ii) present to the Company reasonable evidence
of all expenses for which payment is requested. Submission of an Indemnification
Statement to the Board shall create a presumption that the Indemnitee is
entitled to indemnification under Sections 2(a), 2(b) or 3(a) hereof, as the
case may be, and the Board shall be deemed to have determined that the
Indemnitee is entitled to such indemnification unless with in 30 calendar days
after submission of the Indemnification Statement the Board shall determine by
vote of a majority of the directors at a meeting at which a quorum is present,
based upon clear and convincing evidence (sufficient to rebut the foregoing
presumption), and the Indemnitee shall have received notice within such period
in writing of such determination that the Indemnification is not so entitled to
indemnification, which notice shall disclose with particularity the evidence in
support of the Board's determination. The foregoing notice shall be sworn to by
all persons who participated in the determination and voted to deny
indemnification. The provisions of this section 4(a) are intended to be
procedural only and shall not affect the right of the Indemnitee to
indemnification under this Agreement and any determination by the Board that the
Indemnitee is not entitled to indemnification and any failure to make the
payments requested in the Indemnification Statement shall be subject to judicial
review as provided in Section 5 hereof.
(b) Undertaking or Expense Request Regarding Advancement of
Expenses. For purposes of determining whether to authorize advancement of
expenses pursuant to Section 2(e) hereof, the Indemnitee shall submit to the
board a sworn statement of request for advancement of expenses substantially in
the form of Exhibit 2 attached hereto and made a part hereof (the
"Undertaking"), averring that (i) she has reasonably incurred or will reasonably
incur actual expenses in defending an actual civil or criminal action, suit,
proceeding or claim and (ii) she undertakes to repay such amount if it shall
ultimately be determined that she is not entitled to be indemnified by the
Company under this Agreement or otherwise. For purposes of requesting
advancement of expenses pursuant to Section 3(b) hereof, the Indemnitee (i) may,
but shall not be required to, submit an Undertaking or (ii) shall submit such
other form of request as she determines to be appropriate (an "Expense
Request"). Upon receipt of an Undertaking or Expense Request, as the case may
be, the Board shall within 20 calendar days authorize immediate payment of the
expenses stated in the Undertaking or Expense Request, whereupon such payments
shall immediately be made by the Company. No security shall be required in
connection with any Undertaking or Expense Request and any Undertaking or
Expense Request shall be accepted without reference to the Indemnitee's ability
to make repayment.
6
<PAGE> 7
(c) Independent Counsel. Notwithstanding anything to the contrary
contained in Sections 2(d) or 4(a) of this Agreement, after a Change of Control
and if requested by the Indemnitee at the time of making a claim for
indemnification, (i) any determination under Section 2(a) or 2(b) (unless
ordered by a court) shall be made by Independent Counsel (as defined below), and
(ii) after the submission of an Indemnification Statement, the determination
pursuant to Section 4(a) whether an Indemnitee shall be entitled to
indemnification under Sections 2(a), 2(b) or 3(a) hereof, as the case may be,
shall be made by Independent Counsel (as defined below) instead of by the Board.
For purposes of this Section 4(c) "Independent Counsel" shall be an attorney
selected by Indemnitee and approved by the Company (which approval shall not be
unreasonably withheld), (i) who has not otherwise performed services for the
Company or the Indemnitee (other than in connection with indemnification
matters) within the three years prior to the selection of the Independent
Counsel, and (ii) who shall not, under the applicable standards of professional
conduct then prevailing, have a conflict of interest in representing either the
Company or Indemnitee in an action to determine Indemnitee's rights under this
Agreement. Any determination by Independent Counsel as to whether and to what
extent the Indemnitee should be permitted to be indemnified under applicable law
shall be rendered by its written opinion to the Company and Indemnitee. The
Company agrees to pay the reasonable fees of the Independent Counsel and to
indemnify fully such counsel against any and all expenses (including attorneys'
and others' fees and expenses), claims, liabilities, loss, and damages arising
out of or relating to this Agreement, the engagement of Independent Counsel
pursuant hereto or the opinion of such counsel pursuant hereto.
5. Indemnification Process and Appeal.
(a) Suit to Enforce Rights. If a claim for indemnification made
to the Company pursuant to Section 4 hereof is not paid in full by the Company
within 30 calendar days after a written claim has been received by the Company,
the Indemnitee may at any time thereafter bring suit against the Company to
recover the unpaid amount of the claim in any court having subject matter
jurisdiction thereof. The Company hereby consents to service of process and to
appear in any such proceeding. The remedy provided for in this Section 5 shall
be in addition to any other remedies available to Indemnitee in law or equity.
(b) Defense to Indemnification, Burden of Proof and Presumptions.
In any action brought under Section 5(a) hereof, it shall be a defense to a
claim for indemnification pursuant to Sections 2(a) or 2(b) hereof (other than
an action brought to enforce a claim for expenses incurred in defending any
proceeding in advance of its final disposition where the Undertaking, if any is
required, has not met the standards of conduct which make it permissible under
the GCL for the Company to indemnify the Indemnitee for the amount claimed, but
the burden of proving such defense shall be on the Company. It shall be a
defense to any action brought by Indemnitee against the Company to enforce this
Agreement that it is not permissible under applicable law for the Company to
indemnify Indemnitee for the amount claimed, but the burden of proving such
defense shall be on the Company. Neither the failure of the Company (including
its Board, independent legal counsel or its stockholders) or Independent counsel
to have made a determination prior to the commencement of such action by
Indemnitee that indemnification of the claimant is proper under the
circumstances because she has met the standard of conduct set forth in
applicable law, nor an actual determination by the Company (including its Board,
independent legal counsel or its stockholders) or Independent Counsel that
Indemnitee had not met such applicable standard of conduct, shall be a defense
to the action or create a presumption that Indemnitee has not met the applicable
standard of conduct.
7
<PAGE> 8
(c) Indemnification for Expenses Incurred in Enforcing Rights. It
is the intent of the Company that the Indemnitee not be required to incur the
expenses associated with the enforcement of her rights under this Agreement by
litigation or other legal action because the cost and expense thereof would
substantially detract from the benefits intended to be extended to the
Indemnitee hereunder. Accordingly, if it should appear to the Indemnitee that
the Company has failed to comply with any of its obligations under the Agreement
or in the event that the Company or any other person takes any action to declare
the Agreement void or proceeding designed (or having the effect of being
designed) to deny, or to recover from, the Indemnitee the benefits intended to
be provided to the Indemnitee hereunder, the Company irrevocably authorizes the
Indemnitee from time to time to retain counsel of her choice, at the expense of
the Company as hereafter provided, to represent the Indemnitee in connection
with the initiation or defense of any litigation or other legal action, whether
by or against the Company or any director, officer, stockholder or other person
affiliated with the Company, in any jurisdiction. Regardless of the outcome
thereof, the Company shall pay and be solely responsible for any and all costs,
charges and expenses (including without limitation attorneys' and others' fees
and (expenses) reasonably incurred by the Indemnitee (i) as a result of the
Company's failure to perform this Agreement or any provision thereof or (ii) as
a result of the Company or any other person contesting the validity or
enforceability of this Agreement or any provision thereof as aforesaid; provided
that, if and to the extent that a court of competent jurisdiction determines (in
a final judicial determination as to which all rights of appeal therefrom have
been exhausted or waived or have lapsed) that each of the material assertions
made by Indemnitee in such litigation or other legal action was not made in good
faith or was frivolous, the Company shall not be obligated to pay any such
costs, charges and expenses incurred by Indemnitee in connection with such suit
and shall be entitled to be reimbursed by Indemnitee (who hereby agrees to
reimburse the Company) for all such amounts theretofore paid under this Section
5(c). Notwithstanding the procedure for selection of counsel in Section 6(c)
herein, in connection with the assertion of any claim under this Section 5(c),
Indemnitee from time to time may retain counsel of her choice to represent her.
6. Notification and Defense of Proceeding.
(a) Notice/Cooperation by Indemnitee. Indemnitee shall give the
Company notice in writing as soon as practicable of any claim made against
Indemnitee for which indemnification will or could be sought under this
Agreement (for purposes of this Section 6, a "Claim"). Indemnitee shall also
provide the Company such information and cooperation as the Company from time to
time may reasonably request and as shall reasonably be within Indemnitee's power
to provide.
(b) Notice to Insurers. If at the time of the receipt of a notice
of a Claim pursuant to Section 6(a) hereof the Company has directors' and
officers' liability insurance (or a similar policy covering key employees, if
applicable) in effect, the Company shall give prompt notice of such Claim to the
insurers in accordance with the procedures set forth in the respective policies.
The Company thereafter shall take all necessary or desirable action to cause
such insurers to pay, on behalf of Indemnitee, all amounts payable as a result
of such Claim in accordance with the terms of such policies.
(c) Selection of Counsel. With respect to any litigation or other
legal action relating to a Claim as to which Indemnitee notifies the Company
(for purposes of this Section 6, a "Proceeding"), the Company will be entitled
to participate in the Proceeding at its own expense and except as otherwise
provided below, to the extent the Company so wishes, it may assume the defense
thereof with counsel selected by the Company and approved by
8
<PAGE> 9
Indemnitee, which approval shall not be unreasonably withheld. After notice from
the Company to Indemnitee of its election to assume the defense of any
Proceeding, the Company will not be liable to Indemnitee under this Agreement or
otherwise for any expenses subsequently incurred by Indemnitee in connection
with the defense of such Proceeding other than reasonable costs of investigation
or as otherwise provided below. Indemnitee shall have the right to employ her
own counsel in such Proceeding, but all expenses related thereto incurred after
notice from the Company of its assumption of the defense shall be at
Indemnitee's expense unless: (i) the employment of counsel by Indemnitee has
been authorized by the Company; (ii) Indemnitee has reasonably determined and
either the Company shall have agreed, or disinterested counsel (as defined in
this Section 6(c)) shall have determined, that there may be a conflict of
interest between Indemnitee and the Company in the defense of the Proceeding;
(iii) after a Change in Control, the employment of counsel by Indemnitee has
been approved by the Independent Counsel; or (iv) the Company shall not in fact
have employed counsel to assume the defense of such Proceeding, in each of which
case all expenses of the Proceeding shall be borne by the Company, and
Indemnitee's counsel shall have been approved by the Company (which approval may
not be unreasonably withheld) and any carrier of an applicable insurance policy
if required under the terms of that policy or under applicable law. As used in
this Section 6(c), "disinterested counsel" shall mean counsel selected and
compensated by the Company, and approved by Indemnitee (which approval may not
be unreasonably withheld), to determine whether a conflict of interest may
exist, which counsel shall not represent the Company, Indemnitee or any other
party to the Proceeding for which indemnification is sought. Disinterested
counsel shall be selected promptly following the notice from Indemnitee to the
Company of Indemnitee's belief that a conflict of interest may exist. The
company shall not be entitled to assume the defense of any Proceeding as to
which the determination provided for in (ii) above shall have been made. Nothing
herein shall limit the right of Indemnitee to employ counsel at Indemnitee's
sole expense.
(d) Settlements. Notwithstanding anything to the contrary
contained in this Agreement, the Company shall not be liable to indemnify
Indemnitee under this Agreement or otherwise for any amounts paid in settlement
of any Proceeding effected without the Company's written consent; provided,
however, that if a Change in Control has occurred, the Company shall be liable
for indemnification of Indemnitee for amounts paid in settlement if the
Independent Counsel has approved the settlement. The Company shall not settle
any Proceeding in any manner that would impose any penalty or limitation on
Indemnitee without Indemnitee's written consent. Neither the Company nor the
Indemnitee will unreasonably withhold its consent to any proposed settlement.
The Company shall not be liable to indemnify Indemnitee under this Agreement
with regard to any judicial award if the Company was not given a reasonable and
timely opportunity, at its expense, to participate in the defense of such
action; the Company's liability hereunder shall not be excused if participation
in the Proceeding by the Company was barred by this Agreement.
7. Establishment of a Trust.
Immediately upon the occurrence of a Change in Control or a Potential Change in
Control, the Company shall, upon written request by Indemnitee, create a trust
(a "Trust") for the benefit of Indemnitee and from time to time upon written
request of Indemnitee shall fund the Trust in an amount sufficient to satisfy
any and all amounts reasonably anticipated at the time of each such request to
be incurred in connection with any claim made by Indemnitee. The amount or
amounts to be deposited in the Trust pursuant to the foregoing funding
obligation shall be determined (i) prior to the occurrence of a Change in
Control or a Potential Change in Control, (a) the Board by a majority vote of a
quorum consisting of directors who were not parties to the
9
<PAGE> 10
action, suit or proceeding serving as the basis of a claim by Indemnitee, or (b)
if such a quorum of disinterested directors is not available or so directs, by
independent legal counsel (designated in the manner provided in Section 2(d) in
a written opinion or (c) by the Stockholders, or (ii) after the occurrence of a
Change in Control or a Potential Change in Control, by Independent Counsel as
defined in Section 4(c) (for purposes of this Section 7, the "Reviewing Party").
The terms of the Trust shall provide that upon a Change in Control (i) the Trust
shall not be revoked or the principal thereof invaded without the written
consent of Indemnitee, (ii) the trustee of the Trust (the "Trustee") shall
advance within 20 business days of the request by Indemnitee, any and all
expenses to Indemnitee (and Indemnitee hereby agrees to reimburse the Trust
under the same circumstances for which Indemnitee would be required to reimburse
the Company under Section 4(b) of this Agreement), (iii) the Trust shall
continue to be funded by the Company in accordance with the funding obligation
set forth above, (iv) the Trustee shall promptly pay to Indemnitee all amounts
for which Indemnitee shall be entitled to indemnification pursuant to this
Agreement or otherwise, and (v) all unexpended funds in the Trust shall revert
to the Company upon a final determination by the Reviewing Party or a court of
competent jurisdiction, as the case may be, that Indemnitee has been fully
indemnified under the terms of this Agreement. The Trustee shall be chosen by
Indemnitee. Nothing in this Section 7 shall relieve the Company of any of its
obligations under this Agreement. All income earned on the assets held in the
Trust shall be reported as income by the Company for federal, state, local and
foreign tax purposes. The Company shall pay all costs of establishing and
maintaining the Trust and shall indemnify the Trustee against any and all
expenses (including attorneys' fees), claims, liabilities, loss and damages
arising out of or relating to this Agreement or the establishment and
maintenance of the Trust.
8. Exceptions.
Any other provision herein to the contrary notwithstanding, the Company shall
not be obligated pursuant to the terms of this Agreement:
(a) Claims Initiated by Indemnitee. To indemnify Indemnitee for
any amounts or to advance expenses to Indemnitee with respect to any litigation
or other legal action initiated or brought voluntarily (and not by way defense
or counterclaim) by Indemnitee against the Company or any agent of the Company
unless (i) the Company has joined in or the Board has consented to the
initiation of such litigation or other legal action, (ii) the litigation or
other legal action is brought to establish or enforce a right to indemnification
under Section 5 of this Agreement, or (iii) the litigation or other legal action
is instituted after a Change of Control and Independent Counsel has approved its
initiation; or
(b) No Duplication of Payments. To make any payment in connection with
any claim made against Indemnitee to the extent Indemnitee has otherwise
actually received payment (under any insurance policy, by law or otherwise) of
the amounts otherwise indemnifiable hereunder.
9. Scope; Nonexclusivity.
(a) Scope. In accordance with Section 145(f) of the GCL, the
parties hereto intend that this Agreement shall provide for indemnification in
excess of that expressly permitted by statute, including, without limitation,
any indemnification provided by the Certificate, Bylaws, vote of its
stockholders or disinterested directors or applicable law. To the extent that a
change in applicable law (whether by statue, rule or judicial decision) permits
greater indemnification by agreement than would be afforded currently under the
Certificate,
10
<PAGE> 11
Bylaws, applicable law or this Agreement, it is the intent of the parties that
Indemnitee enjoy by this Agreement the greater benefits so afforded by such
change.
(b) Nonexclusivity. Consistent with Section 145(f) of the GCL,
the indemnification provided by this Agreement shall not be deemed exclusive of
any rights to which Indemnitee may be entitled under the Certificate, Bylaws,
any agreement, any vote of stockholders or disinterested directors, or
otherwise, both as to actions in Indemnitee's official capacity and as to
actions in another capacity while holding such office, and shall continue after
Indemnitee has ceased to be a director, officer, employee or agent.
10. Mutual Acknowledgment.
Both the Company and Indemnitee acknowledge that in certain instances, federal
or state law or applicable public policy may prohibit the Company from
indemnifying its directors, officers, employees or other agents under this
Agreement or otherwise. Indemnitee understands and acknowledges that the Company
has undertaken or may be required in the future to undertake with the U.S.
Securities and Exchange Commission or applicable state securities agencies to
submit the question of indemnification to a court in certain circumstances for a
determination of the Company's right under public policy to indemnify
Indemnitee.
11. Directors' and Officers' Liability Insurance.
The Company shall, from time to time, make the good faith determination whether
or not it is practical for the Company to obtain and maintain a policy or
policies of insurance with reputable insurance companies providing the officers
and directors of the Company with coverage for losses from wrongful acts, or to
ensure the Company's performance of its indemnification obligations under this
Agreement. Among other considerations, the Company will weigh the costs of
obtaining such insurance coverage against the protection afforded by such
coverage. To the extent the Company maintains an insurance policy or policies
providing directors' and officers' liability insurance (or such other similar
insurance policy covering key employees, if applicable), Indemnitee shall be
covered by such policy or policies, in accordance with its or their terms, to
the maximum extent of the coverage available for any Company director or
officer. Notwithstanding the foregoing, the Company shall have no obligation to
obtain or maintain such insurance if the Company determines in good faith that
such insurance is not reasonably available, if the premium costs for such
insurance are disproportionate to the amount of coverage provided, if the
coverage provided by such insurance is limited by exclusions so as to provide an
insufficient benefit, or if Indemnitee is covered by similar insurance
maintained by a subsidiary or parent Company.
12. Effectiveness of Agreement.
This Agreement shall be effective as of the date set forth on the first page and
may apply to acts or omissions of Indemnitee which occurred prior to such date
if Indemnitee was a director, officer, employee or agent of the Company, or was
serving at the request of the Company as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other enterprise,
at the time such act or omission occurred.
11
<PAGE> 12
13. Period of Limitation.
No legal action shall be brought and no cause of action shall be asserted by or
on behalf of the Company or any affiliate of the Company against Indemnitee,
Indemnitee's spouse, heirs, executors, or personal or legal representatives
after the expiration of two years from the date of accrual of such cause of
action, or such longer period as may be required by state law under the
circumstances (i.e., a minimum limitation period that expressly may not be
altered by agreement among the parties). Any claim or cause of action of the
Company or any of its affiliates shall be extinguished and deemed released
unless asserted by the timely filing of a legal action within such period;
provided, however, if any shorter period of limitation is otherwise applicable
to any such cause of action, the shorter period shall govern.
14. Ratification of Acts.
None of the provisions contained in this Agreement is intended to constitute, or
shall be construed in any manner as constituting, a ratification by the Company
(or by any of its directors, officers or other agents) of any action or inaction
on the part of Indemnitee.
15. Continued Employment.
No provision contained herein shall be construed as conferring upon Indemnitee
any right with respect to continuance of performance of services for the
Company, nor shall any such provisions interfere in any way with the right of
the Company to terminate Indemnitee's services as an officer, employee or other
agent at any time with or without cause.
16. Successors and Assigns.
This agreement shall be binding upon, inure to the benefit of and be enforceable
by the parties hereto and their respective successors (including any direct or
indirect successor by purchase, merger, consolidation or otherwise to all or
substantially all of the business and/or assets of the Company), assigns,
spouses, heirs and personal and personal and legal representatives. The Company
shall require and cause any successor (whether direct or indirect by purchase,
merger, consolidation or otherwise) to all, substantially all, or a substantial
part, of the business and/or assets of the Company, by written agreement in form
and substance satisfactory to Indemnitee, expressly to assume and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform if no such succession had taken place.
Nothing in this Section 16 shall be construed to limit the protections afforded
Indemnitee under this Agreement which would occur upon a Change in Control or a
Potential Change in Control. The indemnification provided under this Agreement
shall continue as to Indemnitee for any action taken or not taken while serving
in an indemnified capacity even though Indemnitee may have ceased to serve in
such capacity at the time of any litigation or other legal action relating to
events for which a claim for indemnification is made by Indemnitee hereunder.
17. Notice.
All notices, requests, demands and other communications under this Agreement
shall be in writing and shall be deemed duly given (i) if delivered by hand and
receipted for by the party addressed, on the date of such receipt, or (ii) if
mailed by domestic certified or registered mail with postage prepaid, on the
third business day after the date postmarked. Addresses for
12
<PAGE> 13
notice to either party are as shown on the signature page of this Agreement, or
as subsequently modified by written notice.
18. Choice of Law.
This Agreement shall be governed by, and its provisions construed in accordance
with, the laws of the State of Delaware, including without limitation, all
matters of formation, construction, validity, performance and enforcement and
without giving effect to the principals of conflicts of laws.
19. Severability.
Nothing in this Agreement is intended to require or shall be construed as
requiring the Company to do or fail to do any act in violation of applicable
law. The Company's inability, pursuant to court order, to perform its
obligations under this Agreement shall not constitute a breach of this
Agreement. The provisions of this Agreement shall be severable as provided in
this Section 19. If this Agreement or any portion hereof shall be invalidated or
held unlawful or unenforceable on any ground by any court of competent
jurisdiction, then the Company shall nevertheless indemnify Indemnitee to the
full extent permitted by any applicable portion of this Agreement that shall not
have been invalidated or held unlawful or unenforceable, the provision(s) so
held to be invalid, unenforceable or otherwise illegal shall be reformed to the
extent (and only to the extent) necessary to make it enforceable, valid and
legal and the balance of this Agreement shall be enforceable in accordance with
its terms. Furthermore, to the fullest extent possible, the provisions of this
Agreement (including, without limitation, each portion of this Agreement
containing any provision held to be invalid, void, or otherwise unenforceable,
that is not itself invalid, void or unenforceable) shall be construed so as to
give effect to the intent manifested by the provision held invalid, void or
unenforceable.
20. Amendment and Waiver.
No supplement, modification or amendment of this Agreement shall be binding
unless executed in writing by both of the parties hereto. No waiver of any of
the provisions of this Agreement shall be deemed or shall constitute a waiver of
any other provision hereof (whether or not similar), nor shall such waiver
constitute a continuing waiver. Except as specifically provided herein, no
failure to exercise or any delay in exercising any right or remedy hereunder
shall constitute a waiver thereof.
21. Subrogation.
In the event of payment under this Agreement, the Company shall be subrogated to
the extent of such payment to all of the rights of recovery of Indemnitee, that
may be necessary to secure such rights, including the execution of such
documents necessary to enable the Company effectively to bring suit to enforce
such rights.
22. Future Agreements.
The Company shall not adopt any amendment to its Certificate or Bylaws the
effect of which would be to deny, diminish or encumber Indemnitee's rights to
indemnity pursuant to the Certificate, the Bylaws, the GCL or any other
applicable law as applied to any act or failure to act occurring in whole or in
part prior to the date (the "Effective Date") upon which the
13
<PAGE> 14
amendment was approved by the Board or the stockholders, as the case may be. In
the event that the Company shall adopt any amendment to its Certificate or
Bylaws the effect of which is to so deny, diminish or encumber Indemnitee's
rights to indemnity, such amendment shall apply only to acts or failures to act
occurring entirely after the Effective Date thereof unless the Indemnitee shall
have voted in favor of such adoption as a director or holder of record of the
Company's Voting Securities, as the case may be.
23. Counterparts.
This Agreement may be executed in counterparts, each of which shall be deemed an
original but all of which counterparts taken together shall constitute one and
the same document.
24. Headings.
Section headings herein are for reference purposes only and shall not affect the
meaning or interpretation of any provision of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
THE CLOTHESTIME, INC.
By: /s/ DAVID A. SEJPAL
------------------------------
David A. Sejpal
Chairman of the Board and
Chief Executive Officer
Address: 5325 E. Hunter Avenue
Anaheim,California 92807
AGREED TO AND ACCEPTED:
INDEMNITEE;
Sona A. McGrath
- --------------------
(Type Name)
/s/ SONA A. MCGRATH
- ------------------------
(Signature)
284 Bucknell Road
- ---------------------------
Costa Mesa, California 92626
- --------------------------------
(Address)
14
<PAGE> 15
EXHIBIT 1
INDEMNIFICATION STATEMENT
STATE OF _____________ )
) SS
COUNTY OF _____________ )
I, ____________________, BEING FIRST DULY SWORN, DO DEPOSE AND SAY AS FOLLOWS:
1. THIS INDEMNIFICATION STATEMENT IS SUBMITTED PURSUANT TO THE
INDEMNIFICATION AGREEMENT, DATED AS OF __________________________, 199__,
BETWEEN THE CLOTHESTIME, INC. (THE "COMPANY"), A DELAWARE CORPORATION, AND
THE UNDERSIGNED.
2. I AM REQUESTING INDEMNIFICATION AGAINST CHARGES, COSTS, EXPENSES
(INCLUDING ATTORNEYS' AND OTHERS' FEES AND EXPENSES), JUDGMENTS, FINES AND
AMOUNTS PAID IN SETTLEMENT, ALL OF WHICH HAVE BEEN OR WILL BE INCURRED BY
ME IN CONNECTION WITH AN ACTUAL OR THREATENED ACTION, SUIT, PROCEEDING OR
CLAIM TO WHICH I AM A PARTY OR AM THREATENED TO BE MADE A PARTY.
3. WITH RESPECT TO ALL MATTERS RELATED TO ANY SUCH ACTION, SUIT, PROCEEDING
OR CLAIM, I AM ENTITLED TO BE INDEMNIFIED AS HEREIN CONTEMPLATED PURSUANT
TO THE AFORESAID INDEMNIFICATION AGREEMENT.
4. WITHOUT LIMITING ANY OTHER RIGHTS WHICH I HAVE OR MAY HAVE, I
AM REQUESTING INDEMNIFICATION AGAINST LIABILITIES WHICH HAVE OR MAY ARISE
OUT OF
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SUBSCRIBED AND SWORN TO BEFORE ME, A NOTARY PUBLIC IN AND FOR SAID COUNTY
AND STATE, THIS _________ DAY OF ____________________, 19 ___.
----------------------------------
NOTARY PUBLIC
(SEAL)
MY COMMISSION EXPIRES THE ______ DAY OF ___________________, 19 ___.
15
<PAGE> 16
EXHIBIT 2
INDEMNIFICATION STATEMENT
STATE OF _____________ )
) SS
COUNTY OF ____________ )
I, __________________, BEING FIRST DULY SWORN TO DEPOSE AND SAY AS FOLLOWS:
1. THIS UNDERTAKING IS SUBMITTED PURSUANT TO THE INDEMNIFICATION
AGREEMENT, DATED AS OF _________________, 19 __, BETWEEN THE CLOTHESTIME,
INC. (THE "COMPANY"), A DELAWARE CORPORATION AND THE UNDERSIGNED.
2. I AM REQUESTING ADVANCEMENT OF CERTAIN COSTS, CHARGES AND EXPENSES WHICH I
HAVE INCURRED OR WILL INCUR IN DEFENDING AN ACTUAL OR PENDING CIVIL OR
CRIMINAL ACTION, SUIT, PROCEEDING OR CLAIM.
3. I HEREBY UNDERTAKE TO REPAY THIS ADVANCEMENT OF EXPENSES IF IT SHALL
ULTIMATELY BE DETERMINED THAT I AM NOT ENTITLED TO BE INDEMNIFIED BY THE
COMPANY UNDER THE AFORESAID AGREEMENT OR OTHERWISE.
4. THE COSTS, CHARGES AND EXPENSES FOR WHICH ADVANCEMENT IS REQUESTED
ARE, IN GENERAL, ALL EXPENSES RELATED TO
--------------------------------------------------------------------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------
SUBSCRIBED AND SWORN TO BEFORE ME, A NOTARY PUBLIC IN AND FOR SAID
COUNTY AND STATE, THIS _________ DAY OF ____________________, 19 ___.
----------------------------------
NOTARY PUBLIC
(SEAL)
MY COMMISSION EXPIRES THE ______ DAY OF ___________________, 19 ___.
16
<PAGE> 1
EXHIBIT 10.62
THE CIT GROUP/BUSINESS CREDIT, INC.
Third Floor
300 South Grand Avenue
Los Angeles, California 90071
Telephone: (213) 613-2575
Telecopier: (213) 613-2588
March 7, 1997
Clothestime Stores, Inc.
5325 East Hunter Avenue
Anaheim, California 92807
Attn: Chief Financial Officer
Re: Limited Waiver of Specified Event of Default
Ladies and Gentlemen:
1. We refer to the Financing Agreement dated December 28, 1995, as
amended from time to time (the "Agreement"), among the CIT Group/Business
Credit, Inc., as Lender ("CITBC"), Clothestime Stores, Inc., as Borrower, and
The Clothestime, Inc., MRJ Industries, Inc., Clothestime Investment, Inc.,
Clothestime International, Inc., and Clothestime Acquisition Corporation, as
Guarantors. Capitalized terms used herein and not otherwise defined herein
shall have the meanings ascribed to such terms in the Agreement.
2. You have advised us that you were in violation of the financial
covenant sest forth in Section 6.7 of the Agreement for the fiscal quarter
ended January 25, 1997. At your request, we hereby confirm to you that, except
for purposes of Section 3.4(ii) of the Agrement, (i) we hereby waive this
violation of the Agreement for the fiscal quarter ending January 25, 1997, and
(ii) such violation shall not constitute a Default or an Event of Default under
the Agreement provided you are in compliance with such covenants as amended
therein for the fiscal quarters thereafter; provided, however, that for
purposes of Section 3.4(ii) of the Agreement, unless and until there occurs a
Default or an Event of Default other than that described in the first sentence
of this Paragraph 2, the amount CITBC may hold as cash collateral shall be
equal to 75% of the maximum potential liability of the Borrower under the
Letters of Credit identified on Exhibit A hereto. You shall deposit such
amount in the Concentration Account within 5 Business Days of the execution of
this Waiver Letter.
3. In consideration of our execution of this Waiver Letter you
agree to pay us an Accommodation Fee of $75,000. Such fee shall be due and
payable in full on the Effective Date (as hereinafter defined) and may, at our
option, be charged to your Revolving Loan Account on the due date thereof. By
signing
<PAGE> 2
Clothestime Stores, Inc.
March 7, 1997
Page 2
below, you expressly authorize CITBC to charge your loan account pursuant
hereto.
4. This Waiver Letter shall not constitute a waiver by us of any
other existing Defaults and/or Events of Default under the Agreement whether or
not we have knowledge of same and shall not constitute a waiver of any future
Defaults and/or Events of Default whatsoever.
5. By signing below, you represent and warrant to CITBC that, as
at the date hereof, no event has occurred and is continuing, or would result
from the execution and effectiveness of this Waiver Letter, which would
constitute a Default or Event of Default other than such Defaults or Events of
Default described in Paragraph 2 hereof.
6. This Waiver Letter, and the waivers set forth herein, shall be
effective upon the date (such date, the "Effective Date") that CITBC shall have
received in full the Accommodation Fee set forth in Paragraph 3.
7. Except as herein specifically provided, no other amendment,
modification, waiver or change in any of the other terms or provisions of the
Agreement is hereby intended or implied, and all terms and conditions of the
Agreement and the Loan Documents remain in full force and effect. If the
foregoing is in accordance with your understanding, please sign and return to
us the enclosed copy of this letter to so indicate.
Very truly yours,
THE CIT GROUP/BUSINESS CREDIT, INC.
By: /s/ BONNIE SCHAIN
--------------------------------
Title: Assistant Vice President
-------------------------
Read and agreed to as of the date set forth above:
CLOTHESTIME STORES, INC.
By: /s/ DAVID A. SEJPAL
-----------------------------------
Title: CEO
----------------------------
<PAGE> 3
EXHIBIT "A"
02/26/97
THE CLOTHESTIME, INC.
STANDBY LETTERS OF CREDIT
<TABLE>
<CAPTION>
ISSUE EXPIRATION
DATE DATE L/C # BENEFICIARY AMOUNT
- ---------- ----------- ---------- ------------------------ ------------
<S> <C> <C> <C> <C>
ISSUING BANK: THE CIT GROUP/BUSINESS CREDIT
THE DAI-ICHI KANGYO BANK
02/28/97 11/28/97 HELLER FINANCIAL, INC. 1,500,000.00
02/28/97 11/28/97 CONGRESS TALCOTT CORPORATION 500,000.00
02/28/97 11/28/97 REPUBLIC FACTORS CORPORATION 650,000.00
02/28/97 11/28/97 THE CIT GROUP/COMMERCIAL SERVICES, INC. 500,000.00
02/28/97 11/28/97 CAPITAL FACTORS, INC. 500,000.00
GRAND TOTAL 3,650,000.00
</TABLE>
<PAGE> 1
EXHIBIT 10.63
THE CIT GROUP/BUSINESS CREDIT, INC.
THIRD FLOOR
300 SOUTH GRAND AVENUE
LOS ANGELES, CALIFORNIA 90071
TELEPHONE: (213) 613-2575
TELECOPIER: (213) 613-2588
April 15, 1997
Clothestime Stores, Inc.
5325 East Hunter Avenue
Anaheim, California 92807
Attn: Chief Financial Officer
Re: Limited Waiver
Ladies and Gentlemen:
1. We refer to the Financing Agreement dated December 28, 1995,
as amended from time to time (the "Agreement"), among The CIT Group/Business
Credit, Inc., as Lender ("CITBC"), Clothestime Stores, Inc., as Borrower, and
The Clothestime, Inc. ("TCI"), MRJ Industries, Inc., Clothestime Investment,
Inc., Clothestime International, Inc., and Clothestime Acquisition Corporation,
as Guarantors. The Borrower and the Guarantors are referred to herein
collectively as the "Debtors." Capitalized terms used herein and not otherwise
defined herein shall have the meanings ascribed to such terms in the Agreement.
2. You have advised us of several matters in the Cases and a
prospective transaction that, in the absence of this Waiver Letter, could result
in violations of certain covenants set forth in the Agreement. These matters are
as follows:
a. TCI, Norman Abramson and the Official Committee have
entered into a stipulation and agreed order resolving the claims by Mr.
Abramson against the Debtors and the claims by the Debtors against Mr.
Abramson (the "Abramson Stipulation"). The Abramson Stipulation
provides, among other things, for the Debtors' payment to Mr. Abramson,
not later than 10 business days after the Abramson Stipulation is
entered by the Bankruptcy Court and has become final and nonappealable,
of a lump sum of $378,007.38 (the "Abramson Settlement Payment"). The
Debtors and the Official Committee are jointly seeking Bankruptcy Court
approval of the Abramson Stipulation.
b. TCI, John Ortega II and the Official Committee are
negotiating the terms of a stipulation and
<PAGE> 2
Clothestime Stores, Inc.
April 15, 1997
Page 2
agreed order resolving the claims by Mr. Ortega against the Debtors and
the claims by the Debtors against Mr. Ortega (the "Ortega Stipulation").
The parties anticipate that the Ortega Stipulation will provide, among
other things, for one or more payments to Mr. Ortega, in an aggregate
amount not to exceed $290,765.65 (the "Ortega Settlement Payments"). The
Debtors and the Official Committee anticipate seeking Bankruptcy Court
approval of the Ortega Stipulation after its terms have been finalized.
c. On April 2, 1997, the Bankruptcy Court granted the
motion (the "Wells Motion") of Wells Fargo, as agent for itself and
Union Bank of California, N.A., successor to Union Bank (collectively,
the "Banks"), for relief from the automatic stay to exercise Wells
Fargo's and the Banks' remedies with respect to a bond issued by the New
York State Dormitory Authority (the "New York Bond") and certain sales
proceeds (collectively, the "Collateral") that were collateral for the
Debtors' prepetition financing facility with the Banks. Such remedies
include the right to sell the New York Bond on the public market and to
apply the Collateral to the Banks' secured prepetition claims. The
proposed order granting the relief requested in the Wells Motion that
Wells Fargo has submitted to the Bankruptcy Court is attached hereto as
Exhibit A and referred to herein as the "Wells Collateral Order."
d. The Debtors are in the process of negotiating a sale of
the office and warehouse facility located at 5395 East Hunter Avenue in
Anaheim, California (the "Office Building"). Pursuant to financing
arrangements entered into by the Debtors with Wells Fargo and the Banks
prior to the Petition Date, Wells Fargo holds a first priority lien on
the Office Building, and the Banks hold a second priority lien on the
Office Building. Any sale of the Office Building during the pendency of
the Cases will be subject to Bankruptcy Court approval. The Debtors
anticipate that, in their motion for approval of such sale, they will
seek an order directing that the net proceeds of such sale (the "Office
Building Sale Proceeds") be paid to Wells Fargo, to the extent of its
first lien against the Office Building, and the remainder of the
proceeds be applied to the secured prepetition claims of the Banks. The
Bankruptcy Court order that is ultimately entered approving the sale of
the Office Building is referred to herein as the "Office Building Sale
Order."
3. The Bankruptcy Court's entry of either the Abramson
Stipulation or the Ortega Stipulation may result in an
<PAGE> 3
Clothestime Stores, Inc.
April 15, 1997
Page 3
Event of Default under Section 9.1(g) of the Agreement. In addition, the
Debtors' payment of the Abramson Settlement Payment or the Ortega Settlement
Payments may result in a violation of Section 6.8(J) of the Agreement, and thus
may result in an Event of Default under Sections 9.1(g) and 9.1(r) of the
Agreement.
4. The Bankruptcy Court's entry of the Wells Collateral Order may
result in an Event of Default under Section 9.1(f) of the Agreement. Wells
Fargo's exercise of its and the Banks' remedies, as authorized by the Wells
Collateral Order, also may result in a violation of Section 6.8(J) of the
Agreement, and thus may result in an Event of Default under Sections 9.1(g) and
9.1(r) of the Agreement.
5. The Bankruptcy Court's entry of the Office Building Sale Order
may result in an Event of Default under Section 9.1(f) of the Agreement. The
sale of the Office Building and the payment of the Office Building Sale Proceeds
to the Banks may result in a violation of Sections 6.8(C) and 6.8(J) of the
Agreement, and thus may result in an Event of Default under Sections 9.1(g) and
9.1(r) of the Agreement.
6. At your request, we hereby confirm to you that: (a) we hereby
waive any violations of the Agreement that result from: (i) the Bankruptcy
Court's entry of an order approving the Abramson Stipulation or the Ortega
Stipulation or its entry of the Wells Collateral Order or the Office Building
Sale Order; (ii) the Debtors' payment of the Abramson Settlement Payment or any
of the Ortega Settlement Payments following the Bankruptcy Court's entry of the
Abramson Stipulation or the Ortega Stipulation, as applicable; (iii) Wells
Fargo's exercise of its remedies with respect to the Collateral pursuant to the
Wells Collateral Order, including, without limitation, the sale of the New York
Bond and the application of the Collateral to the Banks' secured prepetition
claims; or (iv) the sale of the Office Building or the payment of the Office
Building Sale Proceeds to Wells Fargo and the Banks; and (b) such violations
shall not constitute or result in a Default or an Event of Default under the
Agreement.
7. In consideration of our execution of this Waiver Letter, you
agree to pay us an Accommodation Fee of $25,000. Such fee shall be due and
payable in full on the Effective Date (as hereinafter defined) and may, at our
option, be charged to your Revolving Loan Account on the due date thereof. By
signing below, you expressly authorize CITBC to charge your loan account
pursuant hereto.
<PAGE> 4
Clothestime Stores, Inc.
April 15, 1997
Page 4
8. This Waiver Letter shall not constitute a waiver by us of any
other existing Defaults and/or Events of Default under the Agreement, whether or
not we have knowledge of same, and shall not constitute a waiver of any future
Defaults and/or Events of Default whatsoever.
9. By signing below, you represent and warrant to CITBC that, as
of the date hereof, no event has occurred and is continuing, or would result
from the execution and effectiveness of this Waiver Letter, that would
constitute a Default or Event of Default other than such Defaults or Events of
Default described herein.
10. This Waiver Letter, and the waivers set forth herein, shall
be effective upon the date (such date, the "Effective Date") that CITBC shall
have received in full the Accommodation Fee set forth in Paragraph 7.
11. Except as herein specifically provided, no other amendment,
modification, waiver or change of any of the other terms or provisions of the
Agreement is hereby intended or implied, and all terms and conditions of the
Agreement and the Loan Documents remain in full force and effect. If the
foregoing is in accordance with your understanding, please sign and return to us
the enclosed copy of this letter to so indicate.
Very truly yours,
THE CIT GROUP/BUSINESS CREDIT, INC.
By: /S/BONNIE SCHAIN
----------------------------------
Title: Assistant Vice President
--------------------------------
Read and agreed to as of the date set forth above:
CLOTHESTIME STORES, INC.
By: /S/DOUGLAS L. PEREIRA
-------------------------
Title: CFO
-------------------
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF
THE CLOTHESTIME, INC.
<TABLE>
<CAPTION>
Name State of Incorporation
---- ----------------------
<S> <C> <C>
1. MRJ Industries Delaware
2. Clothestime Acquisition Corporation Delaware
3. Clothestime Insurance Company Vermont
4. Clothestime International, Inc. Delaware
5. Clothestime Investment, Inc. Delaware
6. Clothestime Stores, Inc. Delaware
</TABLE>
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
The Clothestime, Inc.:
We consent to incorporation by reference in the registration statements
(Nos. 2-90248, 2-92111, 33-3304, 33-24130, 33-31971, 33-34972, 33-43530,
33-43531, 33-69656 and 33-81432) on Form S-8 of The Clothestime, Inc. of our
report dated March 21, 1997, relating to the consolidated balance sheets of The
Clothestime, Inc. and subsidiaries as of January 25, 1997 and January 27, 1996,
and the related consolidated statements of operations, shareholders' equity
(deficiency) and cash flows for each of the years in the three-year period ended
January 25, 1997, which report appears in the January 25, 1997 annual report on
Form 10-K of The Clothestime, Inc.
The consolidated financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note A to the
consolidated financial statements, The Clothestime, Inc. and certain of its
subsidiaries (collectively, the "Debtors") commenced reorganization cases by
filing voluntary petitions for relief under chapter 11 of the United States
Bankruptcy Code in the United States Bankruptcy Court for the Central District
of California (the "Bankruptcy Court") on December 8, 1995. The Debtors are
currently operating their respective businesses as debtors-in-possession under
the jurisdiction of the Bankruptcy Court and continuation of The Clothestime,
Inc. and its subsidiaries as a going concern is contingent upon, among other
things, the ability to (1) formulate an acceptable plan of reorganization that
will be confirmed by the Bankruptcy Court, (2) achieve satisfactory levels of
profitable operations and (3) maintain compliance with the debtor-in-possession
financing and generate adequate sources of other liquidity, as described in Note
A to the consolidated financial statements. These contingencies and the
uncertainties inherent in the bankruptcy process raise substantial doubt about
the ability of The Clothestime, Inc. and its subsidiaries to continue as a going
concern. The consolidated financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
/s/ KPMG PEAT MARWICK LLP
Orange County, California
April 24, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND THE CONSOLIDATED STATEMENTS OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-25-1997
<PERIOD-START> JAN-28-1996
<PERIOD-END> JAN-25-1997
<CASH> 20,695
<SECURITIES> 3,143
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 9,292
<CURRENT-ASSETS> 35,191
<PP&E> 48,479
<DEPRECIATION> 32,644
<TOTAL-ASSETS> 51,314
<CURRENT-LIABILITIES> 21,039
<BONDS> 0
0
0
<COMMON> 15
<OTHER-SE> (23,411)
<TOTAL-LIABILITY-AND-EQUITY> 51,314
<SALES> 195,239
<TOTAL-REVENUES> 195,994
<CGS> 139,460
<TOTAL-COSTS> 139,460
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 827
<INCOME-PRETAX> (30,717)
<INCOME-TAX> 927
<INCOME-CONTINUING> (31,644)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (31,644)
<EPS-PRIMARY> (2.23)
<EPS-DILUTED> (2.23)
</TABLE>
