UNITED STATES
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 For the fiscal year ended November 1, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-9474
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FORSTMANN & COMPANY, INC.
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(Exact name of registrant as specified in its charter)
GEORGIA 58-1651326
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
498 Seventh Avenue, New York, N.Y. 10018
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 642-6900
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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(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 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 ]
The aggregate market value of the common stock held by non-affiliates
of the registrant as of February 10, 1999 was $2,000,809, based on the trading
price in the over-the-counter market on such date.
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes (X) No
As of February 11, 1999 there was 4,391,458 shares of Common Stock outstanding.
Total Number of Pages: 256
Exhibit Index starts on sequentially numbered page 115.
<PAGE>
Item 1. BUSINESS
GENERAL
Forstmann & Company, Inc., a Georgia corporation (the "Company"), is a
leading designer, marketer and manufacturer of innovative, high quality woolen,
worsted and other fabrics which are used primarily in the production of
brand-name and private label apparel for men and women, as well as specialty
fabrics for use in billiard and gaming tables, sports caps and school uniforms.
The apparel industry represents the majority of the Company's customers for its
fabrics. The Company manufactures fabrics produced from 100% wool, wool blends
and blends of other natural and man-made fibers. The Company believes that it is
the largest manufacturer of domestically produced woolen fabrics. Through its
wholly-owned subsidiary, Forstmann Apparel, Inc. ("FAI"), the Company designs
and markets women's suits primarily under the "Oleg Cassini" label. The Company
contracts the manufacturing of women's suits through manufacturers based in the
Caribbean and sources complete apparel packages internationally.
During the Company's 1998 fiscal year (the fifty-two week period from
November 3, 1997 through November 1, 1998) ("Fiscal Year 1998"), women's wear
and outerwear fabrics accounted for approximately 64.0% of revenues and men's
wear fabrics accounted for approximately 19.6% of revenues. During the Company's
1997 fiscal year (the fifty-two week period from November 4, 1996 through
November 2, 1997) ("Fiscal Year 1997"), women's wear and outerwear fabrics
accounted for approximately 67.8% of revenues and men's wear fabrics accounted
for approximately 19.9% of revenues. During the Company's 1996 fiscal year (the
fifty-three week period from October 30, 1995 through November 3, 1996) ("Fiscal
Year 1996"), women's wear and outerwear fabrics accounted for approximately
66.8% of revenues and men's wear fabrics accounted for approximately 19.1% of
revenues. Specialty fabrics, including government and other, and FAI sales (see
"Business Acquisition" below) accounted for remaining revenues during each year.
Although Forstmann was incorporated in December 1985, its predecessors
have been in business for over 100 years. The Company is the successor to the
business of the Woolen and Worsted Fabrics Division of J.P. Stevens & Co., Inc.,
the assets of which the Company acquired in February 1986.
The principal executive offices of the Company are located at 498
Seventh Avenue, New York, New York 10018, and its telephone number is (212)
642-6900.
BUSINESS ACQUISITION
The Company formed FAI in May 1998 to acquire the business and
substantially all of the assets of Arenzano Trading Co., Inc. ("Arenzano").
Arenzano had instituted voluntary bankruptcy proceedings in April 1998. FAI's
purchase was made pursuant to an order signed by United States Bankruptcy Judge
Burton R. Lifland, dated May 8, 1998, in the cases entitled, In re Arenzano
Trading Company, Inc. and In re B&B Corporation, Case Nos. 98 B 42508 and 98 B
42520 (BRL). The transaction was completed on May 13, 1998 at a purchase price
of $2.0 million and FAI assumed the obligation to pay future minimum royalties
related to a licensing agreement. The purpose of the transaction was to permit
the Company to expand its fabrics business into the apparel business.
The acquisition of Arenzano was accounted for using the purchase method
of accounting. The purchase price paid for Arenzano was assigned $0.9 million to
tangible assets and the remainder to intangible assets. The Company subsequently
wrote off the intangible assets, as such costs are not expected to be recovered
by future operations, and accrued the remaining future minimum royalty
obligation assumed. The Company's results of operations for Fiscal Year 1998
include the results of operations of FAI for the period May 13, 1998 to November
1, 1998.
EMERGENCE FROM BANKRUPTCY
On September 22, 1995, as a result of a decline in the Company's
results of operations during Fiscal Year 1995 reflecting, among other factors,
rising wool costs, sluggish retail apparel sales, and high debt leverage, the
Company filed a petition for relief under Chapter 11 of the United States
Bankruptcy Code (the "Bankruptcy Code") with the United States Bankruptcy Court
for the Southern District of New York (the "Bankruptcy Filing"). From September
22, 1995 to July 23, 1997, the Company operated as a debtor-in-possession. On
May 14, 1997, the Company filed its First Amended Plan of Reorganization (the
"Plan of Reorganization") and an accompanying First Amended Disclosure Statement
Pursuant to Section 1125 of the Bankruptcy Code (the "Disclosure Statement"). On
May 15, 1997, the Bankruptcy Court entered an order approving the Company's
Disclosure Statement. Shortly thereafter the Company began to solicit the vote
of its creditors and stockholders with respect to the Plan of Reorganization in
accordance with the Bankruptcy Code. On July 9, 1997, the Bankruptcy Court
entered an order confirming the Plan of Reorganization. On July 23, 1997 (the
"Effective Date"), the Plan of Reorganization was consummated by the Company and
the Company emerged from bankruptcy.
Pursuant to the Plan of Reorganization, all general unsecured claims
against the Company were converted into 100% of the common stock of the
reorganized Company based on a ratio of 50 shares per each $1,000 of allowed
unsecured claim. Secured claims against the Company aggregating approximately
$60.1 million were either refinanced, reinstated or restructured as more fully
described in Note 9 to the Financial Statements contained in Item 8 of this
Annual Report (the "Financial Statements"). In addition, pursuant to the Plan of
Reorganization, as of the Effective Date:
(i) holders of the Company's redeemable preferred stock received
in the aggregate warrants entitling them to purchase 43,878
shares of the new common stock of the Company within two years
of the Effective Date at an exercise price of $23 per share,
and the preferred stock was canceled;
(ii) holders of the Company's old common stock received in the
aggregate warrants entitling them to purchase 43,878 shares of
the new common stock of the Company within two years of the
Effective Date at an exercise price of $23 per share, and the
old common stock was canceled;
(iii) holders of options to purchase common stock of the predecessor
Company received no distributions under the Plan, and the
options were canceled;
(iv) an aggregate of 487,528 shares of common stock of the
reorganized Company were reserved for issuance upon exercise
of options granted or to be granted pursuant to the Company's
Management Stock Option Plan and, as of the Effective Date,
146,258 options were granted to certain employees of the
Company at an exercise price of $12.88 per share;
(v) the Company entered into a Loan and Security Agreement dated
as of July 23, 1997 (the "Loan and Security Agreement") with
BankAmerica Business Credit, Inc. ("BABC"), as agent, and the
financial institutions named therein, providing for a
revolving line of credit (including a $10 million letter of
credit facility) of up to $85 million (the "Revolving Loan
Facility") and term loans of approximately $31.5 million (the
"Term Loan Facility"), the proceeds of which were used to
repay all amounts outstanding under the Company's GE Capital
DIP Facility (hereinafter defined) and CIT Equipment Facility
(hereinafter defined), repay the principal and a portion of
the accrued and unpaid interest due under the Senior Secured
Notes (hereinafter defined) and fund other amounts due
pursuant to the Plan of Reorganization and the Loan and
Security Agreement.
<PAGE>
BUSINESS
Markets and Products. The Company fulfills many of the diverse fabric needs of
leading men's, women's and outerwear apparel makers by offering a collection of
100% wool, wool-blend, synthetic and synthetic-blend fabrics, as well as fabrics
blended with natural fibers such as wool, linen and silk. These fabrics are
offered in a wide variety of styles, colors, weaves and weights which can be
used in tailored clothing, sportswear, coats for men and women, as well as for
specialty applications. The Company introduces new collections throughout the
year to ensure that its customers are frequently presented the latest fabric
offerings and to accommodate seasonal retail cycles.
Women's Apparel Fabrics. The Company designs, markets and manufactures
woolen and worsted fabrics for women's apparel in the moderate, better and
bridge price ranges, primarily for sportswear, suits and dresses. Forstmann is
also a significant supplier of fabrics for women's and men's woolen coats,
providing fabric for most major domestic women's outerwear manufacturers.
Outerwear fabrics include piece dyed solids, stock dyed mixtures and novelty
weaves. Forstmann offers a spring/summer, fall/winter and holiday fabric
collection for women's apparel with each one varying in terms of fabric
composition, weight, color palette and styling to fit the appropriate season.
The fall/winter collection includes traditional fabrics such as 100% wool,
flannels, luster and matte, meltons and velours and 100% worsted crepes,
tricotines and twills. It also includes more fashionable fabrics made with silk,
mohair, alpaca, cashmere, polyester, viscose and other synthetic and natural
fibers.
The spring/summer and holiday collections are generally lighter in
weight and texture. As U.S. consumer habits demand, there is a greater emphasis
on non-wool or "wool-poor" products in these collections. The spring/summer and
holiday collections include a number of 100% worsted viscose and viscose-blend
fabrics, as well as a variety of combinations of fibers such as linen, silk and
polyester. Forstmann also offers a collection of lightweight worsted wool
fabrics, some of which are suitable for year-round wear and contain Lycra (R)
brand spandex* or other synthetic or natural fibers.
With three distinct collections, Forstmann is seeking to serve its
women's wear customers all year long. The women's apparel fabrics group
accounted for approximately 64.0% of total revenue in Fiscal Year 1998, 67.8% of
total revenue in Fiscal Year 1997 and 66.8% of total revenue in Fiscal Year
1996.
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* Lycra (R) brand spandex is a registered trademark of E.I. Dupont de
Nemours & Company, Inc.
<PAGE>
Men's Apparel Fabrics. The Company designs, markets and manufactures
fabrics in the moderate and better price ranges for men's apparel. The men's
wear group presents a fall/winter and spring/summer collection for two general
apparel categories: sportswear (woolen sportcoats, trousers) and tailored
clothing (worsted suits, formal wear, blazers). The product ranges include
traditional fabrics such as tropicals, gabardines and flannels in wool and wool
blends, as well as fabrics made with man-made fibers such as viscose and
polyester and natural fibers such as linen, camel hair, lambswool and silk.
Through market-specific product styling and composition, the Company is able to
serve emerging apparel categories such as suit separates and "casual dress"
sportswear as well as its traditional base of tailored clothing and sportswear.
Men's wear accounted for approximately 19.6% of total revenue in Fiscal Year
1998, 19.9% of total revenue in Fiscal Year 1997 and 19.1% of total revenue in
Fiscal Year 1996.
Specialty and Government Fabrics. The Company produces specialty
fabrics for a wide variety of end uses, including billiard and gaming tables,
sports caps and school uniforms. The Company is a leading domestic billiard
table fabric manufacturer, selling directly to manufacturers and through
distributors. Forstmann is the primary supplier of wool fabric used in
production of official major league baseball caps.
The Company also sells a limited quantity of fabric to the U.S.
government for a variety of military apparel uses. These fabrics are designed to
meet stringent requirements for tailoring, comfort and durability. The Company's
sales to the government are generally in the form of long-term contracts for
high-volume, lower-margin goods. Therefore, the Company bids opportunistically
on contracts that will balance its manufacturing capacity during off-peak
periods. The actual awarding of government contracts can be a long-term process
with legislative approval of funding sometimes required. During Fiscal Year
1998, the Company was awarded $4.0 million in government contracts and, at
November 1, 1998, $2.5 million in orders were open and unfilled. Specialty and
government sales accounted for approximately 12.7% of total revenue in Fiscal
Year 1998, 10.5% of total revenue in Fiscal Year 1997 and 10.2% of total revenue
in Fiscal Year 1996.
Women's Suits. Through FAI, the Company designs and markets women's
suits primarily under the "Oleg Cassini" label. During Fiscal Year 1998, women's
suits accounted for approximately 3.1% of total revenue.
Discontinued Product Lines. During Fiscal Year 1996, the Company
discontinued its civilian uniform, converted fabrics and Carpini fabrics product
lines. Sales from the Company's discontinued product lines, civilian uniform
fabrics, converted fabrics and Carpini fabrics, accounted for approximately 1.0%
of total revenue in Fiscal Year 1998, 1.9% of total revenue in Fiscal Year 1997
and 3.9% of total revenue in Fiscal Year 1996. All three discontinued product
lines were unprofitable in each of these fiscal years.
Additionally, in connection with the 1998 Restructuring and the 1999
Realignment (each as defined and discussed below under "Management's Discussion
and Analysis of Financial Condition and Results of Operations"), the Company is
exiting a portion of its men's wear worsted business as well as its U.S.
government worsted top-dyed business. During Fiscal Year 1998, the discontinued
men's wear worsted business accounted for approximately 9.1% of total revenue
and the U.S. government worsted top-dyed business accounted for approximately
2.5% of total revenue. Accordingly, based on the described discontinued product
lines and prevailing market conditions, the Company expects fabric sales
revenues in its 1999 fiscal year (the 52-week period from November 2, 1998
through October 31, 1999 ("Fiscal Year 1999")) to be approximately 24% lower
than in Fiscal Year 1998. The 1998 Restructuring and the 1999 Realignment are
intended to align the Company's costs during Fiscal Year 1999 with the
significant decline in sales experienced in Fiscal Year 1998 and anticipated in
Fiscal Year 1999.
Styling, Merchandising and Marketing. The Company's styling, merchandising and
marketing functions are integrated and include the conceptualization (styling
and merchandising) and the sales (marketing) of the product line. These
functions are directed from its New York offices and are organized around the
Company's four customer-end use divisions: women's apparel fabrics, men's
apparel fabrics, specialty and government fabrics, and women's suits. The
primary sales force is based in New York, with a sales representative in Dallas.
The Company also retains sales agents in Canada, Germany and California.
Product Development. Over the course of each fiscal year, approximately 30% of
products offered by the Company are new introductions. The ultimate
accountability for the successful, cost-effective development of new products is
firmly placed with the senior manager of each of the Company's customer-end use
divisions. In addition, the Company has established a protocol for new product
development that requires analysis of such factors as research and development
costs, potential margin contribution, and market potential prior to adopting a
new product. The Company's objective is to cultivate innovative product
development that utilizes the Company's resources and maximizes its
manufacturing capabilities, while addressing the ever changing requirements of
its targeted markets.
Manufacturing. The Company owns and operates vertically integrated facilities at
which it performs operations from yarn manufacturing through weaving, dyeing and
finishing of fabric. This vertical integration not only provides significant
flexibility in the production of woolens and worsteds fabrics, but also the
ability to produce a wide variety of other natural and synthetic-blend fabrics.
The Company operates the only major United States mill which manufactures
fabrics on both the woolen and worsted systems.
For the production of woolen fabrics, the Company purchases scoured
(degreased) wool which consists of the shorter fiber taken from the sheep. When
spun into yarn, woolen yarns generally tend to have a "bulky" appearance due to
the length of the fiber. Woolen fabrics are used in garments such as flannel
blazers, outerwear (coats) and sports coats. Woolen fabrics can be produced
piece-dyed (solid color) or as fancies (patterned). In piece dyeing, the fabric
is dyed after it is woven. In fancies, the raw wool is dyed or yarn is dyed and
then woven into the desired pattern. Finishing of woolen fabrics is the critical
value added step in the manufacturing process. It is finishing that gives the
woolen fabric its "hand" (feel) and appearance.
For the production of worsted fabrics, the Company purchases wool top
which consists of the long fiber taken from sheep which has been combed, a
process which parallels and straightens the fibers. The combination of the long
fibers and additional yarn manufacturing steps to straighten the fibers produces
worsted yarn, which is generally fine and has a smooth appearance. Worsted
fabrics are used in garments such as men's suits, women's crepe skirts and men's
trousers. Worsted fabrics, like woolen fabrics, can be produced piece dyed
(solid) or fancy (patterned). Other fibers such as viscose, linen, silk,
polyester, nylon or cotton can be blended or woven into both woolen and worsted
applications.
The curtailment of certain of the Company's Milledgeville operations as
part of the 1999 Realignment will result in the Company becoming dependent on
outside sources for some of its worsted yarn needs and all of its top dyed
worsted needs.
Capital Investment Program. Capital expenditures during Fiscal Year 1998, Fiscal
Year 1997 and Fiscal Year 1996 were limited to maintaining the Company's
facilities, emergency replacements and the relocation of certain wool blending
machinery and equipment from the Company's previously owned Tifton facility to
its Dublin facility. During Fiscal Year 1998 and Fiscal Year 1997, the Company
invested $4.2 million and $1.9 million, respectively, in property, plant and
equipment and $1.0 million and $0.4 million, respectively, in the development
and implementation of certain computer information systems. The Company expects
to spend less than $5.0 million in capital-related expenditures (including costs
associated with the development and implementation of computer information
systems) during Fiscal Year 1999.
Raw Materials. The Company's raw material costs constituted approximately 40% of
its cost of goods manufactured during Fiscal Year 1998. The primary raw material
used by the Company is wool. As a result, the Company's costs are dependent on
its ability to manage its wool inventory and control its wool costs.
Approximately three-quarters of the Company's wool is imported from Australia
and substantially all of the balance is purchased in the United States. The
Company purchases its wool from both brokers and processors and is not dependent
on a single supply source. The Company's foreign wool purchases are denominated
in U.S. dollars and the Company generally does not incur any currency exchange
risk. However, future changes in the exchange rates between United States and
Australian dollars can materially affect the Company's results of operations for
financial reporting purposes. The Company does not have adequate alternative
sources of wool if the existing wool suppliers are unable to supply wool to the
Company.
Based on the Company's forward purchase commitments, the Company
expects its wool costs to be a weighted average of 20% lower during Fiscal Year
1999 as compared to Fiscal Year 1998. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations", below, for a discussion of
the effects of changes in wool prices and the impact of fluctuations in the
exchange rate between the U.S. and Australian dollars.
Customers. The Company has more than 400 active customers. During Fiscal Year
1998, one of the Company's customers accounted for approximately 20% of the
Company's revenues. No other customer of the Company accounted for 10% or more
of the Company's revenues in Fiscal Year 1998.
Substantially all of the Company's customers are located within the
United States. During each of Fiscal Years 1998, 1997 and 1996, less than two
percent of the Company's revenues were derived from exports.
Backlog. The Company's fabric sales order backlog at January 31, 1999 was $34.8
million, a decrease of $15.6 million from the comparable period one year ago.
Excluding government and men's worsted orders, which have historically yielded
lower gross profit margins, the backlog at January 31, 1999 was $33.5 million or
$10.7 million lower than the comparable period one year ago. The decrease in the
backlog, excluding government and men's worsted orders, is primarily
attributable to a decrease in coating and men's woolen fabric orders, as well as
a decline in women's woolen and worsted fabric orders, slightly offset by an
increase in specialty fabric orders. The decrease in coating fabric orders is
primarily due to the unseasonably warm winter experienced throughout much of the
U.S. in 1997-1998. As a result, initial coating fabric orders have been delayed
by retailers, which has delayed orders from apparel manufacturers. Changes in
fashion trends, coupled with increased imports pressures have resulted in a
decline in demand for the Company's men's woolen fabrics. The decline in the
backlog of sales orders for women's fabrics is twofold. First, an over capacity
of woolen flannel manufacturing coupled with excessive women's wool flannel
apparel inventory at retail has lead to a decline in demand for the Company's
women's wool flannel fabrics. Second, the reduction in the Company's worsted
fabrics manufacturing capacity has caused the Company to limit somewhat its
women's worsted product offerings. The increase in specialty sales orders is
attributable to an increase in orders for fabrics used in baseball caps. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", below.
Seasonality. The wool fabric business is seasonal, with the vast majority of
orders placed from December through April for manufacture and shipment from
February through July to enable apparel manufacturers to produce apparel for
retail sale during the fall and winter seasons. As a result of normal payment
terms for the sale of such fabrics, the Company receives the major portion of
its payments from May through October. The Company's worsted fabrics sales tend
to be less seasonal because the lighter weight of such fabrics makes them
suitable for retail sale in the spring and summer seasons as well as in the fall
and winter seasons.
Competition. The textile business in the United States is highly competitive and
the Company competes with many other textile companies. However, due to the
capital intensive nature of wool fabric production, there are a limited number
of domestic textile mills that produce woolen and worsted fabrics. The Company
believes that it is the largest domestic manufacturer of woolen fabrics. The
Company's principal competitors in the sale of woolen fabrics are Warshaw Woolen
Associates, Inc., Carleton Woolen Mills, Inc. and Novalan S.A. De C.V. Its
principal competitors in the sale of worsted fabrics are Burlington Industries
Equity, Inc., Clyne and Tinker, Inc. and The Worcestor Company, Inc.
Almost all of the fabrics the Company produces for apparel are consumed
in the United States, although the finished garments are increasingly cut and
sewn in other countries. For several years, the Company has faced increasing
competition, particularly foreign, in virtually all segments of its business.
This trend has increased with the economic downturn experienced in Asia and is
expected to continue as tariffs are reduced. Competition is increasing from
global woolen and worsted textile manufacturers as well as from imports of
finished goods.
The Company believes that the principal competitive factors are price,
quality, service and fashion, with the significance of each factor depending
upon the product and market involved. The competitive position of the Company
varies among the different fabrics it manufactures. In the current retail
environment, the Company believes that price is the primary factor influencing
its customers to make a purchasing decision.
U.S. Department of Commerce statistics indicate that there was an 8%
annual increase in the import of chiefly wool suit type coats for both men and
boys from November 1997 to November 1998. The increase in this category can be
attributed to the world wide increase of production coupled with the downturn of
the economies in Asia. For the same period, there was an 8% annual decrease in
the import of womens and girls chiefly wool coats. Additionally, there was an
annual decrease of 5% for womens and girls suits of chiefly wool from November
1997 to November 1998. The decrease in womens wool suits and coats can be
attributed to lower demand from consumers for wool garments in general, milder
winter weather for the last few years, and a glut of production capacity both
domestically and internationally.
NAFTA, which became effective in 1994, has resulted in an increasing
percentage of garments for sale in the United States, Canada and Mexico being
manufactured in Canada or Mexico, taking market share from the Far East. In
order for such garments to qualify for duty-free treatment into the United
States and Canada, the fabric has to be sourced from the United States, Canada
or Mexico. Historically, there has been limited capacity for wool production and
garment assembly in Mexico and Canada. Under NAFTA, a Canadian manufacturer is
permitted to export high volumes of men's suits into the United States. This
activity has had little effect on the Company's overall business since the
portion of the Company's business represented by men's suiting fabrics is
relatively small. However, in Mexico, certain competitors have added capacity
for woolen and worsted fabric production and garment packaging. This development
poses greater competitive challenges for the Company as, currently, Mexico
benefits from lower labor rates, lower wool tariffs and much less stringent
environmental regulations.
The Carribean Basin Initiative trade agreement provides reduced duties
under the "807" provision. The General Agreement on Trade and Tariffs ("GATT"),
reduces tariffs on wool fabric from about 33% to 25% over the next seven years.
In exchange for the tariff reduction, market access for products manufactured in
the United States to countries that are parties to GATT is improved.
Trademarks. The Company owns the Forstmann (R) name, which it uses as a trade
name, as a trademark in connection with various merchandise, and as a service
mark in the United States. The Forstmann name is also registered in various
countries, including Austria, Australia, the Benelux countries, Canada, China,
Denmark, France, Germany, Hong Kong, Indonesia, Ireland, Italy, Japan, Norway,
Portugal, Spain, Sweden, Switzerland and the United Kingdom, under International
Class 24. The Company believes that no individual trademark or trade name, is
material to the Company's business. Through its licensing agreement, FAI holds
the North American right to manufacture, market and distribute women's suits
under the "Oleg Cassini" label through 2000.
Employees. As of January 31, 1999, the Company employed approximately 1,200
hourly-paid, full-time skilled personnel at its plants and approximately 175
additional salaried, supervisory, management and administrative employees. None
of the Company's employees is represented by a union or a labor organization.
The Company has never experienced a strike and believes that its relations with
its employees are good.
Environmental Matters. By the nature of its operations, the Company's
manufacturing facilities are subject to various federal, state and local
environmental laws and regulations and occasionally have been subject to
proceedings and orders pertaining to emissions into the environment.
Dublin, Georgia. On December 29, 1995, the Georgia Environmental
Protection Division ("EPD") issued separate administrative orders (the
"Administrative Orders") to the Company and to J.P. Stevens & Co., Inc.
("Stevens") which relate to three sites on the Georgia Hazardous Site Inventory
- - the "TCE site", the "1,1-DCA site" and another site known as the "Burn Area" -
at the Company's Dublin, Georgia facility. The Administrative Orders required
the Company and Stevens to submit a compliance status report ("CSR") for these
sites that would include, among other things, a description of the release,
including its nature and extent, and suspected or known source, the quantity of
the release and the date of the release. The CSR would also have to include a
determination of cleanup standards (called "risk reduction standards") for the
sites and a certification that the sites were in compliance with those
standards; alternatively, the party submitting the CSR could acknowledge that
the site is not in compliance with risk reduction standards. Pursuant to the
Administrative Orders, if a site is not in compliance with the risk reduction
standards, then a Corrective Action Plan (a "Corrective Action Plan") for
remediating the release would have to be submitted to EPD.
Since both the Company and Stevens had been required to perform the
same work at all three of these sites, the Company and Stevens agreed to
allocate responsibilities between themselves pursuant to an Agreement Concerning
Performance of Work ("Agreement") dated January 24, 1997. The Agreement required
the Company to prepare and submit to EPD the CSR for the TCE and 1,1-DCA sites,
while requiring Stevens to prepare and submit to EPD a CSR for the Burn Area
site. The Agreement does not commit either party to perform corrective action at
these sites. On January 27, 1998 EPD provided comments to the CSR previously
submitted by Stevens and requested clarification of the Stevens CSR. By letter
dated March 5, 1998, Stevens submitted a "draft" response to EPD and by letter
of April 6, 1998, a final response. It is the Company's understanding that
Stevens is waiting for a response to this letter from EPD.
The Company submitted a CSR for the TCE and 1,1-DCA sites, which
certified compliance with risk reduction standards for both sites. EPD indicated
that it did not agree to the certification with respect to the TCE site. After
extensive discussions with EPD concerning the issue, the Company submitted a
Corrective Action Plan for the TCE site by letter dated May 15, 1997. By letter
dated September 29, 1997, EPD responded to the Corrective Action Plan with
notice of deficiency. The Company submitted a revised Corrective Action Plan
("CAP") on October 31, 1997. The revised CAP calls for continued operation of
the Company's existing groundwater recovery system, as well as one additional
groundwater recovery well and a groundwater collection trench near the former
dry cleaning basement. On July 28, 1998 EPD approved the Company's CAP. The
Company has begun installation of the recovery well and design of the
groundwater collection trench. In addition to the installation of these two
systems, the CAP requires the submission of an Annual Corrective Action Status
Report to EPD.
Tifton, Georgia. In January 1997, the Company was notified by a
potential buyer of the Company's Tifton facility that soil and groundwater
samples had been obtained from that facility and that certain contaminants had
been identified. Subsequently, through sampling and testing performed by the
Company's environmental consultants, the Company confirmed the presence of
contaminants in groundwater samples taken at the site. On February 28, 1997, the
Company notified EPD of such findings, and the site was placed on the Georgia
Hazardous Site Inventory.
The Company subsequently consummated its sale of the Tifton facility.
As part of that transaction, the Company, the Tift County Development Authority
as purchaser ("TCDA") and Burlen Corporation as operator ("Burlen") entered into
an Environmental Cost Sharing and Indemnity Agreement ("Cost Sharing
Agreement"). Under the Cost Sharing Agreement, the Company retained
responsibility for remediating certain contamination, to the extent required by
law, that originated prior to Burlen's occupancy of the premises. Likewise, the
Company assumed the obligation to indemnify TCDA and Burlen in regard to such
contamination to the extent that a claim is made by an unaffiliated third party
or governmental agency. In exchange, Burlen agreed to pay to the Company the
lesser of (1) $150,000 minus any payments already made to the Company (certain
expenses had already been shared) to respond to the contamination or (2)
one-half of the costs incurred by the Company in response to such contamination.
By letter dated December 21, 1998, EPD requested that the Company
submit a CSR for the site by June 21, 1999. EPD indicated that it had sent
Burlen a similar request. The Company intends to submit the CSR for the site by
the requested deadline.
At November 1, 1998, the Company had $0.3 million accrued for costs to
be incurred in connection with the TCE, 1,1-DCA and Tifton facility
environmental matters. The Company, subject to EPD's response to J.P. Stevens
revised CSR and compliance status certification and EPD's response to the Tifton
site, believes the accrual for environmental costs at November 1, 1998 is
adequate.
FINANCING AGREEMENTS
The Company's indebtedness for borrowed money as of November 1, 1998
consisted of amounts outstanding under the Loan and Security Agreement, a
promissory note and certain capital lease obligations.
Loan and Security Agreement. In connection with the consummation of the Plan of
Reorganization on July 23, 1997, the Company entered into the Loan and Security
Agreement with a syndicate of financial institutions led by BABC. The Loan and
Security Agreement provided for a revolving line of credit (including a $10.0
million letter of credit facility), subject to a borrowing base formula, of up
to $85 million (the "Revolving Loan Facility") and term loans of approximately
$31.5 million (the "Term Loan Facility"). Borrowings on July 23, 1997 of $28.0
million under the Revolving Loan Facility plus the proceeds from the Term Loan
Facility were used to repay all borrowings outstanding under the Company's GE
Capital DIP Facility (hereinafter defined) and CIT Equipment Facility
(hereinafter defined), repay the principal and a portion of the accrued and
unpaid interest due under the Senior Secured Notes (hereinafter defined) and
fund other amounts due pursuant to the Plan of Reorganization and the Loan and
Security Agreement.
The Revolving Loan Facility and Term Loan Facility mature on July 22,
2000. If the Company elects to terminate the Revolving Loan Facility, the
Company must pay a termination fee. The fee, as subsequently amended, will be
equal to one half of one percent (.50%) of the sum of the Maximum Revolver ($70
million) plus the then outstanding principal balance of the Term Loan if the
Loan and Security Agreement is terminated prior to April 23, 2000. The Term Loan
Facility can be prepaid, at the Company's election, without a termination fee at
any time prior to maturity. The Company's obligations under the Loan and
Security Agreement are secured by liens on substantially all of the Company's
assets.
Borrowings under the Revolving Loan Facility and the Term Loan Facility
bear interest, at the Company's option, at a floating rate (which is based on a
Bank of America reference rate ("Prime")) or a fixed rate (which is based on
LIBOR), payable monthly. Under the Revolving Loan Facility, the floating rate is
0.25% per annum above Prime and the fixed rate is 2.50% per annum above LIBOR.
Under the Term Loan Facility, the floating rate is 0.75% per annum above Prime
and the fixed rate is 3.00% per annum above LIBOR.
The Term Loan Facility required monthly principal payments of
approximately $374,000 which began August 31, 1997. Further, the Company was
required to pay 50% of "excess cash flow" for each fiscal year, as defined in
the Loan and Security Agreement, as long as the outstanding principal balance
under the Term Loan Facility was greater than $23.3 million. Such "excess cash
flow" payments are due on April 30 of each year following the fiscal year for
which an "excess cash flow" payment is due. Such payments are to be applied
against the unamortized principal portion of the Term Loan Facility in the
inverse order of maturity. In accordance with this section of the Loan and
Security Agreement on April 27, 1998, the Company repaid the Term Loan Facility
by approximately $1.4 million through borrowings under the Revolving Loan
Facility.
In connection with entering into the Loan and Security Agreement, the
Company paid BABC approximately $728,000 as an underwriting fee and agreed to
pay the financial institutions party to the Loan and Security Agreement an
unused line fee of 0.50% per annum on the average unused portion of the
Revolving Loan Facility. The Company paid approximately $582,000 as a facility
fee to participants in the syndicate to the Loan and Security Agreement. In
addition, the Company pays BABC an agency fee of $125,000 per annum, payable
monthly commencing August 1, 1997, and pays certain fees in connection with
letters of credit. Further, the Company pays BABC a loan administration fee of
0.25% per annum on the principal amount outstanding under the Revolving Loan
Facility and Term Loan Facility.
The Loan and Security Agreement contains certain restrictive covenants,
including limitations on the incurrence of indebtedness, the sale of assets, the
incurrence of liens, the making of certain restricted payments, the making of
specified investments, the payment of cash dividends and the making of certain
fundamental corporate changes and amendments to the Company's corporate
organizational and governance instruments. In addition, the Company is required
to satisfy, among other things, certain financial performance criteria,
including minimum interest and fixed charge coverage ratios, minimum adjusted
tangible net worth requirements and maximum capital expenditure and software
development costs.
The Company and its lenders as of March 24, 1998 entered into an
amendment to the Loan and Security Agreement modifying, among other things, the
definition of earnings before interest, income taxes, depreciation and
amortization and reorganization items ("EBITDAR") and Adjusted Tangible Net
Worth, and modifying certain loan covenants so as to increase permitted capital
expenditures and lower the minimum fixed charge coverage ratio. Such
modifications were made in anticipation of the effects of the Company's 1998
Restructuring. In accordance with the amendment, the Company prepaid $3.0
million of the Term Loan Facility through borrowings under the Revolving Loan
Facility on April 29, 1998.
The Company and its lenders as of September 14, 1998 further amended
and restated the Loan and Security Agreement to incorporate FAI into the Loan
and Security Credit Agreement, fund the on-going working capital needs of FAI
and modify certain existing financial covenants to incorporate FAI and reflect
the Company's financial results through the end of its third quarter as well as
expected results for all of Fiscal Year 1998 and Fiscal Year 1999. Additionally,
the letter of credit facility within the Revolving Loan Facility was increased
from $10.0 million to $15.0 million. In accordance with the amendment, the
Company prepaid $1.5 million of the Term Loan Facility and fees of $0.1 million
through borrowings under the Revolving Loan Facility on October 28, 1998.
Subsequently, as of February 8, 1999 the Company and its lenders
amended the Loan and Security Agreement, waived certain financial covenant
defaults arising from the Company's financial results for Fiscal Year 1998 and,
among other things, set new financial covenants for Fiscal Year 1999. However,
there can be no assurance that the Company will be able to achieve the amended
financial covenants during Fiscal Year 1999. In connection with the amendment,
the Company agreed to prepay $5.6 million of the Term Loan through borrowings
under the Revolving Loan Facility. Additionally, the Company agreed to increase
its monthly Term Loan Facility principal payment from $374,000 to $450,000
beginning March 1, 1999. Further based on the Company's declining working
capital needs in light of declining revenues, the Company and its lenders agreed
to reduce the Revolving Loan Facility commitment from $85 million to $70
million. This reduction is expected to reduce the Company's unused line fee by
approximately $75,000 per annum. The Company further agreed to repay a portion
of its Term Loan Facility in the future if subsequently obtained appraised
orderly liquidation values for the Company's property, plant and equipment
securing the Term Loan Facility fall below 83.1% in relation to the outstanding
amount owed under the Term Loan Facility. In connection with entering into the
amendment to the Loan and Security Agreement, the Company agreed to pay BABC for
the benefit of the lenders $200,000 which is payable in four equal monthly
installments commencing March 31, 1999. Additionally, BABC as Agent, retains the
right to withhold up to approximately $1,694,000 in aggregate availability which
arose from the expiration of certain letters of credit previously outstanding as
a security deposit for the Company's former New York headquarters lease.
DIP Facility. In connection with the Bankruptcy Filing, the Company obtained
debtor-in-possession ("DIP") financing from General Electric Capital Corporation
("GE Capital") under a revolving credit facility which was approved by the
Bankruptcy Court (the "GE Capital DIP Facility"). As noted above, in July 1997,
the Company repaid all amounts outstanding under the GE Capital DIP Facility and
paid approximately $103,000 in unpaid amendment fees and legal fees and expenses
through borrowings under the Loan and Security Agreement.
Deferred Interest Rate Notes and Senior Secured Notes. Prior to the commencement
of its bankruptcy proceeding, the Company issued an aggregate of $30 million of
its Senior Secured Notes due October 30, 1997 (the "Senior Secured Notes"). On
the Effective Date, the outstanding principal amount of the Senior Secured Notes
was repaid in full and the Company issued subordinated floating rate notes (the
"Deferred Interest Rate Notes") in respect of accrued but unpaid interest
(approximately $1.6 million) due the holders of the Senior Secured Notes. In
connection with the issuance of the Deferred Interest Rate Notes, the Company
paid a closing fee of approximately $31,400. Further, in accordance with the
Plan of Reorganization, the Company paid $157,000 in trustee fees and legal fees
and expenses. In December 1997, the Company repaid the Deferred Interest Rate
Notes and accrued interest thereon in full through borrowings under the
Revolving Loan Facility.
Note and Capital Lease Obligations. In connection with the Company's emergence
from bankruptcy, the Company restructured or refinanced certain of its secured
capital lease obligations by issuing a promissory note and modifying the terms
of certain other capital leases. At November 1, 1998, an aggregate of $2.3
million was outstanding under the note and capital leases with interest rates
ranging from 5.1% to 11.1% and varying maturity dates through September 1, 2001.
<PAGE>
Item 2. PROPERTIES
Information regarding the Company's manufacturing facilities, all of
which are owned, is as follows:
Approximate
Square Feet of
Building Acreage
-------------- -------
Dublin Plant 363,000 295
Dublin, Georgia
Nathaniel Plant 313,000 (1)
Dublin, Georgia
Milledgeville Plant 580,000 141
Milledgeville, Georgia
Louisville Plant (2) 153,000 393
Louisville, Georgia
(1) The Nathaniel plant adjoins the Dublin plant and is located on the same
property.
(2) As of January 31, 1999, the Louisville Facility was closed. The Company is
currently evaluating alternative solutions for its Louisville facility,
including a possible sale.
The Company owns a 24,000 square foot office building adjoining its
Dublin plant, which is used for administrative offices.
The Company leased approximately 35,000 square feet of office space at
1155 Avenue of the Americas, New York, New York (the "1155 Lease"), for its
principal executives offices, its styling, and sales and marketing operations.
During Fiscal Year 1998, the Company and the landlord of its corporate and
marketing offices entered into a lease surrender agreement whereby the Company
vacated its former headquarters. On January 25, 1999, the Company relocated to
498 Seventh Avenue, New York, New York under an operating lease for
approximately 16,500 square feet expiring on March 31, 2009. Further, FAI leases
approximately 11,500 square feet of office space at 500 Seventh Avenue, New
York, New York for its principal executive offices, designing and marketing
operations, which lease expires on January 31, 2002. The Company also leases
storage facilities in Georgia, primarily on a short-term basis.
The Company believes that its facilities are adequate for its present
needs. Substantially all of the Company's properties, plants and equipment are
encumbered by security interests under the Loan and Security Agreement. See
"Business -- Financing Arrangements" in Item 1. of this Annual Report on Form
10-K.
<PAGE>
Item 3. LEGAL PROCEEDINGS
The Company is a party to legal actions arising in the ordinary course
of business. Other than environmental matters, the Company has no material
pending legal proceedings. See Item 1. of "Business - Significant Events" and
"Description of Business - Environmental Matters" in Item 1. of this Annual
Report on Form 10-K.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of shareholders on August 14, 1998.
At the meeting, the shareholders:
(i) elected Bruce W. Gregory and James E. Kjorlien as directors of
the Company to serve until the next annual meeting of
shareholders, by a vote of 4,058,647 votes in favor of their
election, with 871 votes against and no abstentions and broker
non-votes;
(ii) approved the Board of Directors' adoption of the 1997
Directors Compensation Plan, by a vote of 3,306,049 votes in
favor of the proposal, with 1,411 votes against and 8,735
votes abstaining and broker non-votes.
(iii) approved a proposal to amend the Company's Amended and
Restated Articles of Incorporation to increase the number of
authorized shares of Common Stock from 10,000,000 shares to
35,000,000 shares, by a vote of 4,032,662 votes in favor of
the proposal, with 20,615 votes against and 6,241 votes
abstaining and broker non-votes.
(iv) approved a proposal to amend the Amended and Restated Articles
of Incorporation to authorize a class of "blank check"
Preferred Stock in one or more series and to authorize the
Board of Directors to fix the rights, powers, preferences and
other terms of such series, by a vote of 3,288,085 votes in
favor of proposal, with 21,395 votes against and 6,241 votes
abstaining and broker non-votes.
(v) approved a proposal to amend the Amended and Restated Articles
of Incorporation to reduce the minimum number of directors
that the Company may have from five to two, by a vote of
4,030,574 votes in favor of the proposal, with 28,229 votes
against and 715 votes abstaining and broker non-votes.
(vi) approved a proposal to ratify the selection of Deloitte &
Touche LLP as the Company's independent auditors for its 1998
fiscal year, by a vote of 4,052,779 votes in favor of the
proposal, with 127 votes against and 6,612 votes abstaining
and broker non-votes.
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Prior to October 1995, the Company's Common Stock was traded on the
NASDAQ National Market System ("NASDAQ-NMS"), the automated quotation system of
The National Association of Securities Dealers, Inc. (the "NASD") under the
symbol "FSTM". In October 1995, the NASDAQ National Market System delisted
Forstmann & Company, Inc. because the closing price of the Company's Common
Stock had been less than $1.00 for more than 30 consecutive days. Since such
time, there has been no established public trading market for the Company's
Common Stock.
The following table sets forth the high and low sales prices for Fiscal
Year 1998 and the 1997 91-Day Period Ended November 2, 1997 of the Company's
Common Stock. There were no over-the-counter market transactions during the 1997
12-Day Period Ended August 3, 1997 (the period from the Effective Date to the
end of the Company's third fiscal quarter). These quotations are based on
reported over-the-counter market transactions and represent prices between
dealers, do not include retail markup or commission and may not necessarily
represent actual transactions.
High Sales Price Low Sales Price
---------------- ---------------
Fiscal Year 1998
1st Fiscal Quarter
(November 3,1997 through
February 1, 1998) $14-7/8 $10-3/4
2nd Fiscal Quarter
(February 2, 1998 through
May 3, 1998) 14-1/16 13-1/2
3rd Fiscal Quarter
(May 4, 1998 through
August 2, 1998) 13-5/8 9-1/8
4th Fiscal Quarter
(August 3, 1998 through
November 1, 1998) 9-3/16 9-1/8
At 1997 91-Day Period Ended
(August 4, 1997 through
November 2, 1997) 13-1/2 11-3/4
At January 29, 1999, the Company had 416 record holders of its Common
Stock, including CEDE & Company, the nominee of Depository Trust Company, that
held 4,107,170 shares of common stock as nominee for an unknown number of
beneficial holders.
Pursuant to the Plan of Reorganization, all general unsecured claims
against the Company were converted into 100% of the common stock of the
reorganized Company based on a ratio of 50 shares per each $1,000 of allowed
unsecured claim. Such shares were not registered under the Securities Act. On
the Effective Date, pursuant to the Plan of Reorganization, the Company entered
into a Registration Rights Agreement (the "Registration Rights Agreement") with
certain holders of its common stock. The Registration Rights Agreement required
that the Company file a registration statement covering the shares of common
stock held by such holders no later than March 31, 1998. The Company is also
required to use its best efforts to have the registration statement declared
effective by the Securities and Exchange Commission and to keep the registration
statement effective for a period of two years. The Company has been unable to
file a registration statement covering the shares of common stock held by such
holders that are a party to the Registration Rights Agreement and on November
25, 1998 the Registration Rights Agreement was amended to delete the requirement
that a holder of common stock covered under the Registration Rights Agreement
hold at least 1% of the total number of shares of common stock outstanding in
order to enjoy registration rights with respect to its shares. The Registration
Rights Agreement was further amended to be binding upon and inure to the benefit
of the holders of the common stock covered under the Registration Rights
Agreement and their respective heirs, successors and permitted assigns.
On October 9, 1997, the Company adopted a shareholders' rights plan
(the "Rights Plan") whereby shareholders of record on October 29, 1997 received
one right (the "Right(s)") to purchase one share of common stock at an exercise
price of $60 for each common share held on the record date. The Rights will
become exercisable in the event that any person or group acquires 25% or more of
the Company's common shares, or announces a tender offer for 25% or more of the
Company's common stock. However, the Rights Plan "grandfathers" positions in the
Company's common stock in existence on October 9, 1997 and the ownership by a
person or group of 25% or more of the Company's common shares on such date will
not trigger the exercisability of the Rights so long as such person or group
does not acquire an additional 1% or more of the Company's common shares. Should
any "non-grand-fathered" person or group acquire 25% or more of the common
shares of the Company, all Rights not held by such person or group will entitle
the holders thereof to purchase common shares of the Company at a 50% discount
from the then current market price for such common stock. Alternatively, after a
person or group crosses the 25% threshold and before such person or group owns
50% or more of the Company's common shares, the Company's Board of Directors may
issue one common share in exchange for each right (other than those held by the
acquiring person) in lieu of permitting the Rights to be exercised. In the event
of a merger of the Company, the Rights Plan requires that the provision be made
for the conversion of the Rights into rights to purchase shares of the acquiring
person at a 50% discount. The Rights, which have a ten-year term, may be
redeemed for $0.01 per Right by the Company at any time prior to the time the
Rights become exercisable.
The Company has not paid, and has no present intention to pay in the
foreseeable future, any cash dividends in respect of its Common Stock. The Loan
and Security Agreement prohibits the payment of cash dividends. The payment of
future cash dividends, if any, would be made only from assets legally available
therefor, and would generally depend on the Company's financial condition,
results of operations, current and anticipated capital requirements, plans for
expansion, if any, restrictions under its then existing credit and other debt
instruments and arrangements, and other factors deemed relevant by the Company's
Board of Directors, in its sole discretion.
Except for the securities issued pursuant to the Plan of
Reorganization, no sales of equity securities that were not registered under the
Securities Act have been made by the Company during the period covered by this
Annual Report.
<PAGE>
Item 6. SELECTED FINANCIAL DATA
Presented below are selected operating statement data for the
Reorganized Company for the fiscal year ended November 1, 1998, the Reorganized
Company 1997 103-Day Period ended November 2, 1997 (as hereinafter defined), the
Predecessor Company 1997 261-Day Period ended July 22, 1997 (as hereinafter
defined) and the predecessor Company for the fiscal years ended November 3,
1996, October 29, 1995 and October 30, 1994. Also presented are selected balance
sheet data for the Reorganized Company as of November 1, 1998, the Reorganized
Company as of November 2, 1997 and the predecessor Company as of November 3,
1996, October 29, 1995 and October 30, 1994. Also, presented below are selected
operating data for Fiscal Year 1997 (the combined Reorganized Company 1997
103-Day Period Ended November 2, 1997 and the Predecessor Company 1997 261-Day
Period Ended July 22, 1997). The selected financial data have been derived from
the audited financial statements of the Company, are not covered by the report
of the Company's independent auditors and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", below and the Company's Financial Statements (and the related notes
and schedules thereto). Due to the effects of the consummation of the Plan of
Reorganization and the application of "fresh start" accounting, the operating
statement data and balance sheet data for different periods are not necessarily
comparable.
The selected operating data for the Reorganized Company for the fiscal
year ended November 1, 1998 includes the applicable operating results for FAI
for the period May 13, 1998 through November 1, 1998. The selected balance sheet
data for the Reorganized Company as of November 1, 1998 includes the applicable
balance sheet data for FAI. All significant intercompany transactions and
accounts have been eliminated.
(continued on next page)
<PAGE>
<TABLE>
Reorganized Combined Reorganized Predecessor Company
Company Company Company
----------- -------- ------------ -------------------------------------------------------
Fiscal Year 1997 103-Day 1997 261-Day Fiscal Year Fiscal Year Fiscal Year
Ended Fiscal Period Ended Period Ended Ended Ended Ended
November 1, Year November 2, July 22, November 3, October 29, October 30,
1998 1997 1997 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
Operating Statement (amounts in thousands, except per share and share information)
Data (1):
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales $149,597 $199,010 $57,126 $141,884 $195,028 $222,217 $237,085
Gross profit 7,837(5)(6) 26,393 7,726(5) 18,667 22,755 26,323 47,852
Operating income
(loss) (12,399)(7) 9,894 2,965 6,929 3,274 (248) 23,417
Income (loss) before
reorganization
items, income taxes
and extraordinary
gain (loss) (18,888) 3,213 1,242 1,971 (5,789) (19,817) 5,900
Reorganization items(2) 99 33,796 395 33,401 12,055 10,904 -
Income tax
(provision) benefit - 461 461(4) - - 4,250 (2,331)
Income (loss) before
extraordinary
gain or (loss) (18,987) (31,044) 386 (31,430) (17,844) (26,471) 3,569
Net income (loss) (18,987) (7,005) 290 (7,295) (17,844) (26,471) 3,569
Income (loss)
applicable to
common shareholders (18,987) (7,005) 290 (7,295) (17,844) (26,701) 3,339
Per share and share
information:
Income (loss) before
extraordinary
gain (loss)
applicable to common
shareholders - basic
and diluted (4.33) n/a 0.09 (5.59) (3.18) (4.75) 0.60
Income (loss)
applicable to
common shareholders
- basic and diluted $(4.33) n/a $0.07 $(1.30) $(3.18) $(4.75) $0.60
Weighted average
common shares
outstanding- basic
and diluted 4,385,955 n/a 4,384,436 5,618,799 5,618,799 5,618,799 5,592,022
</TABLE>
(continued on next page)
<PAGE>
<TABLE>
Reorganized Combined Reorganized Predecessor Company
Company Company Company
----------- -------- ------------ -------------------------------------------------------
Fiscal Year 1997 103-Day 1997 261-Day Fiscal Year Fiscal Year Fiscal Year
Ended Fiscal Period Ended Period Ended Ended Ended Ended
November 1, Year November 2, July 22, November 3, October 29, October 30,
1998 1997 1997 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
Other Operating Statement (amounts in thousands, except per share and share information)
Data (1):
<S> <C> <C> <C> <C> <C> <C> <C>
Income (loss) before
depreciation and
amortization,
restructuring items,
impairment
reorganization items,
interest expense,
income taxes and
extraordinary
gain (loss) $(3,052)(5)(6) $21,088(5) $4,333 $16,755 $15,236 $13,581 $37,074
Net cash flow
provided (used)
by operating
activities 4,663 6,573 15,261 (8,688) 36,232 27,473 (1,700)
Net cash flow
provided (used)
by investing
activities (7,132) 313 (974) 1,287 (1,743) (14,980) (13,207)
Net cash flow
provided (used)
by financing
activities 1,888 (5,883) (13,968) 8,085 (34,493) (12,490) 14,903
</TABLE>
<TABLE>
Reorganized Reorganized Predecessor Company
Company Company
----------- ----------- -----------------------------------------
As of As of As of As of As of
November 1, November 2, November 3, October 29, October 30,
1998 1997(2,3) 1996(2) 1995(2) 1994
---- --------- ------- ------- ----
Balance Sheet Data(2,3): (amounts in thousands, except per share and share information)
<S> <C> <C> <C> <C> <C>
Current assets $71,003 $87,192 $82,058 $116,475 $140,801
Property, plant and
equipment, net of
accumulated
depreciation and
amortization 22,235 24,779(3) 65,664 78,784 79,479
Total assets 95,243 113,641 149,929 198,203 229,256
Long-term debt,
including current
maturities of
long-term debt
and long-term
debt included
in liabilities subject
to compromise 51,184 48,304 109,031 142,935 158,311
Senior preferred
stock, redeemable - - 2,655 2,655 2,425
Shareholders' equity
(deficit) 31,670 50,631 (9,328) 7,667 35,836
</TABLE>
<PAGE>
(1) The Reorganized Company year ended November 1, 1998 ("Fiscal Year
1998") consisted of a 52-week period. The Reorganized Company 1997
103-Day Period ended November 2, 1997 consists of the period from July
23, 1997 (the Effective Date) to November 2, 1997. The Predecessor
Company 1997 261-Day Period Ended July 22, 1997 consists of the period
from November 4, 1996 to July 22, 1997. The year ended November 3, 1996
("Fiscal Year 1996") consisted of a 53-week period. The years ended
October 29, 1995 ("Fiscal Year 1995") and October 30, 1994 ("Fiscal
Year 1994") consisted of 52-week periods. No cash dividends on the
common stock were paid during any of these periods.
(2) On September 22, 1995, the Bankruptcy Filing occurred. The financial
statements of the Reorganized Company 1997 103-Day Period ended
November 2, 1997 and the Predecessor Company 1997 261-Day Period ended
July 22, 1997 and Fiscal Years 1996 and 1995 financial statements have
been prepared in accordance with the American Institute of Certified
Public Accountants Statement of Position 90-7, "Financial Reporting of
Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"). In
accordance with SOP 90-7, professional fees and restructuring charges
directly related to the bankruptcy have been segregated from normal
operations during each of the applicable periods. Reference is made to
Note 16 to the Financial Statements for a description of reorganization
items.
(3) In accordance with SOP 90-7, the Company established its reorganization
value and adopted "fresh start" accounting. Under the principles of
"fresh start" accounting, the Company's total net assets were recorded
at assumed reorganization value, which was then allocated to
identifiable tangible and intangible assets on the basis of their
estimated fair value. In accordance with "fresh start" accounting, the
difference between the assumed reorganization value and the aggregate
fair value of the identifiable tangible and intangible assets resulted
in a reduction in the value assigned to property, plant and equipment.
See Note 2 to the Financial Statements.
(4) In accordance with SOP 90-7, an income tax provision not payable in
cash was recognized for the Reorganized Company 1997 103-Day Period at
an effective income tax rate of 54.43%. Such provision was credited
against additional paid-in capital as net operating losses generated
during the Predecessor Company 1997 261-Day Period and can be used to
offset net taxable income generated during the Reorganized Company's
1997 103-Day Period.
(5) At the Effective Date, the Company adjusted its inventory balances to
fair value resulting in the elimination of the LIFO reserve of
approximately $2.7 million and a write-up of approximately $3.8 million
above the predecessor Company's FIFO cost. Such write-up was credited
against reorganization items during the Predecessor Company 1997 261-
Day Period. This write up will be allocated to cost of goods sold as
the inventory on hand at July 22, 1997 is sold. Approximately $0.7
million and $0.6 million was charged to cost of goods sold during the
Reorganized Company 1997 Fourth Quarter and Fiscal Year 1998,
respectively.
(6) During Fiscal Year 1998, the Company implemented the 1998 Restructuring
and subsequently announced the 1999 Realignment. Such restructurings
impaired the value of certain of the Company's inventories. Included as
a reduction in gross profit is the write-off of approximately $2.6
million in the carrying value of such impaired inventories
Throughout Fiscal Year 1998, the cost of wool declined. The Company
commits to the purchase of its expected wool needs on a forward
purchase order basis. The Company was able to defer the delivery of
such wool used in the manufacture of worsted fabrics. However, as a
result of the Company significantly reducing its worsted manufacturing
capacity, its forward purchases exceeded the Company's needs at
November 1, 1998 and the Company's on order purchase orders to be used
in the manufacturing of worsted fabrics exceeded the then current
market price by approximately $1.5 million. Such market loss was
accrued in the fourth quarter of Fiscal Year 1998 and resulted in a
reduction in gross profit. The Company's policy is to recognize a loss
on open purchase commitments whenever the Company estimates that the
contractual cost can not be recovered through future sales at normal
profit margins.
Substantially all of the Company's inventories are carried at the lower
of LIFO cost or market. The decline in wool costs during Fiscal Year
1998 resulted in the LIFO carrying value of the Company's inventory
exceeding replacement cost by approximately $3.0 million as of November
1, 1998. Accordingly, the Company wrote its LIFO inventory value down
to market value, generally net realizable value or replacement cost,
during the fourth quarter of Fiscal Year 1998. Such write off was
charged to cost of goods sold which resulted in a decrease in gross
profit in Fiscal Year 1998.
During the fourth quarter of Fiscal Year 1998, the Company also
recognized severance expense of $0.4 million in connection with the
termination agreements entered into with the former owners of Arenzano
and a $1.0 million charge relating to the write off of certain
intangible assets of FAI. Further, the Company expensed approximately
$0.8 million for the remaining royalty payments due under licensing
agreement which were assumed in connection with FAI's acquisition of
Arenzano.
(7) During the fourth quarter of Fiscal Year 1998, the Company recognized a
$1.0 million loss from abandonment, disposal and impairment of
machinery and equipment and other assets which related to the write off
of certain intangible assets of FAI.
During Fiscal Year 1998, in connection with the 1998 Restructuring and
the subsequently announced 1999 Realignment, the Company recognized the
following restructuring related expenses (in thousands):
Severance and "stay-put" bonus expense and related
employee benefits paid during Fiscal Year 1998 $803
Loss on impairment of machinery and
equipment 1,423
Loss associated with operating lease cancellation
liability 1,585
Gain associated with New York office lease surrender (368)
Other 52
---------
Total $3,495
=========
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward Looking Statements
Certain matters discussed in this Annual Report are forward looking
statements which reflect the Company's current views with respect to future
events and financial performance. These forward-looking statements are subject
to certain risks and uncertainties which could cause actual results to differ
materially from historical results or those anticipated. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of their dates. The Company undertakes no obligation to publicly update
or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. The following factors could cause
actual results to differ materially from historical results or those
anticipated: demand for the Company's products, competition, the Company's
production needs, wool market conditions, foreign currency exchange rates, the
adequacy of the Company's current financing, any unexpected financing
requirements, and changes in the general economic climate.
The following discussion should be read in conjunction with the
Financial Statements and the related notes included in this Annual Report.
Recent Events
Financial Results
The Company incurred net losses of $19.0 million, $7.0 million and $17.8
million in Fiscal Years 1998, 1997 and 1996, respectively. Such losses were, in
part, due to the development and implementation of the Company's Plan of
Reorganization (hereinafter defined), unstable wool commodity prices and, most
recently, increased international competition which has been compounded by
consumer fashion trends moving away from the Company's core woolen and worsted
fabrics. Net sales declined from $199.0 million in Fiscal Year 1997 to $149.6
million in Fiscal Year 1998 and management expects a similar reduction in net
sales during Fiscal Year 1999. The Company has responded to these challenges by
deleveraging its financial position through the consummation of the Plan of
Reorganization and has more recently implemented numerous cost reduction
programs to more closely align its manufacturing and overhead costs with
expected revenues.
On March 6, 1998, the Company announced that, as part of its long term
strategy, it would discontinue the production of top dye worsted fabrics used to
manufacture men's suits and government uniforms (the "1998 Restructuring") after
completing orders for its fall season. In Fiscal Year 1998, top dyed worsteds
accounted for approximately $14 million in men's suiting fabric and $4 million
in government uniform fabric sales. In Fiscal Year 1997, top dye worsteds
accounted for approximately $18 million in men's suiting fabric and $10 million
in government uniform fabric sales. This decision resulted in the Company's
previous overall workforce of approximately 2,500 people being reduced by
approximately 730 people.
In October 1998, the Company's Board of Directors approved the closing
of its Louisville plant, the realignment of the Company's manufacturing
facilities located in Georgia and further reductions of its selling, styling and
administrative overhead costs (the "1999 Realignment"). The Company expects that
this move will align its overhead with the current reduced market demand for its
products. The Louisville plant was closed as of January 31, 1999. The Company is
currently evaluating alternative solutions for its Louisville facility,
including a possible sale. Implementation of the 1999 Realignment has resulted
in the Company's workforce being further reduced by approximately 410 people.
Implementation of the 1998 Restructuring and 1999 Realignment has
resulted in the Company incurring certain costs, including, among other costs,
salaried severance, special one-time hourly "stay put" bonuses and equipment
relocation costs. Additionally, certain of the Company's inventories and
machinery and equipment have been impaired or rendered obsolete, and certain
equipment covered under operating lease agreements will no longer be required.
Accordingly, during Fiscal Year 1998, the Company recognized severance and "stay
put" bonus expense of approximately $0.8 million, recognized a loss of $1.4
million relating to the impairment of certain machinery and equipment based on
appraisal values, increased inventory market reserves by $2.6 million, and
recognized a loss associated with operating lease cancellation liability of $1.6
million. Severance expense, expense associated with the stay put bonuses, loss
on impairment of certain machinery and equipment and the loss associated with
operating lease cancellation liability were recognized as restructuring items
during Fiscal Year 1998. The Company expects to incur approximately $1.2 million
of severance expense as a restructuring item during its first quarter of Fiscal
Year 1999 in connection with the 1999 Realignment. Inventory market reserves
associated with the 1998 Restructuring were included in cost of goods sold
during Fiscal Year 1998. Any additional impairment of inventories will be
included in cost of goods sold in the periods in which the impairment is
indicated and can be reasonably estimated. Any additional impairment in
property, plant and equipment will be recognized as a restructuring item in the
periods in which the impairment is indicated and can be reasonably estimated.
The Company incurred costs of approximately $0.2 million during Fiscal Year 1998
related to the relocation of certain machinery and equipment which was included
in cost of goods sold during Fiscal Year 1998. Any additional costs incurred to
relocate certain machinery and equipment will be charged to cost of goods sold
in the periods incurred. See Note 15 to the Financial Statements for a
description of restructuring items recognized during Fiscal Year 1998.
Although the consummation of the Plan of Reorganization significantly
reduced the Company's leverage, the operating results for Fiscal Year 1998, the
effect of the 1998 Restructuring and the 1999 Realignment and the formation of
FAI, including the purchase of substantially all of the assets of Arenzano, have
negatively impacted the Company's availability under its Revolving Loan Facility
(hereinafter defined). The Company's availability under its Revolving Loan
Facility was approximately $5.8 million at November 1, 1998 as compared to $36.0
million at November 2, 1997. As of January 31, 1999, availability under the
Revolving Loan Facility was $1.6 million. The Company's ability to maintain
adequate availability to meet its operating needs and to fund the 1999
Realignment is dependent on achieving future sales consistent with management's
expectations for Fiscal Year 1999 and successful implementation of its cost
reductions. The majority of the Company's customers are in the domestic apparel
industry which has continued to suffer an economic decline as a result of higher
levels of imports and changing fashion trends. See "Management's Discussion and
Analysis of Financial Condition and Results of Operation -- Financial Condition,
Liquidity and Capital Resources" contained herein.
Formation Of FAI
On May 11, 1998, the Company announced that it had agreed to acquire
the business and substantially all of the assets of Arenzano. Arenzano had
instituted voluntary bankruptcy proceedings in April 1998. The Company's
purchase was made pursuant to an order signed by United States Bankruptcy Judge
Burton R. Lifland, dated May 8, 1998, in the cases entitled, In re Arenzano
Trading Company, Inc. and In re B&B Corporation, Case Nos. 98 B 42508 and 98 B
42520 (BRL). The transaction was completed on May 13, 1998 at a purchase price
of $2.0 million. Additionally, the Company assumed the obligation to pay future
minimum royalties related to a licensing agreement. The purpose of the
acquisition was to permit the Company to expand its fabrics business into the
apparel business. The Company is operating the new apparel venture through its
wholly-owned subsidiary, FAI.
The acquisition of Arenzano by the Company was accounted for using the
purchase method of accounting. The purchase price paid for Arenzano was assigned
$0.9 million to tangible assets and the remainder to intangible assets. The
Company subsequently wrote off the intangible assets of FAI as such costs are
not expected to be recovered by future operations and accrued the remaining
future minimum royalty obligation assumed. The Company's results of operations
for Fiscal Year 1998 include the results of operations for FAI for the period
May 13, 1998 to November 1, 1998.
Prior Reorganization and "Fresh Start" Accounting
On September 22, 1995, the Company filed for relief under Chapter 11 of
the United States Bankruptcy Code with the Bankruptcy Court for the Southern
District of New York (the "Bankruptcy Filing"). On May 14, 1997, the Company
filed its Plan of Reorganization and Disclosure Statement. On May 15, 1997, the
Bankruptcy Court entered an order approving the Company's Disclosure Statement
and shortly thereafter, the Company began to solicit the vote of its creditors
and stockholders with respect to the Plan of Reorganization in accordance with
the Bankruptcy Code. On July 9, 1997, the Bankruptcy Court entered an order
confirming the Plan of Reorganization. On July 23, 1997 (the "Effective Date"),
the Plan of Reorganization was consummated by the Company.
Pursuant to the Plan of Reorganization, all general unsecured claims
against the Company were converted into 100% of the common stock in the
reorganized Company based on a ratio of 50 shares per each $1,000 of allowed
unsecured claims. Secured claims against the Company aggregating approximately
$60.1 million were either refinanced, reinstated or restructured as more fully
described in Note 9 to the Financial Statements. Further, pursuant to the Plan
of Reorganization, administrative claims (which includes reclamation claims and
approved professional fees), priority claims and convenience claims (unsecured
claims in the amount of $400 or less) were paid in full. See Note 2 to the
Financial Statements for a more detailed description of the effects of the
consummation of the Plan of Reorganization.
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" ("SOP 90-7"), the Company established
its reorganization value and adopted "fresh start" accounting. See Note 2 to the
Financial Statements for a description of the methodology used to determine the
Company's reorganized value and the affect of adopting "fresh start" accounting.
As a result of the consummation of the Plan of Reorganization and the
application of "fresh start" accounting, the Company was required to report its
financial results for the fifty-two weeks ended November 2, 1997 in two separate
periods in this Annual Report.
<PAGE>
The following table describes the periods presented in the Financial
Statements and related notes contained elsewhere in this Annual Report and
discussed herein:
Period Referred to as
- ------------------------------------ ----------------------------------------
Results for the Reorganized Company
Fifty-Two Weeks Ended
November 1, 1998 "Fiscal Year 1998"
Results for the Reorganized Company
From July 23, 1997 to
November 2, 1997 "Reorganized Company 1997 103-Day Period"
Results for the Reorganized Company
From August 4, 1997 to
November 2, 1997 "Reorganized Company 1997 Fourth Quarter"
Results for the Predecessor Company
From November 4, 1996 to
July 22, 1997 "Predecessor Company 1997 261-Day Period"
Combined Reorganized Company
1997 103-Day Period and
Predecessor Company 1997
261-Day Period (Results for
the Fifty-Two Weeks Ended
November 2, 1997) "Fiscal Year 1997"
Results for the Predecessor Company
Fifty-Three Weeks Ended
November 3, 1996 "Fiscal Year 1996"
Due to the effects of the consummation of the Plan of Reorganization
and application of "fresh start" accounting, results for the periods defined
above are not necessarily comparable.
Results of Operations
The discussion below compares the results of operations for Fiscal Year
1998 to Fiscal Year 1997 and Fiscal Year 1997 to Fiscal Year 1996. Due to the
effects of the consummation of the Plan of Reorganization and the application of
"fresh start" accounting, results for Fiscal Year 1997 are not necessarily fully
comparable to the results for Fiscal Year 1998 or Fiscal Year 1996. Except as
indicated, management believes that the impact of the Plan of Reorganization and
the application of "fresh start" accounting did not significantly affect the
results of operations for Fiscal Year 1997. However, management believes that
the combined operating results of the Reorganized Company 1997 103-Day Period
and the Predecessor Company 1997 261-Day Period provide a reasonable means for
the discussion of the operating comparisons described herein.
The 1998 Fifty-Two Weeks ended November 1, 1998 ("Fiscal Year 1998")
compared to the Fifty-Two Weeks ended November 2, 1997 ("Fiscal Year 1997")
Net sales in Fiscal Year 1998 were $149.6 million, a decrease of 24.8%
from Fiscal Year 1997. Total yards of fabric sold decreased 27.0% during Fiscal
Year 1998. The average per yard selling price declined to $7.31 during Fiscal
Year 1998 from $7.33 in Fiscal Year 1997. Sales declined in all major product
lines except for specialty fabric sales. Additionally, the Company added apparel
sales of $4.7 million during Fiscal Year 1998 as a result of the acquisition of
Arenzano (see Note 4 to the Financial Statements). Menswear fabric sales
declined due, in part, to the Company's decision made in March 1998 to exit the
men's top dyed suit business. Coating fabric sales decreased due, in part, to an
unseasonably warm fall and winter season which resulted in lower than
anticipated women's coats selling at retail. This has resulted in delayed fabric
shipments and order assortment by the Company's coating fabric customers.
Further, government uniform fabric sales decreased during Fiscal Year 1998 and
are expected to decline during Fiscal Year 1999 due to the Company's decision in
March 1998 to exit this line of business.
Cost of goods sold decreased $30.9 million to $141.8 million during
Fiscal Year 1998 primarily as a result of the decline in sales and changes in
product mix and a $5.7 million decline in depreciation and amortization expense
primarily due to the effect of "fresh start" accounting discussed elsewhere
within. Gross profit decreased $18.6 million or 70.3% to $7.8 million in Fiscal
Year 1998, and gross profit margin for Fiscal Year 1998 was 5.2% compared to
13.3% for Fiscal Year 1997. Included in cost of goods sold during Fiscal Year
1998 is a $2.6 million charge relating to increased market reserves recorded as
a result of the 1998 Restructuring (see Note 1 to the Financial Statements).
Cost of goods sold includes a $3.0 million charge relating to the write down of
inventory to market at November 1, 1998 and a $1.5 million loss on open wool
purchase commitments as discussed in "Currency Risks" below. During Fiscal Year
1998, FAI's gross profit was $0.5 million and its gross profit margin was 11.8%.
Selling, general and administrative expenses, excluding the provision
for uncollectible accounts, decreased to $14.9 million in Fiscal Year 1998, as
compared to $15.9 million in Fiscal Year 1997. Included in selling, general and
administrative expenses is $3.1 million related to FAI, which includes a $0.8
million charge relating to the expense associated with the recognition of the
future minimum royalty payments due under a licensing agreement. Selling,
general and administrative expenses relating to FAI also includes $0.4 million
which relates to the termination agreements entered into with the former owners
of Arenzano.
The provision for uncollectible accounts increased to $0.9 million in
Fiscal Year 1998 as compared to $0.7 million in Fiscal Year 1997. See Note 3 to
the Financial Statements for a discussion of the Company's accounting policies
regarding the establishment of its allowance for uncollectible accounts.
Restructuring items were $3.5 million in Fiscal Year 1998 and consisted
of (in thousands):
Severance and "stay-put" bonus expense
and related employee benefits $ 803
Loss on impairment of machinery and equipment 1,423
Loss associated with operating lease cancellation liability 1,585
Gain associated with N.Y. office
lease surrender (368)
Other 52
-------
Total $3,495
=======
Reference is made to Note 15 to the Financial Statements for a
discussion of restructuring items incurred during Fiscal Year 1998. The Company
expects to incur additional restructuring items associated with the 1999
Realignment (see Note 1 to the Financial Statements) during its first quarter of
Fiscal Year 1999.
Interest expense for Fiscal Year 1998 was $6.5 million as compared to
$6.7 million in Fiscal Year 1997. This decrease is attributable to lower
interest rates in effect under the Loan and Security Agreement during Fiscal
Year1998 as compared to interest rates in effect during Fiscal Year 1997.
Loss from abandonment, disposal and impairment of machinery and
equipment and other assets increased to $1.0 million in Fiscal Year 1998 from
$7,000 in Fiscal Year 1997. The increase during Fiscal Year 1998 related to the
write off of certain intangible assets of FAI which costs are not expected to be
recovered by future operations.
As a result of the foregoing, a loss before reorganization items,
income tax and extraordinary item of $18.9 million was realized in Fiscal Year
1998 as compared to income before reorganization items, income tax and
extraordinary item of $3.2 million in Fiscal Year 1997. During Fiscal Year 1998,
FAI realized a loss before reorganization items, income tax and extraordinary
item of $3.7 million. Loss before depreciation and amortization, impairment,
reorganization and restructuring items, interest expense, income taxes and
extraordinary item during Fiscal Year 1998 was $3.1 million as compared to
income before depreciation and amortization, impairment, reorganization and
restructuring items, interest expense, income taxes and extraordinary item of
$21.1 million during Fiscal Year 1997. However, included in loss before
depreciation and amortization, impairment, reorganization and restructuring
items, interest expense, income taxes and extraordinary item during Fiscal Year
1998 was a $2.6 million charge to cost of goods sold relating to increased
market reserves recorded as a result of the 1998 Restructuring (see Note 1 to
the Financial Statements). Cost of goods sold also includes a $3.0 million
charge relating to the write down of inventory to market at November 1, 1998 and
a $1.5 million loss on open wool purchase commitments as discussed in "Currency
Risks" below.
Reorganization items were $0.1 million in Fiscal Year 1998 as compared
to $33.8 million in Fiscal Year 1997 and consisted of (in thousands):
Fiscal Year Fiscal Year
1998 1997
---- ----
Professional fees $ 75 $ 3,390
Write off of deferred financing cost and
expense and other financing fees incurred - 403
Impairment of assets - 4,199
Expense (gain) incurred due to the rejection
and amendment of executory contracts (40) 3,314
Default interest expense and professional
fees associated with the Senior Secured
Notes - (388)
Severance expenses - 156
Adjustment of accounts to fair value - 22,076
Other 64 646
---- -------
Total $ 99 $33,796
==== =======
Reference is made to Note 16 to the Financial Statements for a
discussion of reorganization items incurred during Fiscal Year 1997 and Fiscal
Year 1998.
During fiscal year 1995, the Company fully utilized its net operating
loss carrybacks as permitted by the Internal Revenue Code. For Fiscal Year 1998
and the Predecessor Company 1997 261-Day Period, no income tax benefit was
recognized from the realization of net operating losses. In accordance with SOP
90-7, an income tax provision not payable in cash was recognized for the
Reorganized Company 1997 12-Day Period at an effective income tax rate of 39.0%.
Such provision was credited against additional paid-in capital as net operating
losses generated during the Predecessor Company 1997 261-Day Period can be used
to offset net taxable income generated in future periods.
As a result of the consummation of the Plan of Reorganization, which
resulted in the exchange of the general unsecured claims against the Company for
equity in the reorganized Company, the Company recognized an extraordinary gain
on debt discharge of $24.1 million during the Predecessor Company 1997 79-Day
Period. The Company had sufficient net operating loss carryforwards to offset
this gain and therefore, no income tax was recorded.
As a result of the foregoing, net loss for Fiscal Year 1998 was $19.0
million as compared to a net loss of $7.0 million in Fiscal Year 1997. During
Fiscal Year 1998, FAI realized a net loss of $3.7 million.
As a result of the 1998 Restructuring and 1999 Realignment and based on
the current backlog of sales orders for womenswear fabric sales, market trends
and increased competitive pressures, the Company expects overall apparel fabric
sales to be lower in Fiscal Year 1999 than in Fiscal Year 1998. Overall, the
Company expects menswear fabric sales to be lower in Fiscal Year 1999 as
compared to Fiscal Year 1998. Further, government uniform fabric sales are
expected to decline during Fiscal Year 1999 due to the Company's decision in
March 1998 to exit this line of business. Based on these trends (increased
competitive pressures in the woolen and worsted markets, the decline in backlog
of orders, and the effect of discontinued product lines) the Company expects
sales revenue for fabric sales in Fiscal Year 1999 to be approximately 24% lower
than in Fiscal Year 1998. In March 1998, the Company began implementation of the
1998 Restructuring and by the end of Fiscal Year 1998 had discontinued the
production of top dye worsted fabrics used to manufacture men's suits and
government uniforms after completing orders for its fall season. By
discontinuing top dye worsted fabrics, the Company believes it can focus all of
its resources on its strengths in men's and women's woolen and worsted
sportswear, coating and niche specialty markets. Further, in addition to exiting
the production of top-dyed worsted fabrics, the Company, through the 1999
Realignment, is consolidating certain manufacturing operations and implementing
other plans designed to align its costs during Fiscal Year 1999 with the decline
in sales anticipated in Fiscal Year 1999. However, there can be no assurance as
to the level of sales that will actually be attained in Fiscal Year 1999, as
sales are dependent on market conditions and other factors beyond the Company's
control, nor can there be assurance that the 1999 Realignment will be
implemented successfully.
The 1997 Fifty-Two Weeks Ended November 2, 1997 ("Fiscal Year 1997")
compared to the Fifty-Three Weeks Ended November 3, 1996 ("Fiscal Year 1996").
The application of "fresh start" accounting resulted in property, plant
and equipment being written down by $28.6 million, which resulted in an
approximate $6.4 million reduction in annual depreciation expense. Further,
annual amortization expense is approximately $0.3 million lower, as a result of
the Company writing off certain intangible assets (primarily deferred software
development costs) and certain other assets and liabilities associated with the
Company's headquarters lease. The write off of the intangible assets occurred
during the Predecessor Company 1997 261-Day Period and was charged to operations
($0.9 million to cost of goods sold and $0.3 million to selling, general and
administrative expenses). The write off of certain other assets and liabilities
associated with the Company's headquarters lease was charged to reorganization
items during the Predecessor Company 1997 261-Day Period ($0.9 million). In
addition, as described in Note 9 to the Financial Statements, the Company
incurred additional deferred financing costs in connection with entering into
the Loan and Security Agreement and other financing arrangements and wrote off
certain deferred financing costs associated with the debt restructuring. The
write off of deferred financing costs ($0.2 million) was charged to
reorganization items during the Predecessor Company 1997 261-Day Period.
Net sales in Fiscal Year 1997 were $199.0 million, an increase of $4.0
million or 2.0% from Fiscal Year 1996. Total yards of fabric sold increased 3.7%
during Fiscal Year 1997. The increase in sales was primarily attributable to
increases in women's outerwear (coating), men's wear (both woolen and worsted)
and government fabric sales. Such increases in sales during Fiscal Year 1997
were partly offset by declines in sales of women's wear fabrics and the effect
of the strategic decision during Fiscal Year 1996 to discontinue certain product
lines (career uniforms, converting and international). The decline in women's
wear sales was the result of a decline in women's worsted fabric sales, which
was somewhat offset by an increase in women's woolen fabric sales. The increase
in woolen fabric sales is attributable to the favorable market conditions for
women's woolen fabrics, improved market conditions for domestic suppliers of
women's outerwear and reduced pressure from import of women's outerwear. Due to
this shift in product mix, the average per yard selling price declined to $7.33
during Fiscal Year 1997 from $7.45 in Fiscal Year 1996. Excluding government
sales of $10.1 million in Fiscal Year 1997 and $8.9 million in Fiscal Year 1996,
net sales increased 1.5% during Fiscal Year 1997 compared to Fiscal Year 1996.
Cost of goods sold in Fiscal Year 1997 was $172.6 or approximately the
same as in Fiscal Year 1996 when cost of goods sold was $172.3 million. However,
included in cost of goods sold in Fiscal Year 1997 is the effect of $2.2 million
in higher group medical claims due to the Company's self-insured health care
plan experiencing approximately 28 individual claims in excess of $50,000
whereas, in Fiscal Year 1996 only 4 individual claims in excess of $50,000 were
realized. Gross profit in Fiscal Year 1997 increased to $26.4 million or $3.6
million higher than Fiscal Year 1996. The gross profit margin was 13.3% for
Fiscal Year 1997 as compared to 11.7% for Fiscal Year 1996.
The Company's reduction of inventory levels in Fiscal Years 1997 and
1996 resulted in the liquidation of LIFO inventory layers carried at lower costs
prevailing in prior years which increased gross profit by $0.5 million and $2.2
million, respectively. The effect of the liquidation of LIFO inventory layers in
Fiscal Year 1997 was recognized during the Predecessor Company 1997 261-Day
Period. At the Effective Date, the Company adjusted its inventory balances to
fair value resulting in the elimination of the LIFO reserve of approximately
$2.7 million and a write up of approximately $3.8 million above the predecessor
Company's FIFO cost. Such write up was credited against reorganization items
during the Predecessor Company 1997 261-Day Period and will be allocated to cost
of goods sold as the inventory on hand at the Effective Date is sold.
Approximately $0.7 million was charged to cost of goods sold during the
Reorganized Company 1997 Fourth Quarter.
The improvement in gross profit in Fiscal Year 1997 is attributable to
improved manufacturing efficiencies and shifts in product mix. As described
above, during the Predecessor Company 1997 261-Day Period, certain intangible
assets were written off and certain plant and equipment which was idled was
written down to fair value. This resulted in the recognition of approximately
$1.3 million in depreciation and amortization expense in the Predecessor Company
1997 261-Day Period which was offset by $1.6 million in lower depreciation and
amortization costs during the Reorganized Company 1997 103-Day Period due to
"fresh start" accounting.
Selling, general and administrative expenses, excluding the provision
for uncollectible accounts, decreased 12.5% or $2.3 million to $15.9 million in
Fiscal Year 1997, as compared to $18.1 million in Fiscal Year 1996. This
decrease is primarily due to lower human resources related expenses and
professional fees. Since the Bankruptcy Filing, the Company has continued to
streamline its organization structure and reduce its overhead to be more
responsive to customer needs and more closely match selling, general and
administrative expenses to market conditions and expectations. These decreases,
among others, were partially offset by higher incentive compensation expense,
which was related to the Company's retention and confirmation bonus plan.
Further, depreciation and amortization charged to selling, general and
administrative expense was approximately $231,000 lower primarily as a result of
the effects of lowering the value of property, plant and equipment in connection
with "fresh start" accounting.
The provision for uncollectible accounts decreased from $1.4 million in
Fiscal Year 1996 to $0.7 million in Fiscal Year 1997. Such decrease primarily
occurred during the Predecessor Company 1997 261-Day Period.
Interest expense for Fiscal Year 1997 decreased $2.4 million or 26.3%
to $6.7 million, as compared to $9.1 million for Fiscal Year 1996. This decrease
is primarily attributable to lower average borrowings under the Company's credit
facilities which was facilitated by decreased working capital needs mainly due
to the further reduction in inventories. Further, due to the refinancing and
debt restructuring described above, amortization expense during Fiscal Year 1997
was $0.3 million lower.
As a result of the foregoing, income before reorganization items,
income tax and extraordinary item for Fiscal Year 1997 improved $9.0 million to
$3.2 million from a loss before reorganization items, income tax and
extraordinary item of $5.8 million for Fiscal Year 1996. Income before
depreciation and amortization, reorganization items, interest expense, income
taxes and extraordinary item during Fiscal Year 1997 was $21.8 million as
compared to $15.2 in Fiscal Year 1996.
Reorganization items, which are more fully described in Note 16 to the
Financial Statements, were $33.8 million in Fiscal Year 1997 as compared to
$12.1 million in Fiscal Year 1996. Included in Fiscal Year 1997 is the "fresh
start" accounting adjustment of $28.6 million to adjust the carrying value of
property, plant and equipment in accordance with SOP 90-7, a loss on sale of
$2.9 million on certain unerected equipment at the Company's former Tifton
facility, a credit of $6.5 million to adjust inventory to fair market value in
accordance with SOP 90-7, the write off of certain assets and liabilities of
$1.7 million, net associated with the Company's former headquarters leases, the
rejection of certain pre-petition contracts of $1.6 million, and the write off
of certain deferred financing costs of $0.2 million related to the refinancing
and restructuring.
During Fiscal Year 1995, the Company fully utilized its net operating
loss carrybacks as permitted by the Internal Revenue Code. For the Predecessor
Company 1997 261-Day Period and Fiscal Year 1996, no income tax benefit was
recognized from the realization of net operating losses. In accordance with SOP
90-7, an income tax provision not payable in cash was recognized in the
Reorganized Company 1997 103-Day Period at an effective income tax rate of
54.43%. The income tax provision not payable in cash was credited against
additional paid-in capital as net operating losses generated during the
Predecessor Company 1997 261-Day Period can be used to offset net tax able
income, if any, generated during the Reorganized Company's 1997 103-Day Period.
As a result of the consummation of the Plan of Reorganization which
resulted in the exchange of the general unsecured claims against the Company for
equity in the reorganized Company, as more thoroughly described in Note 2 to the
Financial Statements, the Company recognized an extraordinary gain on debt
discharge of $24.1 million during the Predecessor Company 1997 261-Day Period
which was offset by additional costs associated with the debt discharge of $0.1
million which was recognized during the Reorganized Company 1997 103-Day Period.
The Company had sufficient net operating loss carry forwards to offset this gain
and therefore, no income tax was recorded.
Financial Condition, Liquidity and Capital Resources
The implementation of the Plan of Reorganization, which is discussed in
Note 2 to the Financial Statements, significantly deleveraged the Company's
balance sheet and, enhanced the Company's borrowing availability and the
implementation of "fresh start" accounting significantly lowered annual
depreciation and amortization expense. In addition, since the Bankruptcy Filing,
in response to continuing changes in market conditions, management of the
Company formulated and implemented business plans, including the 1998
Restructuring and the 1999 Realignment, that have focused on significantly
reducing product offerings; tightening management of inventory levels;
significantly reducing costs and enhancing cost controls; and reducing capital
expenditures.
On the Effective Date, as described in Note 9 to the Financial
Statements, the Company entered into the Loan and Security Agreement with a
syndicate of financial institutions led by BABC. The Loan and Security Agreement
provided for a Revolving Loan Facility (including a $10.0 million letter of
credit facility), subject to a borrowing base formula and certain borrowing base
limitations, of up to $85 million and the Term Loan Facility of approximately
$31.5 million.
Subsequently, as of February 8, 1999 the Company and its lenders
amended the Loan and Security Agreement, waived financial covenant defaults
arising from the Company's financial results for Fiscal Year 1998 and, among
other things, set new financial covenants for Fiscal Year 1999. However, there
can be no assurance that the Company will be able to achieve the amended
financial covenants during Fiscal Year 1999. In connection with the amendment,
the Company agreed to prepay $5.6 million of the Term Loan Facility through
borrowings under the Revolving Loan Facility. Additionally, the Company agreed
to increase its monthly Term Loan Facility principal payment from $374,000 to
$450,000 beginning March 1, 1999. Further, based on the Company's declining
working capital needs in light of declining revenues, the Company and its
lenders agreed to reduce the Revolving Loan Facility commitment from $85 million
to $70 million. This reduction is expected to reduce the Company's unused line
fee approximately $75,000 per annum. The Company further agreed to repay a
portion of its Term Loan Facility in the future if subsequently obtained
appraised orderly liquidation values for the Company's property, plant and
equipment securing the Term Loan Facility fall below 83.1% in relation to the
outstanding amount owed under the Term Loan Facility. In connection with
entering into the amendment to the Loan and Security Agreement the Company
agreed to pay BABC for the benefit of the lenders $200,000 which is payable over
four equal monthly installments commencing March 31, 1999. Additionally, BABC as
Agent, retains the right to withhold up to approximately $1,694,000 in aggregate
availability which arose from the expiration of certain letters of credit
previously outstanding as a security deposit for the Company's former New York
headquarter's lease. (See Note 9 to these Financial Statements for a more
thorough discussion of the Company's secured indebtedness.)
Although the consummation of the Plan of Reorganization significantly
reduced the Company's leverage, the operating results for Fiscal Year 1998, the
effect of the 1998 Restructuring, and the 1999 Realignment and the formation of
FAI, including the purchase of substantially all of the assets of Arenzano, have
negatively impacted the Company's borrowing availability under its Revolving
Loan Facility (hereinafter defined). The Company's availability under its
Revolving Loan Facility was approximately $5.8 million at November 1, 1998 as
compared to $36.0 million at November 2, 1997. As of January 31, 1999, borrowing
availability under the Revolving Loan Facility was $1.6 million. The Company's
ability to maintain adequate availability to meet its operating needs and to
fund the 1999 Realignment is dependent on achieving future sales consistent with
management's expectation for Fiscal Year 1999 and successful implementation of
its cost reductions. The majority of the Company's customers are in the domestic
apparel industry which has continued to suffer an economic decline as a result
of higher levels of imports and changing fashion trends. Expected cash flow from
operations is dependent upon achieving sales expectations during Fiscal Year
1999, which are influenced by market conditions, including apparel sales at
retail, that are beyond the control of the Company. Further, the collectibility
of accounts receivable is dependent upon the state of the economy and, in
particular, the financial condition of the apparel industry. Also, continuing
refinement of the Company's strategies in response to evolving circumstances
could materially change the Company's working capital and capital expenditures
requirements. There can be no assurance that the Company will be able to achieve
an adequate level of sales consistent with management's expectations for Fiscal
Year 1999 to enable the Company to generate sufficient funds to meet its
operating needs or to fund its 1999 Realignment. Further, there can be no
assurance that the 1999 Realignment will be successfully implemented.
The Company will continue to make significant efforts to reduce its
costs, rationalize its product lines and maintain and increase its sales in the
increasingly difficult market conditions it confronts. The Company may also
consider seeking additional financing from alternative sources and strategic
alliances or combinations with other companies. Management believes that,
despite the financial hurdles and uncertainties in the apparel industry, it has
developed a business plan that if successfully implemented, should significantly
improve operating results. However, the Company will still be likely to realize
a net loss in Fiscal Year 1999. Continued support of the Company's employees,
shareholders, lenders, vendors and customers will be important to the future
success of the Company.
Proceeds from the Company's operations (as defined) are applied to reduce
the principal amount of floating rate borrowings outstanding under the Revolving
Loan Facility. Unused portions of the Revolving Loan Facility may be borrowed
and reborrowed subject to availability in accordance with the then applicable
commitment and borrowing base limitations. At January 31, 1999, the Company's
availability, net of outstanding advances, letters of credit and reserves, under
the Revolving Loan Facility was approximately $1.6 million.
The Company's fabric sales order backlog at January 31, 1999 was $34.8
million, a decrease of $15.6 million from the comparable period one year ago.
Excluding government and men's worsted orders, which have historically yielded
lower gross profit margin, the backlog at January 31, 1999 was $33.5 million or
$10.7 million lower than in January 1998. The decrease in the backlog, excluding
government and men's worsted orders, is primarily attributable to a decrease in
coating and men's woolen fabric orders, as well as a decline in women's woolen
and worsted fabric orders, which were slightly offset by an increase in
specialty fabric orders. The decrease in coating fabric orders is primarily due
to the unseasonably warm winter experienced throughout much of the U.S. in 1997
- - 1998. As a result, initial coating fabric orders have been delayed by
retailers which has delayed orders from apparel manufacturers. Changes in
fashion trends, coupled with increased imports have resulted in a decline in
demand for the Company's men's woolen fabrics. The decline in the backlog of
sales orders for women's fabrics is twofold. First, an overcapacity of woolen
flannel manufacturing coupled with excessive women's wool flannel apparel
inventory at retail has lead to a decline in demand for the Company's women's
wool flannel fabrics. Second, the reduction in the Company's worsted fabric
manufacturing capacity has caused the Company to limit somewhat its women's
worsted produt offerings. The increase in specialty sales orders is attributable
to an increase in orders for fabrics used in baseball caps. Management expects
the apparel fabric business to remain very competitive.
The Company's business is seasonal, with the vast majority of orders
for woolen fabrics placed from December through April for apparel manufacturers
to produce apparel for retail sale during the fall and winter months. This
results in a seasonal sales order and billing pattern which historically
generates higher sales during the Company's second and third fiscal quarters
compared to the Company's first and fourth quarters. This sales pattern places
seasonal constraints on the Company's manufacturing operations which results in
increased working capital requirements in the Company's first fiscal quarter
relating to the manufacture of certain components of inventory which are sold in
the Company's second and third fiscal quarters. The seasonal sales and order
pattern also results in increased levels of accounts receivable due to the
larger sales volume and "dated" sales to coating fabric customers which allows
for payment sixty (60) days from July 1 for invoices billed in January through
June.
Due to the seasonal nature of the Company's core woolen and worsted
business, the Company's borrowings under the Revolving Loan Facility will tend
to increase during the first three fiscal quarters of the Company's fiscal year
until the fourth quarter, when at year-end, borrowings tend to be the lowest.
However, for the reasons indicated above, borrowings during various times within
Fiscal Year 1999 may be higher than comparable periods within Fiscal Year 1998.
Currency Risks
The Company purchases a significant amount of its wool inventory from
Australia. Since all of the Company's forward purchase commitments for raw wool
are denominated in U.S. dollars, there is no actual currency exposure on
outstanding contracts. However, future changes in the relative exchange rates
between the United States and Australian dollars can materially affect the
Company's results of operations for financial reporting purposes. The Company
expects wool costs during Fiscal Year 1999 to be approximately 20% lower than in
Fiscal Year 1998. Throughout Fiscal Year 1998, the cost of wool declined. The
Company commits to the purchase of its expected wool needs on a forward purchase
order basis. The Company was able to defer the delivery of such wool used for
the manufacture of worsted fabrics. However, as a result of the Company
significantly reducing its worsted manufacturing capacity, its forward purchases
exceeded the Company's needs at November 1, 1998 and the Company's on order
purchase price committed under its forward purchase orders for wool consumed on
the worsted system exceeded the then current market price by approximately $1.5
million. Such market price loss was accrued in the fourth quarter of Fiscal Year
1998 and resulted in a reduction in gross profit. Substantially all of the
Company's inventories are carried at the lower of LIFO cost or market. The
decline in wool costs during Fiscal Year 1998 resulted in the LIFO carrying
value of the Company's inventory exceeding replacement cost by approximately
$3.0 million as of November 1, 1998. Accordingly, the Company wrote its LIFO
inventory value down to replacement cost during the fourth quarter of Fiscal
Year 1998. Such write off was charged to cost of goods sold which resulted in a
decrease in gross profit in Fiscal Year 1998.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 130, "Reporting
Comprehensive Income." SFAS 130 is designed to improve the reporting of changes
in equity from period to period. The Company will adopt SFAS 130 in the first
quarter of Fiscal Year 1999. Management does not expect SFAS 130 to have a
significant impact on disclosures in the Company's financial statements.
In June 1997, the FASB issued SFAS 131, "Employers' Disclosures About
Segments of an Enterprise and Related Information." The Company will adopt SFAS
131 in the first quarter of Fiscal Year 1999. This statement establishes
standards for the way enterprises report selected information about operating
segments in annual financial statements and requires that enterprises report
selected information about operating segments in interim financial reports.
Management has not determined what effect, if any, adoption of SFAS 131 will
have on disclosures in the Company's financial statements.
In February 1998, the FASB issued SFAS 132, "Employer's Disclosures
about Pensions and Other Postretirement Benefits." SFAS 132 is designed to
revise disclosures about pensions and other postretirement benefit plans. It
does not change the measurement or recognition of these plans. It standardizes
the disclosure requirements for pensions and other postretirement benefits to
the extent practicable. The Company will adopt SFAS 132 during Fiscal Year 1999.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Financial Instruments and Hedging Activities." SFAS 133 establishes standards
for derivative instruments and hedging activities and requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. SFAS 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
The Company has not determined what effect, if any, adoption of SFAS 133 will
have on the Company's financial statements.
Year 2000 Matters
Many computer systems experience problems handling dates beyond the year
1999. Therefore, some computer hardware and software will need to be modified
prior to the year 2000 in order to remain functional. During 1997 - 1998, the
Company completed an assessment of its internal readiness to implement Year 2000
compliant systems on a timely basis. The Company is in the process of updating
or replacing its computerized systems to ensure its systems are "Year 2000"
compliant and to improve the Company's overall manufacturing, planning and
inventory related systems. The Company is utilizing both internal and external
resources to upgrade or replace its existing computerized systems. Currently,
the Company estimates that the total cost of upgrading or replacing its existing
systems is approximately $2.6 million. Costs associated with upgrading existing
systems to address the Year 2000 matter will be expensed in the period incurred,
whereas costs associated with the replacement of existing systems will be
capitalized in the period incurred. During Fiscal Year 1999, the Company expects
to expense $0.2 million in costs associated with upgrading its existing systems
to make them Year 2000 compliant and capitalize $1.3 million in costs associated
with the replacement of existing systems. During Fiscal Year 1998, the Company
expensed approximately $0.2 million associated with system upgrades and
capitalized $0.9 million associated with the replacement of certain computerized
systems.
The Company expects its Year 2000 upgrade project and the replacement of
its manufacturing, planning and inventory related systems to be completed during
the second quarter of calendar year 1999. There can be no assurance, however,
that there will not be a delay in, or increased costs associated with, the
implementation of such changes, and any inability to implement such changes
could have a material adverse effect on the Company.
The Company has not completed its assessment of the Year 2000 compliance
of its vendors and customers, nor of the possible consequences to the Company of
the failure of one or more of its vendors and customers to become Year 2000
compliant on a timely basis. The Company expects to complete such assessment
before the end of the third quarter of calendar year 1999. It is possible that
if a substantial number of the Company's customers failed to implement Year 2000
compliant billing or payment systems, for example, their payments to the Company
might be disrupted, which might adversely affect the Company's cash flow. The
Company will discuss these matters with its key vendors and customers during
1999 to attempt to ascertain whether and to what extent such problems are likely
to occur. It is not clear, however, what, if any measures the Company could take
to deal with such eventualities while still maintaining customer and vendor
relationships. The Company does not believe that it has other relationships with
vendors and suppliers which, if disrupted due to the failure of such vendors and
suppliers to deal adequately with their own Year 2000 compliance issues, would
have a material adverse effect on the Company.
The Company has completed an assessment of its manufacturing processes
and identified which processes are dependent on third-party provided software
that may need to be modified in order to be Year 2000 compliant. The Company
intends to notify such third-party providers before the end of the second
quarter of calendar year 1999 to determine whether such software needs to be
modified in order to be Year 2000 compliant. Where software modifications are
required, the Company will engage the appropriate third-party software providers
to make such Year 2000 compliant modifications. Should the Company be unable to
obtain the appropriate software modifications, the Company believes it can alter
its manufacturing processes to supplement any processes idled by non compliance
with the Year 2000.
<PAGE>
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Commodity Market Risks
- -----------------------
November 1, 1998
-------------------------------------
Commitment Fair
Amount Value
(in thousands) ---------- -----
Off Balance Sheet Commodity Position $17,003 $15,466
The foregoing data relates to committed and open purchase order value
in aggregate to suppliers for wool to be delivered to the Company in Fiscal Year
1999. The difference between commitment amount and fair value has been recorded
on the Company's balance sheet as a current liability as of November 1, 1998.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Currency Risk" contained in Item 7 of this Annual Report.
<PAGE>
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
Independent Auditors' Report..................................................43
Consolidated Balance Sheets for the Reorganized Company as of November 1, 1998
and November 2, 1997..........................................................45
Consolidated Statements of Operations for the Reorganized Company Fifty-Two
Weeks Ended November 1, 1998 and the Reorganized Company 103-Day Period Ended
November 2, 1997, the Predecessor Company 261-Day Period Ended July 22, 1997
and the Predecessor Company Fifty-Three Weeks Ended November 3, 1996..........47
Consolidated Statements of Cash Flows for the Reorganized Company Fifty-Two
Weeks Ended November 1, 1998 and the Reorganized Company 103-Day Period Ended
November 2, 1997, the Predecessor Company 261-Day Period Ended July 22, 1997
and the Predecessor Company Fifty-Three Weeks Ended November 3, 1996..........49
Consolidated Statements of Shareholders' Equity (Deficit) for the Predecessor
Company Fifty-Three Weeks Ended November 3, 1996 and the Predecessor Company
261-Day Period Ended July 22, 1997 and the Reorganized Company 103-Day Period
Ended November 2, 1997 and the Reorganized Company Fifty-Two
Weeks Ended November 1, 1998..................................................52
Notes to Consolidated Financial Statements for the Reorganized Company Fifty-Two
Weeks Ended November 1, 1998 and the Reorganized Company 103-Day Period Ended
November 2, 1997 and the Predecessor Company 261-Day Period Ended July 22, 1997
and the Predecessor Company Fifty-Three Weeks Ended November 3, 1996..........54
Schedule II
Supplemental Consolidated Financial Statement Schedule for the Fifty-Three
Weeks Ended November 3, 1996, the Fifty-Two Weeks Ended November 2, 1997
and the Fifty-Two Weeks Ended November 1, 1998................................93
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
Forstmann & Company, Inc.:
We have audited the accompanying consolidated financial statements of Forstmann
& Company, Inc. (the "Company") for the following periods:
Period(s) Covered
------------------------------------------------------
Financial Statements Reorganized Company Predecessor Company
- ----------------------- ------------------------- ----------------------------
Consolidated Balance November 1, 1998
Sheets November 2, 1997
Consolidated Statements Fifty-two weeks ended Period from November 4, 1996
of Operations November 1, 1998 to July 22, 1997
Period from July 23, 1997 Fifty-three weeks ended
to November 2, 1997 November 3, 1996
Consolidated Statements Fifty-two weeks ended Period from November 4, 1996
of Cash Flows November 1, 1998 to July 22, 1997
Period from July 23, 1997 Fifty-three weeks ended
to November 2, 1997 November 3, 1996
Consolidated Statements Fifty-two weeks ended Period from November 4, 1996
of Changes in November 1, 1998 to July 22, 1997
Shareholders' Equity
(Deficit) Period from July 23, 1997 Fifty-three weeks ended
to November 2, 1997 November 3, 1996
Our audits also include the consolidated financial statement schedule listed in
the Index to Consolidated Financial Statements and Consolidated Financial
Statement Schedule. These financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at November 1, 1998 and
November 2, 1997, and the results of its operations and its cash flows for the
fifty-two weeks ended November 1, 1998, the period July 23, 1997 to November 2,
1997, the period November 4, 1996 to July 22, 1997 and the fifty-three weeks
ended November 3, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
The accompanying consolidated financial statements for the fifty-two weeks ended
November 1, 1998 have been prepared assuming that the Company will continue as a
going concern. As discussed in Note 1 to the financial statements, the Company's
recurring losses and related matters raise substantial doubt about its ability
to continue as a going concern. Management's plans concerning these matters are
also discussed in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
As discussed in Note 2 to the financial statements, on July 9, 1997 the
Bankruptcy Court entered an order confirming the Company's plan of
reorganization which became effective after the close of business on July 22,
1997. Accordingly, the accompanying financial statements have been prepared in
conformity with AICPA Statement of Position 90-7, "Financial Reporting for
Entities in Reorganization Under the Bankruptcy Code," for the Reorganized
Company as a new entity with assets, liabilities, and a capital structure having
carrying values not comparable with prior periods as described in Note 2.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
February 8, 1999
<PAGE>
FORSTMANN & COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
NOVEMBER 1, 1998 AND NOVEMBER 2, 1997
<TABLE>
Reorganized Reorganized
Company Company
November 1, November 2,
NOTES 1998 1997
----- ---- ----
ASSETS
CURRENT ASSETS:
<S> <C> <C> <C>
Cash $ 143,000 $ 493,000
Cash restricted for settlement of unpaid claims 327,000 558,000
Accounts receivable, net of allowance of
$1,309,000 and $458,000 31,434,000 42,005,000
Inventories 5 38,818,000 43,210,000
Current deferred tax assets 10 - -
Other current assets 281,000 926,000
----------- ------------
Total current assets 71,003,000 87,192,000
Property, plant and equipment, net 6 22,235,000 24,779,000
Other assets 7 2,005,000 1,670,000
----------- ------------
Total $95,243,000 $113,641,000
=========== ============
</TABLE>
See notes to consolidated financial statements.
(continued on next page)
<PAGE>
FORSTMANN & COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
NOVEMBER 1, 1998 AND NOVEMBER 2, 1997 (CONTINUED)
<TABLE>
Reorganized Reorganized
Company Company
November 1, November 2,
NOTES 1998 1997
----- ---- ----
LIABILITIES AND SHAREHOLDERS'
EQUITY
CURRENT LIABILITIES:
<S> <C> <C> <C>
Current maturities of long-term debt 9 $ 7,619,000 $ 5,756,000
Accounts payable 3,151,000 3,335,000
Accrued liabilities 8 9,238,000 11,371,000
------------ ------------
Total current liabilities 20,008,000 20,462,000
Long-term debt 9 43,565,000 42,548,000
Deferred tax liabilities 10 - -
------------ ------------
Total liabilities 63,573,000 63,010,000
Commitments and contingencies 13
SHAREHOLDERS' EQUITY: 11
Preferred Stock, $0.01 par value, 1,000,000
shares authorized, nil outstanding - -
Common stock, $.01 par value, 35,000,000
shares authorized, 4,387,819 and 4,384,436
shares issued and outstanding 43,878 43,844
Additional paid-in capital 50,323,122 50,297,156
Retained earnings (deficit) since July 23, 1997 (18,697,000) 290,000
------------ ------------
Total shareholders' equity 31,670,000 50,631,000
------------ ------------
Total $ 95,243,000 $113,641,000
============ ============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
FORSTMANN & COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
Reorganized Company Predecessor Company
-------------------------------- ------------------------------
Period From Period From
Fifty-Two July 23, November 4, Fifty-Three
Weeks Ended 1997 to 1996 to Weeks Ended
November 1, November 2, July 22, November 3,
NOTES 1998 1997 1997 1996
----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales $ 149,597,000 $57,126,000 $141,884,000 $195,028,000
Cost of goods sold 141,760,000 49,400,000 123,217,000 172,273,000
------------- ----------- ------------ ------------
Gross profit 7,837,000 7,726,000 18,667,000 22,755,000
Selling, general and administrative
expenses 14,935,000 4,296,000 11,576,000 18,129,000
Provision for uncollectible accounts
receivable 851,000 458,000 252,000 1,397,000
Restructuring items 15 3,495,000 - - -
Loss (gain) from abandonment, disposal
and impairment of machinery and
equipment and other assets 6 955,000 7,000 (90,000) (45,000)
------------- ----------- ------------ ------------
Operating income (loss) (12,399,000) 2,965,000 6,929,000 3,274,000
Interest expense (contractual interest
of $11,192,000 for the Predecessor
Company 1997 261-Day Period
and $17,683,000 for 1996) 9 6,489,000 1,723,000 4,958,000 9,063,000
------------- ----------- ------------ ------------
Income (loss) before reorganization
items, income taxes and
extraordinary gain (loss) (18,888,000) 1,242,000 1,971,000 (5,789,000)
Reorganization items 16 99,000 395,000 33,401,000 12,055,000
------------- ----------- ------------ ------------
Income (loss) before income taxes
and extraordinary item (18,987,000) 847,000 (31,430,000) (17,844,000)
See notes to consolidated financial statements.
</TABLE>
(continued on next page)
<PAGE>
FORSTMANN & COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
Reorganized Company Predecessor Company
-------------------------------- ------------------------------
Period From Period From
Fifty-Two July 23, November 4, Fifty-Three
Weeks Ended 1997 to 1996 to Weeks Ended
November 1, November 2, July 22, November 3,
NOTES 1998 1997 1997 1996
----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income tax provision (benefit) 10 - 461,000 - -
------------ ------------ ------------ ------------
Income (loss) before extraordinary item (18,987,000) 386,000 (31,430,000) (17,844,000)
Extraordinary item - gain (loss) on
debt discharge - (96,000) 24,135,000 -
------------ ------------ ------------ ------------
Net income (loss) $(18,987,000) $ 290,000 $(7,295,000) $(17,844,000)
============ ============ =========== ============
Per share and share information:
Income (loss) before extraordinary item
per common share - basic and diluted $ (4.33) $ .09 $ (5.59) $ (3.18)
Extraordinary (loss) gain per common
share - basic and diluted - (.02) 4.29 -
------------ ------------ ------------ ------------
Income (loss) per common share
- basic and diluted $ (4.33) $ .07 $ (1.30) $ (3.18)
============ ============ =========== ============
Weighted average common shares
outstanding - basic and diluted 4,385,955 4,384,436 5,618,799 5,618,799
============ ============ =========== ============
See notes to consolidated financial statements.
</TABLE>
<PAGE>
FORSTMANN & COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
Reorganized Company Predecessor Company
------------------------------- ------------------------------
Period From Period From
Fifty-Two July 23, November 4, Fifty-Three
Weeks Ended 1997 to 1996 to Weeks Ended
November 1, November 2, July 22, November 3,
1998 1997 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $(18,987,000) $ 290,000 $ (7,295,000) $(17,844,000)
------------ ------------ ------------ ------------
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization 5,502,000 1,519,000 10,600,000 13,113,000
Write-off of deferred financing costs -- -- 211,000 --
Income tax not payable in cash -- 461,000 -- --
Income tax refunds (payments), net 218,000 (250,000) (108,000) 2,531,000
Provision for uncollectible accounts 851,000 458,000 252,000 1,397,000
Increase (decrease) in market reserves 4,416,000 721,000 (6,362,000) (2,249,000)
Loss from abandonment, disposal and
impairment of machinery and equipment
and other assets 2,378,000 7,000 3,305,000 1,782,000
Loss associated with restructuring
equipment lease liability 1,578,000 -- -- --
Gain associated with N.Y. office lease surrender(987,000) -- -- --
Loss on wool purchase commitments 1,537,000 -- -- --
Non-cash item-beginning profit inventory
write-down 569,000 686,000 -- --
Adjustment of accounts to fair value -- -- 22,076,000 --
Extraordinary loss (gain) on debt discharge- 96,000 (24,135,000) --
Non-cash compensation expense 32,000 -- -- --
Change in current assets and current liabilities:
Accounts receivable 9,720,000 10,301,000 (17,592,000) 6,594,000
Inventories (3,000) 3,854,000 9,047,000 27,073,000
Other current assets 483,000 182,000 (996,000) 456,000
Accounts payable (323,000) (676,000) 2,028,000 446,000
Accrued liabilities (2,321,000) (2,292,000) 795,000 4,190,000
Operating liabilities subject to compromise -- (96,000) (514,000) (1,257,000)
------------ ------------ ------------ ------------
Total adjustments 23,650,000 14,971,000 (1,393,000) 54,076,000
------------ ------------ ------------ ------------
Net cash provided (used) by operating activities 4,663,000 15,261,000 (8,688,000) 36,232,000
------------ ------------ ------------ ------------
See notes to consolidated financial statements.
</TABLE>
(continued on next page)
<PAGE>
FORSTMANN & COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
Reorganized Company Predecessor Company
------------------------------- ------------------------------
Period From Period From
Fifty-Two July 23, November 4, Fifty-Three
Weeks Ended 1997 to 1996 to Weeks Ended
November 1, November 2, July 22, November 3,
1998 1997 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows provided (used) by investing activities:
Investment in property, plant and equipment (4,244,000) (857,000) (1,036,000) (972,000)
Purchase price paid for Arenzano Trading
Company, Inc. (2,000,000) -- -- --
Investment in other assets (1,047,000) (125,000) (289,000) (921,000)
Proceeds from disposal of property,
plant and equipment 159,000 8,000 2,612,000 150,000
------------ ------------ ------------ ------------
Net cash provided (used) by investing activities (7,132,000) (974,000) 1,287,000 (1,743,000)
------------ ------------ ------------ ------------
Cash flows provided (used) by financing activities:
Net borrowings (repayments) under the
Revolving Loan Facility 14,519,000 (12,855,000) 26,244,000 --
Borrowings under the Term Loan Facility -- -- 31,450,000 --
Repayment of the Term Loan Facility (9,984,000) (1,123,000) -- --
Net borrowings (repayments) under DIP Facility - -- (16,017,000) 6,582,000
Net borrowings (repayments) under GE Capital
Facility -- -- --
(38,626,000)
Repayment of Senior Secured Notes -- -- (26,909,000) (91,000)
Repayment of Deferred Interest Rate Notes (1,571,000) -- -- --
Borrowing under financing arrangements 69,000 -- 1,691,000 --
Repayment of CIT Equipment Facility and other
financing arrangements (967,000) (99,000) (6,368,000) (1,770,000)
Deferred financing costs (178,000) 109,000 (2,006,000) (588,000)
------------ ------------ ------------ ------------
Net cash provided (used) by financing activities 1,888,000 (13,968,000) 8,085,000 (34,493,000)
------------ ------------ ------------ ------------
Net increase (decrease) in cash (581,000) 319,000 684,000 (4,000)
Cash and restricted cash at beginning of period 1,051,000 732,000 48,000 52,000
------------ ------------ ------------ ------------
Cash and restricted cash at end of period $ 470,000 $ 1,051,000 $ 732,000 $ 48,000
============ ============ ============ ============
See notes to consolidated financial statements.
</TABLE>
(continued on next page)
<PAGE>
FORSTMANN & COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
Reorganized Company Predecessor Company
------------------------------- ------------------------------
Period From Period From
Fifty-Two July 23, November 4, Fifty-Three
Weeks Ended 1997 to 1996 to Weeks Ended
November 1, November 2, July 22, November 3,
1998 1997 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Supplemental schedule of cash flow information:
Cash paid during the period for interest $ 5,827,000 $ 1,520,000 $ 5,093,000 $ 6,187,000
============ ============ ============ ============
Cash (received) paid during the period for
income taxes , net $ (218,000) $ 250,000 $ 108,000 $ (2,531,000)
============ ============ ============ ============
Cash paid during the period for professional fees
relating to services rendered in connection with
the Chapter 11 proceeding and other
reorganization items paid $ 678,000 $ 2,392,000 $ 4,019,000 $ 4,778,000
============ ============ ============ ============
Cash paid during the period for restructuring items$ 1,263,000 $ -- $ -- $ --
============ ============ ============ ============
Cash paid during the period for Arenzano Trading
Company, Inc. as assigned to identifiable assets
and liabilities:
Increase in inventories $ 590,000 $ -- $ -- $ --
Increase in other current assets 56,000 -- -- --
Increase in accounts payable (139,000) -- -- --
Increase in property, plant and equipment 269,000 -- -- --
Increase in other assets 1,224,000 -- -- --
------------ ------------ ------------ ------------
Total cash paid $ 2,000,000 $ -- $ -- $ --
============ ============ ============ ============
Supplemental schedule of changes in current assets
and current liabilities:
Accounts receivable trade, net:
Decrease (increase) from operations $ 9,720,000 $ 10,301,000 $(17,592,000) $ 6,594,000
Loss on asset impairment -- -- 466,000 --
Provision for uncollectible accounts 851,000 458,000 252,000 1,397,000
------------ ------------ ------------ ------------
Net decrease (increase) $ 10,571,000 $ 10,759,000 $(16,874,000) $ 7,991,000
============ ============ ============ ============
Inventories:
Decrease (increase) from operations$ (3,000) $ 3,854,000 $ 9,047,000 $ 27,073,000
Increase from purchase of Arenzano Trading
Company, Inc. (590,000) -- -- --
Decrease from non-cash beginning profit
inventory write-down 569,000 686,000 -- --
Increase from fair market valuation -- -- (6,510,000) --
Increase (decrease) in market reserves 4,416,000 721,000 (6,362,000) (2,249,000)
------------ ------------ ------------ ------------
Net decrease (increase) $ 4,392,000 $ 5,261,000 $ (3,825,000) $ 24,824,000
============ ============ ============ ============
See notes to consolidated financial statements
</TABLE>
<PAGE>
FORSTMANN & COMPANY, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
Shares Pension Total
Of Additional Liability Retained Shareholders'
Common Common Paid-In Over Prior Earnings Equity
Stock Stock Capital Service Cost (Deficit) (Deficit)
------------ ------- ------------ ------------ ------------ ------------
PREDECESSOR COMPANY:
<S> <C> <C> <C> <C> <C> <C>
Balance, October 29, 1995 5,618,799 $5,619 $ 26,564,381 $ (1,956,000) $(16,947,000) $ 7,667,000
Adjustments to pension
liability over prior
service cost -- -- -- 849,000 -- 849,000
Loss applicable to
common shareholders -- -- -- -- (17,844,000) (17,844,000)
------------ ------- ------------ ------------ ------------ ------------
Balance, November 3, 1996 5,618,799 5,619 26,564,381 (1,107,000) (34,791,000) (9,328,000)
Loss for period before debt
discharge and refinancing
and fresh start accounting -- -- -- -- (8,760,000) (8,760,000)
Adjustments for:
Cancellation of old
common stock and
old preferred stock (5,618,799) (5,619) 2,660,619 -- -- 2,655,000
Discharge of debt 4,384,436 43,844 62,697,156 -- 24,135,000 86,876,000
Debt refinancing expense -- -- -- -- (594,000) (594,000)
Fresh start accounting adjustments:
Fair market valuation of assets
and liabilities -- -- -- -- (22,076,000) (22,076,000)
Eliminate retained earnings
deficit and pension liability
over prior service cost -- -- (43,193,000) 1,107,000 42,086,000 --
------------ ------- ------------ ------------ ------------ ------------
Balance, July 22, 1997 4,384,436 43,844 48,729,156 -- -- 48,773,000
</TABLE>
See notes to consolidated financial statements.
(continued on next page)
<PAGE>
FORSTMANN & COMPANY, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT) (CONTINUED)
<TABLE>
Shares Pension Total
Of Additional Liability Retained Shareholders'
Common Common Paid-In Over Prior Earnings Equity
Stock Stock Capital Service Cost (Deficit) (Deficit)
------------ ------- ------------ ------------ ------------ ------------
REORGANIZED COMPANY:
<S> <C> <C> <C> <C> <C> <C>
Adjustments to pension liability
over prior service cost -- -- 1,107,000 -- -- 1,107,000
Income for period -- -- -- -- 290,000 290,000
Income taxes not payable
in cash -- -- 461,000 -- 461,000
------------ ------- ------------ ------------ ------------ ------------
Balance, November 2, 1997 4,384,436 43,844 50,297,156 -- 290,000 50,631,000
Director shares awarded 3,997 40 31,960 -- -- 32,000
Shares acquired
(constructively retired) (614) (6) (5,994) -- -- (6,000)
Loss for period -- -- -- -- (18,987,000)
------------ ------- ------------ ------------ ------------ ------------
Balance November 1, 1998 4,387,819 $43,878 $ 50,323,122 $ -- $(18,697,000) $ 31,670,000
============ ======= ============ ============ ============ ============
See notes to consolidated financial statements.
</TABLE>
<PAGE>
FORSTMANN & COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE REORGANIZED
COMPANY FIFTY-TWO WEEKS ENDED NOVEMBER 1, 1998 AND 1997 103-DAY PERIOD ENDED
NOVEMBER 2, 1997 AND THE PREDECESSOR COMPANY 1997 261-DAY PERIOD ENDED JULY 22,
1997 AND FIFTY-THREE WEEKS ENDED NOVEMBER 3, 1996
1. NATURE OF BUSINESS, FINANCIAL RESULTS AND LIQUIDITY
Forstmann & Company, Inc. ("the Company") is a leading designer,
marketer and manufacturer of innovative, high quality woolen, worsted and other
fabrics which are used primarily in the production of brand-name and private
label apparel for men and women, as well as specialty fabrics for use in
billiard and gaming tables, sports caps and school uniforms. The apparel
industry represents the majority of the Company's customers for its fabrics.
Additionally, through the Company's wholly owned subsidiary Forstmann Apparel,
Inc. ("FAI") the Company designs and markets women's suits primarily under the
"Oleg Cassini" label. The Company contracts the manufacturing of women's suits
through manufacturers based in the Caribbean and sources complete apparel
packages internationally. See Note 4 to these Financial Statements for a
discussion of FAI and it's purchase of certain assets of Arenzano Trading
Company, Inc. and B&B Corporation, collectively ("Arenzano").
The Company has incurred net losses of $19.0 million, $7.0 million and
$17.8 million in Fiscal Years 1998, 1997 and 1996, respectively. Such losses
were, in part, due to the development and implementation of the Company's Plan
of Reorganization (hereinafter defined), unstable wool commodity price and most
recently increased international competition which has been compounded by
consumer fashion trends moving away from the Company's core woolen and worsted
fabrics. Net sales declined from $199.0 million in Fiscal Year 1997 to $149.6
million in Fiscal Year 1998 and management expects a similar reduction in net
sales during fiscal year 1999. The Company has responded to these challenges by
deleveraging its financial position through the consummation of the Plan of
Reorganization and has more recently implemented numerous cost reduction
programs to more closely align its manufacturing and overhead costs with
expected revenues.
On March 6, 1998, the Company announced that, as part of its long term
strategy, it will discontinue the production of top dye worsted fabrics used to
manufacture men's suits and government uniforms (the "1998 Restructuring") after
completing orders for its fall season. In Fiscal Year 1998, top dyed worsteds
accounted for approximately $14 million in men's suiting fabric and $4 million
in government uniform fabric sales. In Fiscal Year 1997, top dye worsteds
accounted for approximately $18 million in men's suiting fabric and $10 million
in government uniform fabric sales. This decision resulted in the Company's
previous overall workforce of approximately 2,500 people being reduced by
approximately 730 people.
In October 1998, the Company's Board of Directors approved the closing
of its Louisville plant, realignment of the Company's manufacturing facilities
located in Georgia and further reductions of its selling, styling and
administrative costs (the "1999 Realignment"). The Company expects that this
move will align its overhead with the current market demand for its products.
The Louisville plant was closed as of January 31, 1999. The Company is currently
evaluating alternative solutions for its Louisville facility including a
possible sale. Implementation of the 1999 Realignment has resulted in the
Company's workforce being further reduced by approximately 410 people.
Implementation of the 1998 Restructuring and 1999 Realignment has
resulted in the Company incurring certain costs, including, among other costs,
salaried severance, special one-time hourly "stay put" bonuses and equipment
relocation costs. Additionally, certain of the Company's inventories and
machinery and equipment have been impaired or rendered obsolete, and certain
equipment covered under operating lease agreements will no longer be required.
Accordingly, during Fiscal Year 1998, the Company recognized severance and "stay
put" bonus expense of approximately $0.8 million, recognized a loss on
impairment of $1.4 million relating to the impairment of certain machinery and
equipment based on appraised values, increased inventory market reserves by $2.6
million, and recognized a loss associated with operating lease cancellation
liability of $1.6 million. Severance expense, expense associated with the stay
put bonuses, loss on impairment of certain machinery and equipment and the loss
associated with operating lease cancellation liability were recognized as
restructuring items during Fiscal Year 1998. The Company expects to incur
approximately $1.2 million of severance expense as a restructuring item during
its first quarter of fiscal year 1999 in connection with the 1999 Realignment.
Inventory market reserves associated with the 1998 Restructuring were included
in cost of goods sold during Fiscal Year 1998. Any additional impairment of
inventories, if any, will be included in cost of goods sold in the periods in
which the impairment is indicated and can be reasonably estimated. Any
additional impairment in property, plant and equipment will be recognized in the
periods in which the impairment is indicated and can be reasonably estimated.
The Company incurred costs of approximately $0.2 million during Fiscal Year 1998
related to the relocation of certain machinery and equipment which was included
in cost of goods sold during Fiscal Year 1998. Any additional costs incurred to
relocate certain machinery and equipment will be charged to cost of goods sold
in the periods incurred. See Note 15 to the Financial Statements for a
description of restructuring items recognized during Fiscal Year 1998.
Although the consummation of the Plan of Reorganization significantly
reduced the Company's leverage, the operating results for Fiscal Year 1998, the
effect of the 1998 Restructuring, and the 1999 Realignment and the formation of
FAI, including the purchase of substantially all of the assets of Arenzano, have
negatively impacted the Company's borrowing availability under its Revolving
Loan Facility (hereinafter defined). The Company's availability under its
Revolving Loan Facility was approximately $5.8 million at November 1, 1998 as
compared to $36.0 million at November 2, 1997. As of January 31, 1999, borrowing
availability under the Revolving Loan Facility was $1.6 million. The Company's
ability to maintain adequate availability to meet its operating needs and to
fund the 1999 Realignment is dependent on achieving future sales consistent with
management's expectations for Fiscal Year 1999 and successful implementation of
its cost reductions. The majority of the Company's customers are in the domestic
apparel industry which has continued to suffer an economic decline as a result
of higher levels of imports and changing fashion trends. Expected cash flow from
operations is dependent upon achieving sales expectations during Fiscal Year
1999, which are influenced by market conditions, including apparel sales at
retail, that are beyond the control of the Company. Further, the collectibility
of accounts receivable is dependent upon the state of the economy and, in
particular, the financial condition of the apparel industry. Also, continuing
refinement of the Company's strategies in response to evolving circumstances
could materially change the Company's working capital and capital expenditures
requirements. There can be no assurance that the Company will be able to achieve
an adequate level of sales consistent with management's expectations for Fiscal
Year 1999 to enable the Company to generate sufficient funds to meet its
operating needs or to fund its 1999 Realignment. Further, there can be no
assurance that the 1999 Realignment will be successfully implemented. These
factors raise substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any adjustments that
might result from the outcome of these uncertainties.
As described more thoroughly in Note 9 to the Financial Statements, as
of February 8, 1999, the Company and its lenders amended the Loan and Security
Agreement, waived certain financial covenant defaults arising from the Company's
financial results for Fiscal Year 1998 and, among other things, set new
financial covenants for Fiscal Year 1999. However, there can be no assurance
that the Company will be able to achieve the amended financial covenants during
Fiscal Year 1999.
The Company will continue to make significant efforts to reduce its
costs, rationalize its product lines and maintain and increase its sales in the
increasingly difficult market conditions it confronts. The Company may also
consider seeking additional financing from alternative sources and strategic
alliances or combinations with other companies. Management believes that,
despite the financial hurdles and uncertainties in the apparel industry, it has
developed a business plan that if successfully implemented should significantly
improve operating results. However, the Company will still be likely to realize
a loss in Fiscal Year 1999. Continued support of the Company's employees,
stockholders, lenders, vendors and customers will be important to the future
success of the Company.
2. PRIOR REORGANIZATION AND "FRESH START" ACCOUNTING
In September 1995, as a result of a decline in the Company's results of
operations during Fiscal Year 1995 reflecting, among other factors, rising wool
costs, sluggish retail apparel sales, and high debt leverage, the Company filed
a petition for relief under Chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Code"). In July 1997, the Bankruptcy Court entered an order
confirming the Plan of Reorganization and on July 23, 1997 (the "Effective
Date"), the Plan of Reorganization was consummated by the Company.
Pursuant to the Plan of Reorganization, all general unsecured claims
against the Company were converted into 100% of the common stock of the
reorganized Company based on a ratio of 50 shares per each $1,000 of allowed
unsecured claim. Secured claims against the Company aggregating approximately
$60.1 million were either refinanced, reinstated or restructured as more fully
described in Note 9 to the Financial Statements. In addition, pursuant to the
Plan of Reorganization, as of the Effective Date:
(i) holders of the Company's redeemable preferred stock received
in the aggregate warrants entitling them to purchase 43,878
shares of the new common stock of the Company within two years
of the Effective Date at an exercise price of $23 per share,
and the preferred stock was canceled;
(ii) holders of the Company's old common stock received in the
aggregate warrants entitling them to purchase 43,878 shares of
the new common stock of the Company within two years of the
Effective Date at an exercise price of $23 per share, and the
old common stock was canceled;
(iii) holders of options to purchase common stock of the Company
received no distributions under the Plan, and the options were
canceled;
(iv) an aggregate of 487,528 shares of common stock of the
reorganized Company were reserved for issuance upon exercise
of options granted or to be granted pursuant to the Company's
Management Stock Option Plan and, as of the Effective Date,
146,258 options were granted to certain employees of the
Company at an exercise price of $12.88 per share;
(v) the Company entered into a Loan and Security Agreement dated
as of July 23, 1997 (the "Loan and Security Agreement") with
BankAmerica Business Credit, Inc. ("BABC"), as agent, and the
financial institutions named therein, the proceeds of which
were used to repay all amounts outstanding under the Company's
GE Capital DIP Facility (hereinafter defined) and CIT
Equipment Facility (hereinafter defined), repay the principal
and a portion of the accrued and unpaid interest due under the
Senior Secured Notes (hereinafter defined) and fund other
amounts due pursuant to the Plan of Reorganization and the
Loan and Security Agreement.
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" ("SOP 90-7"), the Company established
its reorganization value and adopted "fresh start" accounting as of July 22,
1997.
Pursuant to SOP 90-7, the total reorganization value of the reorganized
Company's assets was determined using several factors and by reliance on various
valuation methods, including discounting cash flow, as well as by analyzing
market cash flow multiples applied to the Company's pro forma adjusted 12-month
trailing cash flows.
The factors considered by the Company included:
(i) Forecasted operating and cash flow results which gave effect
to the estimated impact of the restructuring and
implementation of the Company's strategic initiatives;
limitations on the use of available net operating loss
carryovers and other tax attributes resulting from
consummation of the Plan of Reorganization and other events;
(ii) the discounted residual value at the end of the forecast
period;
(iii) market share and position;
(iv) competition and general economic considerations;
(v) future potential profitability, and;
(vi) the Company's seasonality and working capital requirements.
Based on this analysis, the Company, after consultation with the
Company's creditors' committee established by the Bankruptcy Court and an
independent firm specializing in reorganizations retained by the creditors'
committee, established the Company's reorganization value. Under the principles
of "fresh start" accounting, the Company's total net assets were recorded at
this assumed reorganization value, which was then allocated to identifiable
tangible and intangible assets on the basis of their estimated fair value. In
accordance with "fresh start" accounting, the difference between the assumed
reorganization value and the aggregate fair value of the identifiable tangible
and intangible assets resulted in a reduction in the value assigned to property,
plant and equipment. In addition, the Company's accumulated deficit was
eliminated.
(continued on next page)
<PAGE>
The effect of the Plan of Reorganization and the application of "fresh
start" accounting to the Company's condensed balance sheet as of July 22, 1997
was as follows (in thousands):
<TABLE>
Pre-Fresh
Start Plan of Fresh Start
Balance Reorganization Fair Value Balance
Sheet Adjustments Adjustment Sheet
July 22, 1997 (A) (B) July 22, 1997
------------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 48 $ 684 $ -- $ 732
Accounts receivable 52,764 -- -- 52,764
Inventory 41,961 -- 6,510 48,471
Other current assets 1,220 (360) -- 860
--------- --------- --------- ---------
Total current assets 95,993 324 6,510 102,827
Property, plant and equipment, net 53,879 -- (28,586) 25,293
Deferred financing costs 794 995 -- 1,789
Other assets 91 -- -- 91
--------- --------- --------- ---------
Total assets $ 150,757 $ 1,319 $ (22,076) $ 130,000
========= ========= ========= =========
Current maturities of long-term debt $ 53,906 $(48,282) $ -- $ 5,624
Accounts payable 3,964 -- -- 3,964
Accrued liabilities 17,043 (3,378) --
--------- --------- ---------
13,665
Total current liabilities 74,913 (51,660) --
23,253
Long-term debt 2,690 54,114 -- 56,804
Other long-term obligations 1,170 -- -- 1,170
Liabilities subject to compromise 87,417 (87,417) -- --
Redeemable preferred stock 2,655 (2,655) -- --
Stockholders' equity (deficit) (18,088) 88,937 (22,076) 48,773
--------- --------- --------- ---------
Total liabilities and stockholders' equity $ 150,757 $ 1,319 $ (22,076) $ 130,000
========= ========= ========= =========
</TABLE>
(A) To record the transactions consummated pursuant to the Plan of
Reorganization and eliminate the deficit in accumulated
stockholders' deficit.
(B) To record the adjustments to state assets and liabilities at fair
value and adjust for the difference between the assumed
reorganization value and the fair value of the identifiable
tangible and intangible assets by reducing the value assigned to
property, plant and equipment.
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reorganization Value and "Fresh Start" Accounting - The Company's
financial statements for Fiscal Year 1997 and Fiscal Year 1996 have been
prepared in accordance with SOP 90-7.
Principles of Consolidation - The consolidated financial statements
include the accounts of Forstmann Apparel, Inc. ("FAI"). All significant
intercompany accounts and transactions have been eliminated.
Fiscal Year - The Company has adopted a fiscal year ending on the Sunday
nearest to October 31.
As a result of the consummation of the Plan of Reorganization and the
application of "fresh start" accounting in accordance with SOP 90-7, the Company
was required to report its financial results for Fiscal Year 1997 in two
separate periods. The following table describes the periods presented in the
financial statements and the notes thereto:
Period Referred to as
----------------------------------- ------------------------------------
Results for the Reorganized Company "Fiscal Year 1998"
Fifty-Two Weeks Ended
November 1, 1998
Results of the Reorganized Company "Reorganized Company 1997 103-Day
From July 23, 1997 to Period"
November 2, 1997
Results for the Reorganized Company "Reorganized Company 1997 Fourth
From August 4, 1997 to Quarter"
November 2, 1997
Results for the Predecessor Company "Predecessor Company 1997 261-Day
From November 4, 1996 to Period"
July 22, 1997
Combined Reorganized Company "Fiscal Year 1997"
1997 103-Day Period and
Predecessor Company 1997
261-Day Period (Results for the
Fifty-Two Weeks Ended
November 2, 1997)
Results for the Predecessor Company "Fiscal Year 1996"
Fifty-Three Weeks Ended
November 3, 1996
Due to the effects of the consummation of the Plan of Reorganization and
application of "fresh start" accounting, results for Fiscal Year 1998 and Fiscal
Year 1997 are not necessarily fully comparable to each other or to the results
for Fiscal Year 1996. Due to the seasonal nature of the Company's business, the
results of each of the Reorganized Company 1997 103-Day Period and the
Predecessor Company 1997 261-Day Period can not be annualized so as to be
indicative of the results for a full fiscal year.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Revenue Recognition - Generally, sales are recognized when goods are
sold and then shipped to the Company's customers. A portion of such sales is
made on extended terms of up to 240 days. At November 1, 1998, $1.4 million of
sales made on extended terms were included in accounts receivable under terms of
specific sales.
When customers, under the terms of specific orders, request that the
Company manufacture, invoice and ship goods on a bill and hold basis, the
Company recognizes revenue based on the completion date required in the order
and actual completion of the manufacturing process. At the time such goods are
ready for delivery, title and risk of ownership pass to the customer. Accounts
receivable included bill and hold receivables of $14.0 million at November 1,
1998 and $20.2 million at November 2, 1997.
One of the Company's customers accounted for approximately 20%, 17% and
13% of the Company's revenues during Fiscal Years 1998, 1997 and 1996,
respectively. No other customer of the Company accounted for 10% or more of the
Company's revenues in these Fiscal Years 1998, 1997 and 1996.
Allowance for Uncollectible Accounts - Based on a review and assessment
of the collectibility of aged balances included in accounts receivable, the
Company establishes a specific allowance for uncollectible accounts.
Additionally, the Company establishes a general allowance for uncollectible
accounts based, in part, on historical trends and the state of the economy and
its effect on the Company's customers. The Company also establishes allowances
for estimated sales returns. The Company grants credit to certain customers,
most of which are companies in apparel industries. One individual customer's
accounts receivable balance represented approximately 24% of gross accounts
receivable at November 1, 1998 and no other individual customer's accounts
receivable balance exceeded 7% of gross accounts receivable at November 1, 1998.
Inventories - Inventories are stated at the lower of cost, determined
principally by the last-in, first-out ("LIFO") method, or market (principally
net realizable value or replacement cost).
Property, Plant and Equipment - Property, plant and equipment is
recorded at adjusted cost, net of accumulated depreciation and amortization. In
conjunction with adoption of "fresh start" accounting, all property, plant and
equipment was adjusted to reflect reorganization value. Depreciation and
amortization is computed using the straight-line method over the estimated
useful lives of the assets or the lease terms of certain capital leased assets.
For income tax purposes, accelerated methods of depreciation are used.
Maintenance and repairs are expensed when incurred, and renewals or betterments
are capitalized. Property, plant and equipment is evaluated on a quarterly basis
and written down to net realizable value when management believes that the
undepreciated cost can not be recovered through future cash flow.
Deferred Financing Costs - Costs incurred to obtain financing are
included as other assets and amortized using the straight-line method over the
expected maturities of the related debt.
Computer Information Systems - Costs directly associated with the
initial purchase, development and implementation of computer information systems
are deferred and included as other assets. Such costs are amortized on a
straight-line basis over the expected useful life of the systems, principally
three years. Ongoing maintenance costs of computer information systems are
expensed.
Environmental Remediation Liabilities - The Company recognizes
environmental remediation liabilities when a loss is probable and can be
reasonably estimated. Estimates are developed in consultation with environmental
consultants and legal counsel and are periodically revised based on expenditures
against established reserves and the availability of additional information.
Such liabilities are included on the balance sheet as accrued liabilities and
include estimates for legal and other consultation costs.
Income (Loss) Per Share - Statements of Financial Accounting Standards
No. 128, "Earnings Per Share," became effective during Fiscal Year 1998 and
requires two presentations of earnings per share - "basic" and "diluted." Basic
earnings per share is computed by dividing income available to common
stockholders (the numerator) by the weighted-average number of common shares
(the denominator) for the period. The computation of diluted earnings per share
is similar to basic earnings per share, except that the denominator is increased
to include the number of additional common shares that would have been
outstanding if the potentially dilutive common shares had been issued.
The numerator in calculating both basic and diluted earnings per share
for each period is the reported net income. The denominator used in calculating
both basic and diluted is the weighted average common shares outstanding as
there were no potentially dilutive shares for any period.
Recent Accounting Pronouncements - In June 1997, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") 130, "Reporting Comprehensive Income." SFAS 130 is designed
to improve the reporting of changes in equity from period to period. The Company
will adopt SFAS 130 in the first quarter of fiscal year 1999. Management does
not expect SFAS 130 to have a significant impact on disclosures in the Company's
financial statements.
In June 1997, the FASB issued SFAS 131, "Employers' Disclosures About
Segments of an Enterprise and Related Information." The Company will adopt SFAS
131 during the Company's fiscal year 1999 financial statements. This statement
establishes standards for the way enterprises report information about operating
segments in annual financial statements and requires that enterprises report
selected information about operating segments in interim financial reports.
Management has not determined what effect, if any, adoption of SFAS 131 will
have on the disclosures in the Company's financial statements.
In February 1998, the FASB issued SFAS 132, "Employer's Disclosures
about Pensions and Other Postretirement Benefits." SFAS 132 is designed to
revise disclosures about pensions and other postretirement benefit plans. It
does not change the measurement or recognition of these plans. It standardizes
the disclosure requirements for pensions and other postretirement benefits to
the extent practicable. The Company will adopt SFAS 132 during fiscal year 1999.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Financial Instruments and Hedging Activities." SFAS 133 establishes standards
for derivative instruments and hedging activities and requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. SFAS 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
The Company has not determined what effect, if any, adoption of SFAS 133 will
have on the Company's financial statements.
4. FORMATION OF FORSTMANN APPAREL, INC.
On May 11, 1998, the Company announced that it had agreed to acquire
the business and substantially all of the assets of Arenzano Trading Co., Inc.
("Arenzano"). Arenzano had instituted voluntary bankruptcy proceedings in April
1998. The Company's purchase was made pursuant to an order signed by United
States Bankruptcy Judge Burton R. Lifland, dated May 8, 1998, in the cases
entitled, In re Arenzano Trading Company, Inc. and In re B&B Corporation, Case
Nos. 98 B 42508 and 98 B 42520 (BRL). The transaction was completed on May 13,
1998 at a purchase price of $2.0 million. Additionally, the Company assumed the
obligation to pay future minimum royalties related to a licensing agreement. The
purpose of the acquisition was to permit the Company to expand its fabrics
business into the apparel business. The Company is operating the new apparel
venture as a wholly-owned subsidiary under the name Forstmann Apparel, Inc.
Arenzano had sales of approximately $17 million during its most recent fiscal
year.
The acquisition of Arenzano by the Company was accounted for using the
purchase method of accounting. Accordingly, the accompanying consolidated
statements of operations do not include any revenues or expenses related to the
acquisition prior to closing. The purchase price paid for Arenzano was assigned
$0.9 million to tangible assets and the remainder to intangible assets. Based on
operating projections for FAI, the Company subsequently wrote-off the intangible
assets of FAI as such assets are not expected to be recovered by future
operations and expensed the remaining future minimum royalty obligation assumed.
The following are the Company's unaudited pro forma results for the
fiscal years ended November 1, 1998 and November 2, 1997 assuming the
acquisitions occurred at the beginning of each fiscal period:
1998 1997
---- ----
(in thousands, except per share amounts)
Revenues $157,039 $215,487
Loss before extraordinary items (20,920) (37,555)
Net loss (20,920) (13,516)
Loss per share
Basic and diluted ($4.77) ($3.08)
This unaudited pro forma information has been prepared for comparative
purposes only and is not necessarily indicative of results of operations had the
acquisition occurred at the beginning of the periods presented nor should it be
used to project the Company's results of operations for any future periods.
5. INVENTORIES
Inventories consist of the following at November 1, 1998 and
November 2, 1997 (in thousands):
1998 1997
---- ----
Raw materials and supplies................ $10,218 $ 8,303
Work-in-process........................... 19,390 27,459
Finished products......................... 12,331 8,169
Less market reserves...................... (3,121) (721)
-------- --------
Total................................ 38,818 43,210
Difference between LIFO carrying
value and current replacement cost...... - -
------- -------
Current replacement cost.................. $38,818 $43,210
======= =======
Market reserves are estimated by the Company based, in part, on
inventory age as well as estimated usage.
The Company increased market reserves by $2.6 million for inventory
related to the top dye worsted fabrics product line which was discontinued as
part of the 1998 Restructuring (see Note 1 to these Financial Statements). This
expense was charged to cost of goods sold during Fiscal Year 1998. The Company
recognized a $3.0 million charge to cost of goods sold in the fourth quarter of
Fiscal Year 1998 relating to the write down of inventory on hand as of November
1, 1998 to market value, generally net realizable value or replacement costs.
Inventory value declined as a result of substantially lower wool prices in
effect at the end of Fiscal Year 1998. The write down was made in anticipation
of a proportionate decline in the Company's selling prices during Fiscal Year
1999.
During the Predecessor Company 1997 261-Day Period, the Company sold
certain yarn inventory which had been previously identified as surplus or
obsolete for its net carrying value which was $3.0 million below its gross
inventory value. This transaction resulted in a release of yarn inventory market
reserves of $3.0 million and did not give rise to any loss during the
Predecessor Company 1997 261-Day Period. Additionally, the Company increased
market reserves by $0.9 million for inventory related to the converting fabrics
product line which had been discontinued as part of the product rationalization
effort undertaken in Fiscal Year 1996. Such reserve was necessary as a result of
selling price markdowns anticipated to sell off the remaining converting fabrics
inventory on hand. This expense was charged to reorganization items during the
Predecessor Company 1997 261-Day Period.
At the Effective Date, the Company adjusted its inventory balances to
fair value resulting in the elimination of the LIFO reserve of approximately
$2.7 million and a write-up of approximately $3.8 million above the predecessor
Company's FIFO cost. Such write-up was credited against reorganization items
during the Predecessor Company 1997 261-Day Period and will be allocated to cost
of goods sold as the inventory on hand at the Effective Date is sold.
Approximately $0.6 million and $0.7 million was charged to cost of goods sold
during the Reorganized Company Fiscal Year 1998 and 1997 Fourth Quarter,
respectively.
The reduction of inventory quantities has resulted in the liquidation
of LIFO inventory layers carried at lower costs prevailing in prior years. The
effect of this liquidation increased gross profit by $0.5 million during the
Predecessor Company 1997 261-Day Period and $2.2 million in Fiscal Year 1996.
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at
November 1, 1998 and November 2, 1997 (in thousands):
1998 1997
---- ----
Land.................................... $ 172 $ 243
Buildings............................... 5,511 4,062
Machinery and equipment................. 17,407 21,003
Construction in progress................ 1,430 826
Idle assets............................. 5,960 -
------- ------
Total................................ 30,480 26,134
Less accumulated depreciation and
amortization.......................... (8,245) (1,355)
------- -------
Net............................. $22,235 $24,779
======= =======
Capital lease assets (principally machinery and equipment) at November
1, 1998 and November 2, 1997 were $847,000 and $808,000, respectively.
Accumulated amortization related to such capital lease assets at November 1,
1998 and November 2, 1997 was $96,000 and $23,000, respectively.
Depreciation and amortization expense of property, plant and equipment
was $4,377,000 for Fiscal Year 1998, $9,792,000 for Fiscal Year 1997 and
$11,417,000 for Fiscal Year 1996.
In connection with the 1998 Restructuring and 1999 Realignment (see Note
1 to these Financial Statements), the Company has evaluated its carrying value
of property, plant and equipment and determined that the carrying value of
certain property will not be fully recovered by future operations. Accordingly,
the Company has written down the carrying value of property, plant and equipment
by $1.4 million during Fiscal Year 1998 based on appraised values. This resulted
in a $1.4 million charge to restructuring items during Fiscal Year 1998.
Additionally, the Company had idle assets which are stated at fair value, based
on appraised values of approximately $6.0 million as of November 1, 1998 which
will not be depreciated in future periods.
In connection with entering into the lease surrender agreement (see Note
13 to these Financial Statements), the Company wrote-down property, plant and
equipment by approximately $1.1 million associated with the future abandonment
of leasehold improvements and furniture and fixtures.
During Fiscal Year 1996, the Company announced its intention to close
its Tifton facility. The closing commenced in late July 1996 and was completed
in November 1996. The Company incurred $0.4 million during Fiscal Year 1996 and
$0.1 million in expenses during the Predecessor Company 1997 261-Day Period in
connection with the relocation of certain of its wool blending machinery and
equipment from the Tifton facility to the Dublin facility. These expenses were
reflected as reorganization items in the period incurred.
In November 1996, the Company entered into a Contract of Sale with the
Tift County Development Authority (the "TCDA"), providing for the sale of the
Tifton facility for $1.25 million. On July 18, 1997, the sale was consummated
and the net proceeds of $1.25 million were applied to a portion of the accrued
but unpaid interest due to the holders of the Company's Senior Secured Notes.
The selling price for the Tifton facility was $1.1 million below the net book
value for the facility and such loss was accrued during Fiscal Year 1996.
In accordance with "fresh start" accounting, the difference between the
assumed reorganization value and the fair value of the identifiable tangible and
intangible assets resulted in a write-down in the value assigned to property,
plant and equipment of $28.6 million. During the Predecessor Company 1997
261-Day Period, the Company adjusted certain impaired property, plant and
equipment to its net realizable value. This resulted in a $0.4 million increase
in cost of goods sold and a $0.1 million increase in selling, general and
administrative expenses during the Predecessor Company 1997 261-Day Period.
As of November 3, 1996, $4.2 million was included in construction in
progress relating to certain unerected equipment located at the Tifton facility.
Such equipment was not sold in connection with the sale of the Tifton facility.
During the Predecessor Company 1997 261-Day Period, the Company negotiated the
return of such equipment to its manufacturer or sold such equipment and
recognized a loss of $2.9 million. Such loss is reflected as an reorganization
item in the Predecessor Company 1997 261-Day Period.
7. OTHER ASSETS
Other assets consist of the following at November 1, 1998 and
November 2, 1997 (in thousands):
1998 1997
---- ----
Computer information systems,
net of accumulated amortization of
$93 and $0............................ $ 909 $ 94
Deferred financing costs, net of
accumulated amortization of
$744 and $164......................... 1,086 1,520
Other, net.............................. 10 56
------ ------
Total................................... $2,005 $1,670
====== ======
During the Predecessor Company 1997 261-Day Period, the Company
evaluated its computer information systems that were being internally developed
and concluded that the majority of such previously capitalized costs will not be
recovered through future operations and, accordingly, wrote off approximately
$1.2 million of such deferred software development costs.
Also, during the Predecessor Company 1997 261-Day Period, the Company
wrote off approximately $0.2 million of deferred financing costs associated with
debt agreements that were fully paid in connection with the consummation of the
Plan of Reorganization.
Based upon analysis of planned barter credit use, the Company wrote down
its barter credits by $0.2 million during the Predecessor Company 1997 261-Day
Period.
8. ACCRUED LIABILITIES
Accrued liabilities consist of the following at November 1, 1998
and November 2, 1997 (in thousands):
1998 1997
---- ----
Salaries and wages
(including related payroll taxes)........... $ 606 $ 978
Incentive compensation......................... 290 2,082
Vacation....................................... 1,243 1,729
Interest on long-term debt..................... 143 62
Medical insurance claims....................... 1,416 1,327
Professional fees.............................. 105 355
Environmental remediation...................... 292 361
Deferred rental and other lease obligations.... - 2,186
Loss on open wool purchases commitments........ 1,537 -
Restructuring items............................ 1,796 -
Other.......................................... 1,810 2,291
------ -------
Total...................................... $9,238 $11,371
====== =======
The Company reduced its deferred rent liability by $2.1 million during
Fiscal Year 1998 in connection with entering into the lease surrender agreement
as more fully described in Note 13 to these Financial Statements. During Fiscal
Year 1998, the Company also increased liabilities by $1.6 million relating to
operating leases (see Note 15 to these Financial Statements) and increased
liabilities by $1.5 million relating to loss on open wool purchase commitments.
9. LONG-TERM DEBT AND OTHER FINANCING AGREEMENTS
Long-term debt consists of the following at November 1, 1998 and
November 2, 1997 (in thousands):
1998 1997
---- ----
Revolving Loan Facility $27,908 $13,389
Term Loan Facility 20,343 30,327
Deferred Interest Rate Notes - 1,571
Other note 374 603
Capital lease obligations 1,890 2,414
License agreement (see Note 13) 669 -
------- -------
Total debt 51,184 48,304
Current portion of long-term debt (7,619) (5,756)
------- -------
Total long-term debt $43,565 $42,548
======= =======
Revolving Loan and Term Loan Facilities - On July 23, 1997, the Company
entered into the Loan and Security Agreement with a syndicate of financial
institutions led by BABC. The Loan and Security Agreement provided for a
revolving line of credit (including a $10.0 million letter of credit facility),
subject to a borrowing base formula, of up to $85 million (the "Revolving Loan
Facility") and term loans of approximately $31.5 million (the "Term Loan
Facility").
Borrowings on July 23, 1997 of $28.0 million under the Revolving Loan
Facility, plus the proceeds from the Term Loan Facility, were used to repay all
borrowings outstanding under the Company's GE Capital DIP Facility (hereinafter
defined) and CIT Equipment Facility (hereinafter defined), repay the principal
and a portion of the accrued and unpaid interest due under the Senior Secured
Notes (hereinafter defined) and fund other amounts due pursuant to the Plan of
Reorganization and the Loan and Security Agreement.
The Revolving Loan Facility and the Term Loan Facility mature on July
22, 2000. If the Company elects to terminate the Revolving Loan Facility prior
to April 23, 2000, the Company must pay a termination fee. The fee as
subsequently amended will be equal to one half of one percent (.50%) of the sum
of the Maximum Revolver ($70 million) plus the then outstanding principal
balance of the Term Loan if the Loan and Security Agreement is terminated prior
to April 23, 2000. The Term Loan Facility can be prepaid, at the Company's
election, without a termination fee at any time prior to maturity. The Company's
obligations under the Loan and Security Agreement are secured by liens on
substantially all of the Company's assets.
Outstanding borrowings (including outstanding letters of credit) under
the Revolving Loan Facility cannot exceed the sum of (1) 85% of eligible
accounts receivable (including eligible bill and hold receivables up to $17.6
million), plus (2) the lesser of $30.0 million or 65% of eligible inventory
excluding work-in-process inventory which is 50% eligible, less (3) a reserve
that is initially $6.5 million and declines by $47,500 each month as payments
under the Term Loan Facility are made. Further, the Company's borrowing base is
subject to other reserves which may be established from time to time by BABC. At
November 1, 1998, the Company's loan availability as defined in the Loan and
Security Agreement, in excess of outstanding advances and letters of credit, was
approximately $5.8 million.
Borrowings under the Revolving Loan Facility and the Term Loan Facility
bear interest, at the Company's option, at a floating rate (which is based on a
Bank of America reference rate ("Prime")) or a fixed rate (which is based on
LIBOR), payable monthly. Under the Revolving Loan Facility, the floating rate is
0.25% per annum above Prime and the fixed rate is 2.50% per annum above LIBOR.
Under the Term Loan Facility, the floating rate is 0.75% per annum above Prime
and the fixed rate is 3.00% per annum above LIBOR.
At November 1, 1998, there was one fixed rate loan of approximately
$18.0 million outstanding under the Revolving Loan Facility, which bore interest
at 8.125% per annum, through November 5, 1998. There was one fixed rate loan of
approximately $19.0 million outstanding under the Term Loan Facility, which bore
interest at 8.50% per annum, through November 30, 1998. Further, at November 1,
1998, approximately $1.3 million of the Term Loan Facility bore floating rate
interest at 9.0% per annum, and approximately $9.9 million of the Revolving Loan
Facility bore floating rate interest at 8.5% per annum.
The Term Loan Facility required monthly principal payments of
approximately $374,000 commencing August 31, 1997 through February 28, 1999.
Further, the Company was required to pay 50% of excess cash flow (as defined in
the Loan and Security Agreement) for each fiscal year as long as the outstanding
principal balance under the Term Loan Facility was greater than $23.3 million.
Such excess cash flow payments are due on April 30 of each year following the
fiscal year for which an "excess cash flow" payment is due. Such payments are to
be applied against the unamortized principal portion of the Term Loan Facility
in the inverse order of maturity. Excess Cash Flow for Fiscal Year 1997 was
approximately $2.7 million, and on April 27, 1998, the Company repaid the Term
Loan Facility by approximately $1.4 million through borrowings under the
Revolving Loan Facility. The Company anticipates no excess cash flow payment for
Fiscal Year 1998 because the outstanding principal balance under the Term Loan
Facility at November 1, 1998 was $20.3 million.
In connection with entering into the Loan and Security Agreement, the
Company paid BABC approximately $728,000 as an underwriting fee and agreed to
pay the financial institutions party to the Loan and Security Agreement an
unused line fee of 0.50% per annum on the average unused portion of the
Revolving Loan Facility. The Company paid approximately $582,000 as a facility
fee to participants in the syndicate to the Loan and Security Agreement. In
addition, the Company pays BABC an agency fee of $125,000 per annum, payable
monthly commencing August 1, 1997, and pays certain fees in connection with
letters of credit. Further, the Company pays BABC a loan administration fee of
0.25% per annum on the principal amount outstanding under the Revolving Loan
Facility and Term Loan Facility.
The Loan and Security Agreement contains certain restrictive covenants,
including limitations on the incurrence of indebtedness, the sale of assets, the
incurrence of liens, the making of certain restricted payments, the making of
specified investments, the payment of cash dividends and the making of certain
fundamental corporate changes and amendments to the Company's corporate
organizational and governance instruments. In addition, the Company is required
to satisfy, among other things, certain financial performance criteria,
including minimum interest and fixed charge coverage ratios, minimum adjusted
tangible net worth requirements and maximum capital expenditure and software
development costs.
The Company and its lenders as of March 24, 1998 entered into an
amendment to the Loan and Security Agreement modifying, among other things, the
definition of earnings before interest, income taxes, depreciation, amortization
and reorganization items ("EBITDAR") and Adjusted Tangible Net Worth, and
modifying certain loan covenants so as to increase permitted capital
expenditures and lower the minimum fixed charge coverage ratio. Such
modifications were made in anticipation of the effects of the Company's 1998
Restructuring as more fully described in Note 1 to these Financial Statements.
In accordance with the amendment, the Company prepaid $3.0 million of the Term
Loan Facility through borrowings under the Revolving Loan Facility on April 29,
1998.
The Company and its lenders as of September 14, 1998 further amended
and restated the Loan and Security Agreement to incorporate FAI into the Credit
Facility, fund the on-going working capital needs of FAI, and modify certain
existing financial covenants to incorporate FAI and reflect the Company's
financial results to date as well as expected results for all of Fiscal Year
1998 and fiscal year 1999. Additionally, the letter of credit facility within
the Revolving Loan Facility was increased from $10.0 million to $15.0 million.
In accordance with the amendment, the Company prepaid $1.5 million of the Term
Loan Facility through borrowings under the Revolving Loan Facility and fees of
$0.1 million on October 28, 1998.
Subsequently, as of February 8, 1999 the Company and its lenders
amended the Loan and Security Agreement, waived certain financial covenant
defaults arising from the Company's financial results for Fiscal Year 1998 and,
among other things, set new financial covenants for Fiscal Year 1999. However,
there can be no assurance that the Company will be able to achieve the amended
financial covenants during Fiscal Year 1999. In connection with the amendment,
the Company agreed to prepay $5.6 million of the Term Loan Facility through
borrowings under the Revolving Loan Facility. Additionally, the Company agreed
to increase its monthly Term Loan Facility principal payment from $374,000 to
$450,000 beginning March 1, 1999. Further based on the Company's declining
working capital needs in light of declining revenues, the Company and its
lenders agreed to reduce the Revolving Loan Facility commitment from $85 million
to $70 million. This reduction is expected to reduce the Company's unused line
fee by approximately $75,000 per annum. The Company further agreed to repay a
portion of its Term Loan Facility in the future if subsequently obtained
appraised orderly liquidation values for the Company's property, plant and
equipment securing the Term Loan Facility fall below 83.1% in relation to the
outstanding amount owed under the Term Loan Facility. In connection with
entering into the amendment to the Loan and Security Agreement the Company
agreed to pay BABC for the benefit of the lenders $200,000 which is payable in
four equal monthly installments commencing March 31, 1999. Additionally, BABC as
Agent, retains the right to withhold up to approximately $1,694,000 in aggregate
availability which arose from the expiration of certain letters of credit
previously outstanding as a security deposit for the Company's former New York
headquarters lease.
Deferred Interest Rate Notes and Senior Secured Notes - On April 5,
1993, the Company issued an aggregate of $20 million of its Senior Secured
Floating Rate Notes and on March 30, 1994, the Company issued an aggregate of
$10 million of its Senior Secured Floating Rate Notes, all of which were due
October 30, 1997 (collectively the "Senior Secured Notes"). The Senior Secured
Notes were issued pursuant to an indenture dated April 5, 1993, which was
amended and restated as of March 30, 1994 between the Company and Shawmut Bank
Connecticut, National Association, as trustee (the "Senior Secured Notes
Indenture").
On the Effective Date, the outstanding principal amount of the Senior
Secured Notes was repaid in full and the Company issued subordinated floating
rate notes (the "Deferred Interest Rate Notes") in respect of accrued but unpaid
interest (approximately $1.6 million) due the holders of the Senior Secured
Notes. In connection with the issuance of the Deferred Interest Rate Notes, the
Company paid a closing fee of approximately $31,000. Further, in accordance with
the Plan of Reorganization, the Company paid $157,000 in trustee fees and legal
fees and expenses. The Deferred Interest Rate Notes were due July 23, 2001 and
bore interest at 4.5% per annum above LIBOR, payable monthly. Subject to certain
exceptions, the Deferred Interest Rate Notes restricted, among other things, the
incurrence of indebtedness and liens. On December 22, 1997, the Company repaid
the Deferred Interest Rate Notes and accrued interest due thereon through
borrowings under the Revolving Loan Facility.
Other Note and Capital Lease Obligations - Prior to the Bankruptcy
Filing, the Company was a party to certain capital lease financing arrangements
which provided financing for the acquisition of various textile machinery and
equipment. In connection with the consummation of the Plan of Reorganization,
the Company issued a secured note in satisfaction of its obligations under one
of the capital leases and restructured the remaining capital leases, with the
exception of the ABB Credit, Inc. equipment lease as described below, in
settlement of the lessors' secured claims. The principal amount due under such
note and capital lease obligations are included in the schedule of aggregate
long-term debt maturities below and in Note 13 to these Financial Statements.
ABB Credit, Inc. ("ABB") and the Company are parties to an equipment
lease, dated December 3, 1993 (the "Lease"), pursuant to which ABB leases
certain equipment to the Company. The Lease is a financing lease, and ABB
perfected its security interest in the equipment. As of November 1, 1998, the
aggregate amount that was due to ABB under the Lease was $664,164. Based on an
independent appraisal performed at the Company's request, the Company believes
that the value of the equipment is substantially less than the amount due to ABB
under the Lease and that the secured portion of ABB's claim in the Company's
bankruptcy should be reduced to the appraised value of the equipment pursuant to
Section 506(a) of the Bankruptcy Code. Since the Company's Plan of
Reorganization was confirmed, the Company and ABB have engaged in settlement
negotiations. After numerous discussions, the Company and ABB have reached an
agreement to settle ABB's claim subject to the approval of the Bankruptcy Court.
The settlement provides that ABB shall have a secured claim of $350,000 and an
unsecured claim of $314,164. In respect of ABB's secured claim, the Company will
pay ABB $60,000 in cash and issue a note to ABB in the amount of $290,000, which
will bear interest at the rate of 9% per annum and will be paid in 60 equal
monthly installments. In respect of its unsecured claim, ABB shall receive a pro
rata distribution of the Company's common stock based on the formula set forth
in the Company's Plan of Reorganization.
GE Capital DIP Facility - In connection with the Bankruptcy Filing, the
Company obtained debtor-in-possession ("DIP") financing from General Electric
Capital Corporation ("GE Capital") under a revolving facility which was approved
by the Bankruptcy Court (the "DIP Facility"). The DIP Facility provided up to
$85 million in financing (including a $10.0 million letter of credit facility)
under a borrowing base formula. In connection with its emergence from
bankruptcy, the Company repaid all amounts outstanding under the GE Capital DIP
Facility and paid approximately $103,000 in unpaid amendment fees and legal fees
and expenses.
CIT Equipment Facility - The Company was a party to a loan and security
agreement (the "CIT Equipment Facility") with the CIT Group/Equipment Financing,
Inc. ("CIT") which provided financing for the acquisition of, and to refinance
borrowings incurred to acquire, various textile machinery and equipment. At the
Bankruptcy Filing date the Company owed CIT approximately $7.7 million in
principal and accrued interest. On the Effective Date, the outstanding principal
and accrued but unpaid interest due under the CIT Equipment Facility was repaid
in full. Further, in accordance with the Plan of Reorganization, the Company
paid approximately $36,000 in legal fees and expenses.
Subordinated Notes - On April 20, 1989, through an underwritten public
offering, the Company sold $100 million of 14-3/4% Senior Subordinated Notes due
April 15, 1999 (the "Subordinated Notes"). In fiscal year 1992, the Company
acquired, and did not retire or cancel, $46,240,100 aggregate face amount of the
Subordinated Notes. The Company used $2,875,000 of such Subordinated Notes to
satisfy a January 31, 1993 mandatory redemption required in the Subordinated
Notes Indenture.
In accordance with the Plan of Reorganization, the Subordinated Notes
were settled through the issuance of 3,013,744 shares of common stock of the
reorganized Company. Further, in accordance with the Plan of Reorganization, the
Company paid $80,000 in trustee fees associated with the Subordinated Notes.
Aggregate Maturities - Aggregate long-term debt maturities excluding
capital lease obligations (see Note 13 to the Financial Statements), are as
follows (in thousands):
Fiscal Year Amount
----------- -------
1999 ..................................... $ 6,361
2000 ..................................... 42,904
2001 ..................................... 29
-------
Total ..................................... $49,294
=======
10. INCOME TAXES
The provision for income taxes is as follows (in thousands):
Reorganized Predecessor
Company 1997 Company 1997
103-Day 261-Day
1998 Period Period 1996
---- ------ ------ ----
Current $ - $ - $ - $ -
Deferred - 461 - -
----- ---- ------ -----
Total $ - $461 $ - $ -
===== ==== ====== =====
A reconciliation between federal income taxes at the statutory rate and
the Company's income tax provision is as follows:
Reorganized Predecessor
Company 1997 Company 1997
103-Day 261-Day
1998 Period Period 1996
---- ------ ------ ----
Federal statutory tax rate (35.00)% 35.00% (35.00)% (35.00)%
State income taxes, net
of federal benefit (4.50) 4.50 (4.50) (4.50)
Valuation allowance 39.50 -- 29.09 32.94
Non-deductible expenses -- 14.93 10.41 6.56
----- ----- ----- -----
Income tax provision -- % 54.43% -- % -- %
===== ===== ===== =====
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes, and (b)
operating loss and tax credit carryforwards. The tax effects of significant
items comprising the Company's net deferred tax accounts at November 1, 1998 and
November 2, 1997 are as follows (in thousands):
1998 1997
---- ----
Deferred tax liabilities:
Inventories.................................... $ - $ 968
-------- -------
Deferred tax assets:
Operating loss carryforwards................... (11,139) (7,773)
Alternative minimum tax carryforwards.......... (923) (923)
Differences between book and tax basis of
property, plant and equipment............... (2,855) (2,797)
Difference between book and tax basis of
intangible assets........................... (706) -
Accrued liabilities............................ (4,235) (2,954)
Barter credits reserve......................... (963)
Allowance for uncollectible accounts........... (1,419) (2,068)
Inventories.................................... (1,369) -
Other ........................................ (111) (30)
-------- -------
Total....................................... (22,757) (17,508)
Valuation allowance............................ 22,757 16,540
-------- -------
Net deferred tax accounts...................... $ - $ -
======== =======
The valuation allowance has been provided due to uncertainties
regarding the realization of net deferred tax assets, and increased $6.2 million
during Fiscal Year 1998 primarily due to the increase in the operating loss
carryforwards. At November 1, 1998, the Company had cumulative net operating
loss carryforwards for federal income tax purposes of approximately $31.8
million. For federal income tax purposes, net operating loss carryforwards begin
to expire in the year 2010. Under the Plan of Reorganization, certain debt
instruments were canceled in exchanged for shares in the reorganized Company's
common stock as described in Note 2 to the Financial Statements. As a result,
the Company recognized a gain on extinguishment of debt of approximately $24.1
million in the Predecessor Company 1997 261-Day Period. The Company had
sufficient net operating loss carryforwards to offset this gain and therefore,
no income tax expense was recorded.
Distribution of the new common stock of the Company to the Company's
unsecured creditors pursuant to the Plan of Reorganization is believed to have
resulted in an ownership change as defined in Section 382 of the Internal
Revenue Code. This ownership change limits the Company's ability to utilize its
net operating loss carryforwards. Such ownership change further limits the
Company's ability to utilize certain of its other carryforward tax attributes.
Certain future events may result in such benefits being utilized in the
Company's future income tax returns, which the Company will record as a
reduction in the valuation allowance and, in accordance with the principles of
"fresh start" accounting, a credit to additional paid-in capital.
During Fiscal Year 1995, the Company fully utilized its net operating
loss carrybacks as permitted by the Internal Revenue Code. For the Predecessor
Company's 1997 261-Day Period and Fiscal Year 1996, no income tax benefit has
been recognized from the realization of net operating losses. In accordance with
SOP 90-7, an income tax provision not payable in cash was recognized for the
Reorganized Company 1997 103-Day Period at an effective income tax rate of
54.43%. Such provision was credited against additional paid-in capital as net
operating losses generated during the Predecessor Company 1997 261-Day Period
can be used to offset net taxable income generated during the Reorganized
Company's 1997 103-Day Period.
11. SHAREHOLDERS' EQUITY AND STOCK OPTION PLANS
Shareholders' Equity - The Company had 4,387,819 shares of common stock
outstanding at November 1, 1998 (including 48,127 shares of common stock held by
the Company as the Distribution Agent under the Plan of Reorganization in a
Disputed Claims Equity Reserve pending determination of the entitlement thereto
of holders of certain disputed claims against the Company) having a par value of
$.01 per share. Authorized shares were 35,000,000 at November 1, 1998. In
accordance with "fresh start" accounting, as more thoroughly described in Note 2
to the Financial Statements, the balance of the shareholders' deficit on July
22, 1997 was reclassified to additional paid-in capital. Accordingly, at
November 1, 1998 and November 2, 1997, retained earnings (deficit) is comprised
of the net income (loss) of the Company since its emergence from bankruptcy on
July 23, 1997.
Also on the Effective Date, the Company issued warrants to holders of
record as of July 9, 1997 of its old common stock and its old preferred stock.
Eligible stockholders received warrants to purchase an aggregate of 87,756
shares of the Company's new common stock at an exercise price of $23 per share.
The warrants may be exercised at any time prior to the second anniversary of the
Effective Date.
Registration Rights Agreement - On the Effective Date, pursuant to the
Plan of Reorganization, the Company entered into a Registration Rights Agreement
(the "Registration Rights Agreement") with certain holders of its common stock.
The Registration Rights Agreement required the Company to file a registration
statement covering the shares of common stock held by such holders on or before
March 31, 1998. The Company has been unable to file a registration statement
covering the shares of common stock held by such holders that are a party to the
Registration Rights Agreement. On November 25, 1998, the Registration Rights
Agreement was amended to delete the requirement that a holder of common stock
covered under the Registration Rights Agreement hold at least 1% of the total
number of shares of common stock outstanding in order to enjoy registration
rights with respect to its shares. The Registration Rights Agreement was further
amended to be binding upon and inure to the benefit of the holders of the common
stock covered under the Registration Rights Agreement and their respective
heirs, successors and permitted assigns..
Rights Plan - On October 9, 1997, the Company adopted a shareholders'
rights plan (the "Rights Plan") whereby shareholders of record on October 29,
1997 received one right (the "Right(s)") to purchase one share of common stock
at an exercise price of $60 for each common share held on the record date. The
Rights will become exercisable in the event that any person or group acquires
25% or more of the Company's common shares, or announces a tender offer for 25%
or more of the Company's common stock. However, the Rights Plan "grandfathers"
positions in the Company's common stock in existence on October 9, 1997 and the
ownership by a person or group of 25% or more of the Company's common shares on
such date will not trigger the exercisablility of the Rights so long as such
person or group does not acquire an additional 1% or more of the Company's
common shares. Should any "non-grand-fathered" person or group acquire 25% or
more of the common shares of the Company, all Rights not held by such person or
group will entitle the holders thereof to purchase common shares of the Company
at a 50% discount from the then current market price for such common stock.
Alternatively, after a person or group crosses the 25% threshold and before such
person or group owns 50% or more of the Company's common shares, the Company's
Board of Directors alternatively may issue one common share in exchange for each
Right (other than those held by the acquiring person) in lieu of the Rights to
be exercised. In the event of a merger of the Company, the Rights Plan requires
that provision be made for the conversion of the Rights into rights to purchase
shares of the acquiring person at a 50% discount. The Rights, which have a ten
year term, may be redeemed for $0.01 per Right by the Company at any time prior
to the time the Rights become exercisable.
Stock Option Plans - On September 18, 1992, the Company adopted the
Forstmann & Company, Inc. Common Stock Incentive Plan, as subsequently amended
(the "Option Plan"), for key employees of the Company. Through November 3, 1996
the Company's shareholders had reserved 950,000 shares for issuance by the
Company under the Option Plan. Options granted under the Option Plan may be
either incentive stock options, which are intended to meet the requirements of
Section 422 of the Internal Revenue Code, or non-qualified stock options.
Pursuant to the Plan of Reorganization options outstanding under the
Option Plan were terminated. The Company, pursuant to the Plan of
Reorganization, adopted the Forstmann & Company, Inc. Executive Stock Option
Plan (the "Executive Option Plan") for key employees and reserved 487,528 shares
of its new common stock for future issuance upon the exercise of stock options
granted or to be granted pursuant to the Executive Option Plan. On the Effective
Date, the Company granted options to purchase an aggregate of 146,258 shares of
common stock at an exercise price of $12.88 per share to certain employees.
One-quarter of these options vested on the Effective Date and an additional
quarter will vest on each of the first three anniversaries of the Effective
Date. No options under the Executive Option Plan were exercised during Fiscal
Year 1998.
Directors Plan - In October 1997, the Board of Directors of the Company
adopted the 1997 Directors Compensation Plan (the "Directors Plan"). The
Directors Plan became effective on December 19, 1997 was approved by the
shareholders of the Company on August 14, 1998 and will terminate on December
31, 2007, unless earlier terminated by the shareholders of the Company.
Directors of the Company who are not also officers or employees of the Company
or its subsidiaries are eligible to participate in the Directors Plan (each a
"Participant").
A total of 450,000 shares of the Common Stock will be available, and
have been reserved, for issuance under the Directors Plan pursuant to stock
options granted or to be granted, and share awards made or to be made, under the
Directors Plan. The Directors Plan provides for the automatic grant of a fixed
number of stock options and the automatic making of share awards having a fixed
fair market value to each Participant. If any stock option or share award made
under the Directors Plan is canceled or forfeited, the shares subject to the
stock option or share award will again be available for issuance under the
Directors Plan.
The Directors Plan authorizes the Company to grant non-qualified stock
options, but not incentive stock options (within the meaning of Section 422 of
the Code). On the date that an individual becomes a Participant, he or she will
automatically be granted an option to purchase 12,000 shares of the Common Stock
(an "Initial Option"). On the third anniversary of such initial grant and on
each anniversary date thereafter, provided that a Participant is still a
director, he or she will automatically be granted an option to purchase an
additional 2,500 shares. Each option will become exercisable as to one-third of
the shares subject to such option on the date of grant and on each of the first
two anniversary dates of the date of grant. Options will be exercisable for a
term of 10 years or until earlier terminated.
The exercise price of an option granted under the Directors Plan will
be the Fair Market Value (as defined in the Directors Plan) of the Common Stock
on the date of grant, except that the exercise price of any Initial Option will
in no event be less than $12.88 per share. The exercise price of an option,
together with any required taxes, must be paid in full at the time of exercise
in cash, by the delivery of shares of the Common Stock (subject to certain
conditions) or a combination of cash and shares.
Each Participant will receive for services as a director, for each
fiscal quarter during each fiscal year of the Company from 1998 through 2007, an
award of that number of shares of the Common Stock (rounded to the nearest whole
number) as equals $3,000 divided by the Fair Market Value of a share of the
Common Stock as of the last business day of such fiscal quarter, subject to a
prorated adjustment if the Participant was not a director at the time of each
meeting of the Board of Directors held during such fiscal quarter. Pursuant to
the Directors Plan, 3,997 shares of the Common Stock were awarded to directors
during Fiscal Year 1998.
In October 1995, Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation" was issued. The adoption of
the new recognition provisions for stock-based compensation expense included in
SFAS No.123 is optional. As permitted by SFAS No. 123, the Company has elected
to follow the measurement provisions of Accounting Principles Board Opinion 25,
"Accounting for Stock Issued to Employees," in its accounting for employee stock
options and does not recognize compensation expense for its stock-based plans;
therefore, no impact on the Company's financial position and results of
operations is expected. Had compensation cost for the Executive Option Plan been
determined consistent with the methodology prescribed by SFAS No.123, the
Company's net income and earnings per share for the Reorganized Company 1997
103-Day Period and Fiscal Year 1998 would have been as follows:
Reorganized
Fiscal Year Company
1998 103-Day Period
---- --------------
Net income (loss)
As reported $(18,987,000) $290,000
Pro forma (19,384,000) 113,000
Income (loss) per share
- basic and diluted
As reported $(4.33) $.07
Pro forma (4.42) .03
The following summarizes the stock option activity for Fiscal Year
1998, 1997 and 1996:
1998 1997 1996
---- ---- ----
Shares under option at
beginning of fiscal year 146,258 145,667 421,301
Granted 72,000 146,258 --
Exercised -- -- --
Terminated (36,377) (145,667) (275,634)
-------- -------- --------
Shares under option at end
of fiscal year 181,881 146,258 145,667
======== ======== ========
Options exercisable at end of
of fiscal year 88,941 36,564 95,667
======== ======== ========
Options/shares available for
future grant/award 751,595 341,270 800,536
======== ======== ========
Option prices per share:
Granted $ 12.88 $ 12.88 --
Exercised -- -- --
Outstanding at end of fiscal
year $ 12.88 $ 12.88 $6.75-$8.50
The Company used the Black-Scholes option pricing model to determine
the fair value of grants made in Fiscal Year 1998 and Fiscal Year 1997. The
following variables were applied in determining the pro forma compensation cost:
Fiscal Year Fiscal Year
1998 1997
---- ----
Risk free interest rate 5.20% 6.06%
Expected dividend yield 0.00% 0.00%
Expected option life 10.0 years 5.0 years
Expected stock price volatility 44.20% 44.20%
Weighted average fair value of
options granted $6.89 $4.30
The outstanding stock options at November 1, 1998 have a weighted
average contractual life of 8 years eleven months.
12. EMPLOYEE BENEFIT PLANS
The Company has established and presently maintains qualified
noncontributory pension plans and qualified profit sharing and savings plans
covering substantially all hourly and salaried employees.
Pension plan assets consist primarily of common stocks, bonds and
United States government securities. The plans provide pension benefits that are
determined by years of service. Pension benefits for salaried plan participants
are based on the plan participants' average compensation for the last five years
of service and pension benefits for hourly plan participants are based on the
plan's applicable hourly rate for each specific participant's year of service.
The Company's funding policy is to make the annual contribution required by
applicable regulations and recommended by its actuary.
Net periodic pension cost for the periods indicated include the
following components at November 1, 1998 and November 2, 1997 (Combined
Reorganized Company 1997 103-Day Period and Predecessor Company 1997 261-Day
Period) and November 3, 1996 (in thousands, except assumption percentages):
<TABLE>
1998 1997 1996
-------------------- ---------------------- ---------------------
Hourly Salaried Hourly Salaried Hourly Salaried
Pension Pension Pension Pension Pension Pension
Plan Plan Plan Plan Plan Plan
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 632 $ 627 $ 633 $ 695 $ 659 $ 798
Interest cost 839 744 750 676 681 577
Return on plan assets (1,078) (856) (853) (730) (537) (503)
------- ------- ------- ------- ------- -------
Net periodic pension cost $ 393 $ 515 $ 530 $ 641 $ 803 $ 872
======= ======= ======= ======= ======= =======
Assumptions used in the accounting are:
Discount rates 6.75% 6.75% 7.25% 7.25% 7.50% 7.50%
Rate of increase in
compensation levels -- 4.00% -- 4.00% -- 4.00%
Expected long-term rate
of return on assets 8.75% 8.75% 8.75% 8.75% 8.00% 8.00%
</TABLE>
The following schedule sets forth the funded status of the hourly and
salaried pension plans and the plan assets (accrued pension costs) included in
the Company's balance sheets at November 1, 1998 and November 2, 1997,
respectively (in thousands):
<TABLE>
1998 1997
-------------------- --------------------
Hourly Salaried Hourly Salaried
Pension Pension Pension Pension
Plan Plan Plan Plan
Actuarial present value of pension obligation:
<S> <C> <C> <C> <C>
Vested $(11,867) $(10,106) $(10,293) $ (8,613)
Nonvested (1,251) (316) (1,125) (408)
-------- -------- -------- --------
Accumulated benefit obligation (13,118) (10,422) (11,418) (9,021)
Effects of projected future
compensation levels -- (1,330) -- (1,434)
-------- -------- -------- --------
Projected benefit obligation (13,118) (11,752) (11,418) (10,455)
Plan assets at fair value 13,510 11,088 12,121 9,831
Unrecognized net loss (gain) 1,766 (786) 719 (814)
-------- -------- -------- --------
Plan assets (accrued pension
costs) included in balance sheet $ 2,158 $ (1,450) $ 1,422 $ (1,438)
======== ======== ======== ========
</TABLE>
The Company's assumed discount rate ("discount rate") used to measure
the accumulated benefit obligation for its hourly and salaried pension plans as
of the end of Fiscal Year 1998 was decreased from 7.25% to 6.75% based on the
composition of the accumulated benefit obligation and current economic
conditions.
In accordance with "fresh start" accounting the hourly pension plan's
excess of additional pension liability over unrecognized prior service cost was
eliminated and charged to paid-in capital at July 22, 1997. During the
Reorganized Company 1997 103-Day Period, the Company decreased its accrued
additional pension liability in excess of accumulated benefit obligation from
$1,170,000 to zero and, in accordance with "fresh start" accounting, credited
additional paid-in capital $1,107,000 and credited other assets $63,000.
The Company's assumed discount rate used to measure the accumulated
benefit obligation for its hourly and salaried pension plans as of the end of
Fiscal Year 1997 was decreased from 7.50% to 7.25% based on the composition of
the accumulated benefit obligation and current economic conditions. Also, as of
the beginning of Fiscal Year 1997, the Company increased its assumed expected
long-term rate of return on assets from 8.00% to 8.75% for both the hourly and
salaried pension plans. This increase in the expected long-term rate of return
on assets was based on the historical actual returns on plan assets.
The Company has a qualified employees' savings, investment and profit
sharing plan under Section 401(k) of the Internal Revenue Code (the "Qualified
401(k) Plan"). During Fiscal Year 1997, the Qualified 401(k) Plan was amended to
include eligible hourly employees participation in the Qualified 401(k) Plan
effective January 1, 1998. The Company also adopted a non-qualified salaried
employees' savings, investment and profit sharing plan covering certain salaried
employees not covered under the Qualified 401(k) Plan (the "Non-Qualified
Plan"). During Fiscal Year 1998, the Company terminated the Non-Qualified Plan.
The Company contributed approximately $37,000 to the Qualified 401(k) Plan
during Fiscal Year 1998. No matching contributions were made to the
Non-Qualified plan during Fiscal Year 1998. No matching contributions to the
Qualified 401(k) Plan or Non-Qualified Plan were made by the Company in Fiscal
Year 1997 or Fiscal Year 1996.
Effective as of November 14, 1996, the Bankruptcy Court approved the
Company's Incentive Compensation and Retention Program (the "Program") which
provided certain eligible employees with a pre-determined confirmation bonus and
provided for a discretionary bonus to certain employees of the Company selected
by the Company's Chief Executive Officer in consultation with the Board of
Directors. The aggregate amounts payable under the program as a confirmation
bonus could not exceed $990,000 and the total of the discretionary bonuses
awarded could not exceed $510,000 (plus any portion of the confirmation bonus
pool not paid to a participant as a result of ineligibility of any one or more
confirmation bonus participants). The confirmation and discretionary bonuses
payable to a participant under the Program were to be payable in two
installments, 50% one month after the Company's Plan of Reorganization became
effective with the remaining 50% payable six months after the Plan of
Reorganization became effective. The Plan of Reorganization became effective on
July 23, 1997. Accordingly, on August 26, 1997 and January 20, 1998, the Company
paid approximately $0.8 million on each date in connection with the Program.
Further, the Program provides a termination award to certain key employees if
the eligible employee is terminated without "cause" within two years following
the confirmation of the Plan of Reorganization. A termination award will be
equal to one and one-half times the terminated participant's base salary and is
payable to the terminated participant no later than three business days
following the date of the participant's termination with the Company.
13. COMMITMENTS AND CONTINGENCIES
Lease Commitments - Aggregate future minimum lease commitments under
operating leases and capital leases with an initial or remaining non-cancelable
term in excess of one year, together with the present value of the minimum
capital lease payments at November 1, 1998, are as follows (in thousands):
Operating Capital
Fiscal Year Leases Leases
----------- ------ ------
1999..................................... $1,985 $1,516
2000..................................... 1,742 624
2001..................................... 1,502 20
2002..................................... 912 8
2003..................................... 511 8
Thereafter............................... 3,033 -
------ ------
Total minimum lease payments............. $9,685 $2,176
======
Less amount representing interest........ 286
------
Present value of minimum lease
payments.............................. 1,890
Less current portion of capital
lease obligations..................... 1,258
------
Long-term portion of capital
lease obligations..................... $ 632
======
Rental expense under operating leases was $2.8 million for Fiscal Year
1998, $2.8 million for Fiscal Year 1997 and $3.1 million for Fiscal Year 1996.
The Company and the landlord of its corporate and marketing offices
have entered into a lease surrender agreement whereby the Company vacated its
former New York office on January 25, 1999. Pursuant to the agreement, the
Company waived any and all existing and future claims against the landlord
arising out of, or in connection with the takeover agreement, effective August
1, 1995, whereby the landlord had previously agreed to take over the Company's
remaining obligations under the Company's previous lease. The Company waived the
right to collect contributions due the Company from the landlord for leasehold
improvements and related fees and expenses the Company had incurred. The Company
had fully reserved such claims against the landlord during Fiscal Year 1997. In
connection with entering into the lease surrender agreement, the Company wrote
down property, plant and equipment by approximately $1.1 million associated with
the abandonment of leasehold improvements and furniture and fixtures, wrote-down
the estimated deferred rent liability at January 1, 1999 by approximately $2.1
million, accrued $0.5 million for broker's commission and accrued approximately
$0.1 million for lease cancellation liability. These items resulted in a $0.4
million gain which was recorded as a restructuring item during Fiscal Year 1998.
The Company has entered into a ten-year lease for corporate and marketing
offices at a new location in New York, New York, pursuant to which the Company
will reduce the amount of space it occupies and lower the associated annual rent
expense by approximately $0.7 million. In connection with the new lease, the
Company expects to incur approximately $1.0 million in build-out cost, furniture
and moving related costs. Such costs will be funded through borrowings under the
Company's Revolving Loan Facility.
License & Royalty Agreements - FAI is a party to a license agreement
with Oleg Cassini, Inc. which permits the Company to use the Oleg Cassini
trademark in connection with the manufacturing, advertising, merchandising,
selling and distribution of women's tailored suits through December 31, 2000.
The agreement requires the Company to pay Oleg Cassini, Inc. a minimum royalty
of $350,000 annually payable in equal consecutive monthly installments of
$29,167. Further, the Company is required to pay Oleg Cassini, Inc. percentage
royalties in an amount equal to 2% of net sales for FAI in excess of $30.0
million during any annual period.
Purchase Commitments - In the ordinary course of business, the Company
has significant purchase orders for wool outstanding, which generally require
the placement of an order six-to-nine months prior to delivery.
Letters of Credit - At November 1, 1998, the Company had outstanding
letters of credit aggregating $3.1 million.
Litigation - The Company is a party to legal actions arising out of the
ordinary course of business. In the opinion of management, after consultation
with counsel, other than environmental matters, the resolution of these claims
will not have a material adverse effect on the financial position or results of
operations of the Company.
Employment Agreements - The Company has employment and compensation
agreements with two key officers. The agreements provide for a minimum annual
salary of $265,000 each through January 26, 2000. Each of the officers was also
granted 12,000 options under the Executive Option Plan. The agreements also
provide for subsequent option grants of 2,500 options each on an annual basis,
beginning on the third anniversary of the agreements.
Environmental - By the nature of its operations, the Company's
manufacturing facilities are subject to various federal, state and local
environmental laws and regulations and occasionally have been subject to
proceedings and orders pertaining to emissions into the environment.
Dublin, Georgia. On December 29, 1995, the Georgia Environmental
Protection Division ("EPD") issued separate administrative orders (the
"Administrative Orders") to the Company and to J.P. Stevens & Co., Inc.
("Stevens") which relate to three sites on the Georgia Hazardous Site Inventory
- - the "TCE site", the "1,1-DCA site" and another site known as the "Burn Area" -
at the Company's Dublin, Georgia facility. The Administrative Orders required
the Company and Stevens to submit a compliance status report ("CSR") for these
sites that would include, among other things, a description of the release,
including its nature and extent, and suspected or known source, the quantity of
the release and the date of the release. The CSR would also have to include a
determination of cleanup standards (called "risk reduction standards") for the
sites and a certification that the sites were in compliance with those
standards; alternatively, the party submitting the CSR could acknowledge that
the site is not in compliance with risk reduction standards. Pursuant to the
Administrative Orders, if a site is not in compliance with the risk reduction
standards, then a Corrective Action Plan (a "Corrective Action Plan") for
remediating the release would have to be submitted to EPD.
Since both the Company and Stevens had been required to perform the
same work at all three of these sites, the Company and Stevens agreed to
allocate responsibilities between themselves pursuant to an Agreement Concerning
Performance of Work ("Agreement") dated January 24, 1997. The Agreement required
the Company to prepare and submit to EPD the CSR for the TCE and 1,1-DCA sites,
while requiring Stevens to prepare and submit to EPD a CSR for the Burn Area
site. The Agreement does not commit either party to perform corrective action at
these sites. On January 27, 1998 EPD provided comments to the CSR previously
submitted by Stevens and requested clarification of the Stevens CSR. By letter
dated March 5, 1998, Stevens submitted a "draft" response to EPD and by letter
of April 6, 1998, a final response. It is the Company's understanding that
Stevens is waiting for a response to this letter from EPD.
The Company submitted a CSR for the TCE and 1,1-DCA sites, which
certified compliance with risk reduction standards for both sites. EPD indicated
that it did not agree to the certification with respect to the TCE site. After
extensive discussions with EPD concerning the issue, the Company submitted a
Corrective Action Plan for the TCE site by letter dated May 15, 1997. By letter
dated September 29, 1997, EPD responded to the Corrective Action Plan with
notice of deficiency. The Company submitted a revised Corrective Action Plan
("CAP") on October 31, 1997. The revised CAP calls for continued operation of
the Company's existing groundwater recovery system, as well as one additional
groundwater recovery well and a groundwater collection trench near the former
dry cleaning basement. On July 28, 1998 EPD approved the Company's CAP. The
Company has begun installation of the recovery well and design of the
groundwater collection trench. In addition to the installation of these two
systems, the CAP requires the submission of an Annual Corrective Action Status
Report to EPD.
Tifton, Georgia. In January 1997, the Company was notified by a
potential buyer of the Company's Tifton facility that soil and groundwater
samples had been obtained from that facility and that certain contaminants had
been identified. Subsequently, through sampling and testing performed by the
Company's environmental consultants, the Company confirmed the presence of
contaminants in groundwater samples taken at the site. On February 28, 1997, the
Company notified EPD of such findings, and the site was placed on the Georgia
Hazardous Site Inventory.
The Company subsequently consummated its sale of the Tifton facility.
As part of that transaction, the Company, the Tift County Development Authority
as purchaser ("TCDA") and Burlen Corporation as operator ("Burlen") entered into
an Environmental Cost Sharing and Indemnity Agreement ("Cost Sharing
Agreement"). Under the Cost Sharing Agreement, the Company retained
responsibility for remediating certain contamination, to the extent required by
law, that originated prior to Burlen's occupancy of the premises. Likewise, the
Company assumed the obligation to indemnify TCDA and Burlen in regard to such
contamination to the extent that a claim is made by an unaffiliated third party
or governmental agency. In exchange, Burlen agreed to pay to the Company the
lesser of (1) $150,000 minus any payments already made to the Company (certain
expenses had already been shared) to respond to the contamination or (2)
one-half of the costs incurred by the Company in response to such contamination.
By letter dated December 21, 1998, EPD requested that the Company
submit a CSR for the site by June 21, 1999. EPD indicated that it had sent
Burlen a similar request. The Company intends to submit the CSR for the site by
the requested deadline.
At November 1, 1998, the Company had $0.3 million accrued for costs to
be incurred in connection with the TCE, 1,1-DCA and Tifton facility
environmental matters. The Company, subject to EPD's response to J.P. Stevens
revised CSR and compliance status certification and EPD's response to the Tifton
site, believes the accrual for environmental costs at November 1, 1998 is
adequate.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Fair Value of
Financial Instruments", requires that the fair value of all financial
instruments be estimated and compared to the carrying amount of such financial
instruments as of the balance sheet date.
Judgement is required in developing the estimates of fair value
presented herein. Accordingly, these estimates are not necessarily indicative of
the amounts the Company could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies may have a material
effect on the estimated fair value amounts. The following methods and
assumptions were used to estimate the fair value of each class of financial
instruments:
Cash, accounts receivable and accounts payable - The carrying amount of
these items is a reasonable estimate of their fair value.
Long-term debt (other than capital lease obligations) - The Company's
borrowings under the Revolving Loan Facility and Term Loan Facility approximate
fair value because the interest rates are floating rates and identified by
reference to market rates.
Accordingly, the Company believes that the carrying amount for cash,
accounts receivable, accounts payable and long-term debt (other than capital
lease obligations) approximates fair value at November 1, 1998 and November 2,
1997.
15. RESTRUCTURING ITEMS
Restructuring items related to the Company's 1998 Restructuring have
been segregated and included in normal operations during Fiscal Year 1998 and
consists of (in thousands):
1998
----
Severance and "stay-put" bonus expense
and related employee benefits $ 803
Loss on impairment of machinery and equipment 1,423
Loss associated with operating lease cancellation liability 1,585
Gain associated with N.Y. office
lease surrender (368)
Other 52
------
Total $3,495
======
During Fiscal Year 1998, certain of the Company's machinery and
equipment was rendered impaired. The Company currently estimates based on
appraised values, that the fair value of such equipment is $1.4 million below
its current net book value. Accordingly, the Company recognized a loss on
impairment of $1.4 million as a restructuring item during Fiscal Year 1998.
As a result of the company's 1998 Restructuring and 1999 Realignment
(see Note 1 to these Financial Statements), the Company evaluated its equipment
needs and determined that it no longer required certain equipment which was
covered under operating lease agreements. The future minimum lease payments
associated with such equipment was approximately $1.6 million. Accordingly, the
Company recognized a loss of $1.6 million as a restructuring item during Fiscal
Year 1998.
In connection with entering into the lease surrender agreement (see
Note 13 to these Financial Statements), the Company wrote-down property, plant
and equipment by approximately $1.1 million associated with the future
abandonment of leasehold improvements and furniture and fixtures, wrote-down the
estimated deferred rent liability at January 1, 1999 by approximately $2.1
million, accrued $0.5 million for broker's commission and accrued approximately
$0.1 million for lease cancellation liability. These items resulted in a $0.4
million gain which was recorded as a restructuring item during Fiscal Year 1998.
The cash and non-cash elements of the 1998 Restructuring and 1999
Realignment approximate $3.1 million and $0.4 million, respectively. Details of
the restructuring charge for Fiscal Year 1998 are as follows:
Original Utilized Balance at
Accrual Cash Non-Cash November 1, 1998
------- ---- -------- ----------------
Impairment of
long-lived assets $1,423 $ - $1,423 $ -
Employee severance 803 592 - 211
Operating lease 1,585 7 - 1,578
Other (316) 664 (987) 7
------ ------ ------ ------
Total $3,495 $1,263 $ 436 $1,796
====== ====== ====== ======
16. REORGANIZATION ITEMS
In accordance with SOP 90-7, professional fees, asset impairments and
restructuring charges directly related to the Bankruptcy Filing and related
reorganization proceedings have been segregated from normal operations during
Fiscal Year 1998, the Reorganized Company 1997 103-Day Period, the Predecessor
Company 1997 261-Day Period and Fiscal Year 1996 and consists of (in thousands):
<TABLE>
Reorganized Predecessor
Company Company
------------------------ ----------------------
1997 103-Day 1997 261-Day
Fiscal Period Ended Period Ended Fiscal
Year November 2, July 22, Year
1998 1997 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Professional fees ................................... $ 75 $ 288 $ 3,102 $ 4,084
Write off of deferred financing cost and
expense and other financing fees incurred ......... -- -- 403 --
Impairment of assets (See Notes 5, 6 and 7) ......... -- -- 4,199 5,076
Expense (gain) incurred due to the rejection
and amendment of executory contracts ............. (40) -- 3,314 925
Default interest expense and professional
fees associated with the Senior Secured
Notes ........................................... -- -- (388) 1,101
Severance expenses .................................. -- 51 105 279
Adjustment of accounts to fair value
(see Note 2) ..................................... -- -- 22,076 --
Other ............................................... 64 56 590 590
------- ------- ------- -------
Total ............................................. $ 99 $ 395 $33,401 $12,055
======= ======= ======= =======
</TABLE>
During the Predecessor Company 1997 261-Day Period, the Company
recognized a $2.9 million loss for certain equipment not installed at the
Company's Tifton facility which was sold during the Predecessor Company 1997
261-Day Period.
During the Predecessor Company 1997 261-Day Period, pre-petition
unsecured liabilities were increased by $3.3 million associated with contract
rejection damages relating to the Company's former headquarters and marketing
office leases ($1.7 million), the termination of a contract to purchase certain
equipment ($0.9 million) and two rejected contracts relating to the former joint
venture with an Italian fabric designer ($0.7 million). These charges were
recognized as reorganization items during the Predecessor Company 1997 261-Day
Period. Such charges were partially offset by the recognition of a $0.9 million
net receivable from the Company's current landlord related to its assumption of
a portion of the Company's obligations under its former headquarters lease.
During the Predecessor Company 1997 261-Day Period, the Company fully
reserved against accounts receivable from its current landlord of its
headquarters and marketing offices lease relating to its assumption of a portion
of the Company's former headquarters lease as well as the remaining work
allowance receivable under the lease. This charge was partially offset by a
reduction in the deferred rent liability account for the lease due to the
adjustment of the work allowance receivable. Expense of $0.9 million was charged
to reorganization expense during the Predecessor Company 1997 261-Day Period as
a result of these items.
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for Fiscal Year 1998 and the Reorganized
Company 12-Day Period Ended August 3, 1997 and 91-Day Period Ended November 2,
1997, the Predecessor Company 1997 first and second fiscal quarters and the
Predecessor Company 1997 79-Day Period Ended July 22, 1997 are summarized as
follows (in thousands, except per share information):
<TABLE>
Reorganized Company: Fiscal Quarter
-------------------------------------- ------------------------------------------------------------------
First Second Third Fourth
----- ------ ----- ------
Fiscal Year 1998
----------------
<S> <C> <C> <C> <C>
Net sales . . ......................... $29,017 $49,625 $38,996 $31,959
Gross profit (loss).................... 3,312 7,907 1,975 (5,357)
Restructuring items.................... - 312 1,254 1,929
Reorganization items................... 20 35 25 19
Net income (loss)...................... (1,258) 1,480 (4,160) (15,049)
Income (loss) per common
share - basic and diluted........... (.29) .34 (.95) (3.43)
</TABLE>
<TABLE>
Reorganized Company: Fiscal Period
--------------------------------------- -------------------------------------------------------------------
12-Day 91-Day
Period Period
Ended Ended
August 3, November 2,
1997 1997
---- ----
Fiscal Period 1997
------------------
<S> <C> <C>
Net sales . . ........................ $8,016 $49,110
Gross profit.......................... 2,163 5,563
Reorganization items.................. - 395
Income (loss) before
extraordinary item................. 893 (567)
Income (loss) applicable to
common shareholders................ 893 (603)
Income (loss) before
extraordinary item per share
applicable to common
shareholders - basic
and diluted........................ .20 (.11)
Extraordinary loss on debt
discharge - basic and diluted...... - -
Income (loss) per share applicable
to common shareholders
- basic and diluted................ .20 (.13)
</TABLE>
<TABLE>
Predecessor Company: Fiscal Period
- ---------------------------------------- -------------------------------------------------------------------
79-Day
Period
Ended
July 22,
First Second 1997
----- ------ ----
Fiscal Period 1997
------------------
<S> <C> <C> <C>
Net sales............................. $31,218 $64,786 $ 45,880
Gross profit.......................... 2,843 11,926 3,898
Reorganization items.................. 4,151 4,174 25,076
Income (loss) before
extraordinary item................. (7,318) 2,040 (26,152)
Income (loss) applicable to
common shareholders................ (7,318) 2,040 (2,017)
Income (loss) before extraordinary
item per share applicable to
common shareholders
- basic and diluted................ (1.30) .36 (4.65)
Extraordinary gain on debt
discharge - basic and diluted...... - - 24,135
Income (loss) per share applicable
to common shareholders
- basic and diluted................ (1.30) .36 (.36)
</TABLE>
During the second quarter of Fiscal Year 1998, the Company recognized
$1.0 million of severance and stay-put bonus expense in connection with the
1998 Restructuring (see Note 1 to these Financial Statements). Additionally,
the Company recognized a $0.7 million gain in anticipation of entering into
the lease surrender agreement (see Note 13 to these Financial Statements).
These items resulted in a $0.3 million charge to restructuring items during
the second quarter of Fiscal Year 1998. The Company increased inventory
market reserves by $1.1 million relating to the 1998 Restructuring. This
expense was charged to cost of goods sold during the second quarter of
Fiscal Year 1998.
During the third quarter of Fiscal Year 1998, the Company recognized
a loss of $0.7 million as a restructuring item relating to the impairment of
certain machinery and equipment. Additionally, the Company recognized
severance and stay-put bonus expense of $0.2 million and a $0.3 million loss
related to the lease surrender agreement. These items resulted in a $1.2
million charge to restructuring items during the third quarter of Fiscal
Year 1998. The Company increased inventory market reserves by $1.5 million
relating to the 1998 Restructuring. This expense was charged to cost of
goods sold during the third quarter of Fiscal Year 1998.
During the fourth quarter of Fiscal Year 1998, the Company recognized
a $0.4 million gain associated with severance and stay-put bonuses, a $0.7
million loss on impairment of certain machinery and equipment and a $1.6
million loss associated with operating lease cancellation liability. These
items resulted in a $1.9 million charge to restructuring items during the
fourth quarter of Fiscal Year 1998. Additionally, the Company wrote
inventory down by $3.0 million (see Note 5 to these Financial Statements)
and increased accrued liabilities by $1.5 million relating to loss on open
wool purchase commitments. These items resulted in a $4.5 million charge to
cost of goods sold during the fourth quarter of Fiscal Year 1998. During the
fourth quarter of Fiscal Year 1998, the Company also recognized severance
expense of $0.4 million in connection with the termination agreement entered
into with the former owners of Arenzano and a $1.0 million charge relating
to the write off of certain intangible assets of FAI. Further, the Company
expensed approximately $0.8 million for the remaining royalty payments due
under a licensing agreement assumed in connection with FAI's acquisition of
Arenzano. These items resulted in an increase to selling, general and
administrative expenses of $1.2 million and a $1.0 million charge to loss
from abandonment, disposal and impairment of machinery and equipment and
other assets during the fourth quarter of Fiscal Year 1998.
During the Predecessor Company 79-Day Period Ended July 22, 1997 in
connection with the adoption of "fresh start" accounting, the Company
adjusted its inventory balances to fair value resulting in the elimination
of the LIFO reserve of approximately $2.7 million and a write-up of
approximately $3.8 million above the predecessor Company's FIFO cost (See
Note 5 to these Financial Statements) and decreased the value assigned to
property, plant, and equipment by $28.6 million (See Note 6 to these
Financial Statements). These items resulted in a $22.1 million charge to
reorganization items during the Predecessor Company 1997 79-Day Period Ended
July 22, 1997.
As a result of the consummation of the Plan of Reorganization which
resulted in the exchange of the general unsecured claims against the Company
for equity in the reorganized Company, the Company recognized an
extraordinary gain on debt discharge of $24.1 million during the Predecessor
Company 79-Day Period Ended July 22, 1997. Also during the Predecessor
Company 79-Day Period Ended July 22, 1997, the Company wrote off
approximately $1.2 million of deferred software development costs (See Note
7 to these Financial Statements) and wrote off approximately $0.9 million of
certain assets and liabilities associated with the Company's headquarters
lease (See Note 16 to these Financial Statements), accelerated depreciation
associated with impaired property, plant and equipment by $0.5 million (See
Note 6 to these Financial Statements) and wrote off approximately $0.2
million of deferred financing costs (See Note 9 to these financial
statements).
During the first quarter of Fiscal Year 1997, the Company accrued a
$3.0 million loss for certain unerected equipment at the Company's Tifton
facility which was held for sale. During the Predecessor Company's 1997
79-Day Period Ended July 22, 1997, such equipment was sold and a gain of
$0.1 million was realized (See Note 6 to these Financial Statements). During
the second quarter of Fiscal Year 1997, the Company increased pre-petition
unsecured liabilities by $3.3 million (See Note 16 to these Financial
Statements), increased inventory market reserves related to the converting
fabrics product line by $0.9 million (See Note 5 to these Financial
Statements) and wrote down its barter credits by $0.2 million (See Note 7 to
these Financial Statements). Also, due to the seasonal nature of the
Company's business, during the first quarter of Fiscal Year 1997 and the
Reorganized Company 1997 Fourth Quarter, the Company incurred significant
unfavorable manufacturing variances resulting from a slowdown of production
at its manufacturing facilities.
<PAGE>
<TABLE>
SCHEDULE II
FORSTMANN & COMPANY, INC.
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
THE FIFTY-THREE WEEKS ENDED NOVEMBER 3, 1996 AND THE
FIFTY-TWO WEEKS ENDED NOVEMBER 2, 1997 AND NOVEMBER 1, 1998
Additions
Balance at Charged to Balance
Beginning Costs and at End
Description of Period Expenses Deductions of Period
- -------------------------------- --------- -------- ---------- ---------
Allowance for Doubtful Accounts:
<S> <C> <C> <C> <C>
Fifty-Three Weeks Ended
November 3, 1996 $2,991,000 $1,397,000 $(183,000) (1) $4,205,000
Fifty-Two Weeks Ended
November 2, 1997 $4,205,000 $710,000 $(4,457,000) (1)(2) $458,000
Fifty-Two Weeks Ended
November 1, 1998 $458,000 $851,000 - $1,309,000
Inventory Market Reserves:
Fifty-Three Weeks Ended
November 3, 1996 $8,611,000 $10,678,000 $(12,927,000) $6,362,000
Fifty-Two Weeks Ended
November 2, 1997 $6,362,000 $3,334,000 $(8,975,000) (2) $721,000
Fifty-Two Weeks Ended
November 1, 1998 $721,000 $5,648,000 $(3,248,000) $3,121,000
</TABLE>
(1) Accounts written off net of recoveries of accounts previously written
off.
(2) Includes amounts netted against the gross accounts as of July 23, 1997
in connection with "fresh start" accounting.
<PAGE>
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.
Directors of the Company
Each of Bruce W. Gregory, James Kjorlien and David Matlin is a member
of the Board of Directors (the "Board") of Forstmann & Company, Inc. (the
"Company") and is not an officer or employee of the Company.
The following table provides information regarding the directors:
Name Age Date Appointed Director
- ----------------- ---- -----------------------
Bruce W. Gregory 34 September 1997
James E. Kjorlien 47 July 1997
David T. Matlin 37 October 1998
Bruce W. Gregory is a Managing Director of Daystar L.L.C., a Rye, New
York-based investment management firm that specializes in investments in
companies that are in the midst of restructurings. Before joining Daystar L.L.C.
in 1996, Mr. Gregory was employed by Progressive Partners, an investment
management firm, as an equity portfolio manager from 1990 to 1996. Previously,
Mr. Gregory was employed by Chase Manhattan Bank in the North American Corporate
Finance Group and Investment Management Group of US Private Banking. Mr. Gregory
serves on the Board of Trustees of Trinity Presbyterian Church and Here's Life
Inner City New York. Mr. Gregory is a Chartered Financial Analyst and a member
of the Association of Investment Management and Research and the New York
Society of Security Analysts.
James E. Kjorlien is a Managing Member of Credit Research and Trading
LLC, a Greenwich, Connecticut-based broker-dealer. Mr. Kjorlien joined Credit
Research in June 1990.
David T. Matlin is a Managing Director at Credit Suisse First Boston in
New York, NY, where he is head of the Global Special Situations group. Mr.
Matlin has been at Credit Suisse First Boston since 1994 where he is responsible
for the firm's long term proprietary investments in this area. Mr. Matlin serves
as a director of California Coastal Committees, Inc., a real estate investment
company.
None of the directors has any family relationship with any other
director or with any executive officer of the Company.
Executive Officers of the Company
The following table provides information regarding the Company's
executive officers:
Name Age Title
- ------------------ ---- -----------------------------
Brian A. Moorstein 38 President (Principal Executive
Officer)
Rodney J. Peckham 43 Executive Vice President Finance,
Administration and Strategic
Planning,
Secretary and
Treasurer (Principal Financial
Officer)
Gary E. Schafer 47 Vice President and Corporate
Controller (Principal Financial
Accounting Officer)
Brian A. Moorstein became President of the Company on January 26, 1998.
Mr. Moorstein started his career at the Company in 1984 working in styling and
then moved into sales. In 1986, he founded the Company's Women's Wear Worsted
Department. During 1990, his responsibilities were expanded to include Women's
Wear Woolen, sportswear and coatings.
Rodney J. Peckham became Executive Vice President Finance,
Administration and Strategic Planning and Secretary on January 26, 1998. Mr.
Peckham also serves as Chief Financial Officer and Treasurer of the Company. He
became Chief Financial Officer of the Company in March 1996. From October 1995
until he became Chief Financial Officer, Mr. Peckham was employed as Director of
Financial Operations. Mr. Peckham was previously employed by the Company from
August 1986 through May 1995 during which time he served as Corporate Controller
from August 1986 until he became Treasurer in March 1992, and he also served as
Secretary from December 1992 to September 1993. From May 1995 through October
1995, Mr. Peckham was self-employed and provided various financial consulting
services to the Company.
Gary E. Schafer became Vice President and Corporate Controller of the
Company in March 1992. Mr. Schafer joined the Company in 1990 as Director of
Cost Accounting.
Executive officers are appointed by and serve at the discretion of the
Board of Directors for a term beginning after the first regular meeting of the
Board of Directors following the Annual Meeting of Shareholders and until their
respective successors are duly appointed and qualified.
None of the executive officers has any family relationships with any
other executive officer.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange
Act") requires the Company's directors, executive officers and persons who own
beneficially more than 10% of the outstanding Common Stock to file with the
Securities and Exchange Commission initial reports of beneficial ownership and
reports of changes in beneficial ownership of the Common Stock and other
securities of the Company on Forms 3, 4 and 5, and to furnish the Company with
copies of all such forms they file. Based on a review of copies of such reports
furnished to it, the Company believes that all the Company's directors and
officers timely filed all reports required during the Company's Fiscal Year
1998.
ITEM 11. EXECUTIVE COMPENSATION.
Summary Compensation Table
The following table sets forth information concerning compensation for
services in all capacities awarded to, earned by or paid to the three executive
officers of the Company during Fiscal Years 1998, 1997 and 1996 of the Company.
<TABLE>
Other Annual Securities All Other
Name and Fiscal Bonus Compensation Underlying Compensation
Principal Position Year Salary($) ($)1 ($)2 Options (#)3,4 ($)5
------------------ ---- --------- ----- ---------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Brian A. Moorstein 1998 257,830 - 739 12,000 50,000
President 1997 193,000 53,446 8,479 19,501 50,000
(Principal Executive 1996 174,667 - 7,234 - -
Officer)
Rodney J. Peckham(6) 1998 257,830 - 3,369 12,000 50,616
Executive 1997 234,015 63,381 9,241 19,501 50,000
Vice President 1996 238,013 - 2,486 - -
Finance,
Administration and
Strategic Planning
(Principal Financial
Officer)
Gary E. Schafer 1998 125,000 - 1,046 - 17,500
Vice President 1997 125,000 32,715 4,750 4,875 17,500
and Corporate 1996 119,708 - 4,900 - -
Controller
(Principal
Financial Accounting
Officer)
</TABLE>
- ------------------------
1 The amount of any bonus earned for a fiscal year, although included in
the fiscal year earned, is actually determined and paid after the end
of the fiscal year. The amount in Fiscal Year 1997 reflects the actual
amount earned under the Company's Management Incentive Plan for Fiscal
Year 1997, of which 70% was paid in December 1997 and the remaining
amount was paid in November 1998.
2 Represents tax liability reimbursed by the Company arising from
contributions made by the executive officer and for investment earnings
thereon under a Company employee savings plan, auto allowance and
related tax liability reimbursed by the Company for Messrs. Moorstein
and Peckham and moving costs for Mr. Peckham and amounts paid for
health club dues for executives participating in the Company's health
club program.
3 Pursuant to the Company's Plan of Reorganization, an aggregate of
487,528 shares of the Common Stock were reserved for issuance on
exercise of options granted or to be granted pursuant to the Company's
Executive Stock Option Plan and, as of the effective date of the Plan
of Reorganization (the "Effective Date"), 146,258 options were granted
to certain employees of the Company at an exercise price of $12.88 per
share. Amounts reflected for Fiscal Year 1997 represent the options
granted under the Executive Stock Option Plan, of which 25% vested on
the Effective Date and an additional 25% will vest on each of the first
three anniversaries of the Effective Date.
4 During Fiscal Year 1998, Messrs. Moorstein and Peckham entered into
employment agreements, hereinafter more thoroughly described (the
"Executive Employment Agreements") which among other things, granted an
additional 12,000 shares of the Company's Common Stock under the
Company's Option Plan at an exercise price of $12.88 per share.
Additionally, the Executive Employment Agreements provide for an
automatic annual grant of options commencing on the third anniversary of
the Executive Employment Agreements to purchase an additional 2,500
shares of the Company's Common Stock under the Option Plan. All options
granted pursuant to the Executive Employment Agreements become
exercisable as to one-third of the shares subject to such option on the
date of grant and on each of the first two anniversary dates of the date
of grant.
5. Effective as of November 14, 1996, the court administering the Company's
bankruptcy approved the Company's Incentive Compensation and Retention
Program which provided certain eligible employees with a predetermined
confirmation bonus and provided for a discretionary bonus to certain
employees selected by the Company's Chief Executive Officer in
consultation with the Board of Directors. During the 1997 fiscal year,
Messrs. Moorstein and Peckham were paid $50,000 and Mr. Schafer was paid
$17,500 under this program. During Fiscal Year 1998, Messrs. Moorstein
and Peckham were paid $50,000 and Mr. Schafer was paid $17,500 under
this program.
Compensation Arrangements with Mr. Moorstein and Mr. Peckham
On January 26, 1998, Mr. Moorstein was appointed President of the
Company and Mr. Peckham was appointed Executive Vice President of Finance,
Administration and Strategic Planning and Chief Financial Officer. Each of them
participates in the Management Incentive Plan and the Executive Stock Option
Plan. Messrs. Moorstein and Peckham entered into the Executive Employee
Agreements dated as of January 26, 1998. The Executive Employment Agreements
provide each of the executives an annual salary of not less than $265,000
through January 26, 2000. On such date and on each following January 26, the
term of each Executive Employment Agreement shall automatically be extended for
an additional year, unless the Company notifies the executive not later than one
year prior to January 26, 2000 or to any anniversary date thereof of its
election not to so extend the term. Each Executive Employment Agreement provides
for the payment of a termination award if the executive is terminated without
cause or, in the event of a change of control (as defined), if the executive is
terminated or his role is diminished within two years following a change of
control. The termination award due the affected executive will be 200% of the
affected executive's base salary plus an amount equal to the average of the
annual incentive bonuses paid to the execution over the three completed years
preceding the date of termination. Further, pursuant to the Executive Employment
Agreement, Messrs. Moorstein and Peckham were granted 12,000 shares of the
Company's Common Stock under the Company's Executive Stock Option Plan at an
exercise price of $12.88 per share. Additionally, the Executive Employee
Agreements provide for an automatic grant of options commencing on the third
anniversary of the Executive Employment Agreements to purchase an additional
2,500 shares of the Company's Common Stock under the Option Plan. All options
granted pursuant to the Executive Employment Agreements become exercisable as to
one-third of the shares subject to such option on the date of grant and on each
of the first two anniversary dates of the date of grant.
Stock Options Granted During the 1998 Fiscal Year
The Company granted 24,000 stock options under the Company's Executive
Stock Option Plan during Fiscal Year 1998 at an exercise price of $12.88 per
share.
<TABLE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants
Number of Securities Percent of Total
Underlying Options/SARs Granted to Exercise or
Options/SARs(1) Employees in Fiscal Year(3) Base Price Expiration
Name Granted(#) ($/Sh) Date
---- ---------- --------------------------- ------ ----
<S> <C> <C> <C> <C>
Brian A. Moorstein 12,000(2)(3) 50.0% $12.88 January 26, 2008
Rodney J. Peckham 12,000(2)(3) 50.0% $12.88 January 26, 2008
</TABLE>
(1) To date, the Company has issued no SARs.
(2) One-third of these options vested on the January 26, 1998, the
Effective Date of the Executive Employee Agreements, and an additional
one-third will vest on each of the first two anniversaries of the date
of grant.
(3) Includes all options granted to executives pursuant to the Company's
Executive Stock Option Plan.
Stock Options Held at the End of the Fiscal Year 1998
The following table sets forth the total number of exercisable and
unexercisable stock options granted under the Company's Executive Stock
Incentive Plan held by each executive officer named below on November 1, 1998.
As of October 30, 1998, the last sales price of the Common Stock in the
over-the-counter market was $3-7/8 per share.
<TABLE>
Number of
Securities Underlying Value of Unexercised
Unexercised Options In-the-Money Options at
at Fiscal Year End (#) Fiscal Year End
------------------------------------------ ----------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C>
Brian A. Moorstein 13,750 17,750 $0.00 $0.00
Rodney J. Peckham 13,750 17,750 0.00 0.00
Gary E. Schafer 2,438 2,437 0.00 0.00
</TABLE>
Retirement Pension Plan
The Company maintains a Retirement Pension Plan (the "Pension Plan")
for its salaried employees. The Pension Plan is a defined benefit pension plan
providing a formula benefit, on vesting, for employees 21 years of age or older
who have completed one year of service with the Company. The Pension Plan
generally takes into account credited service and annual compensation earned
under the pension plan of a predecessor of the Company (the "Predecessor Plan"),
but the benefit payable from the Pension Plan, depending on the circumstances,
may be reduced by any benefit payable under the Predecessor Plan.
The following table shows the estimated annual benefits upon retirement
to participants in the Pension Plan in specified annual compensation and years
of credited service classifications. The amounts shown are subject to the
maximum benefit limitations set forth in Section 415 of the Internal Revenue
Code of 1986 (the "Code") and are subject to reduction for amounts payable under
the Predecessor Plan. The pension benefits shown are based upon retirement at
age 65 and the payment of a single-life annuity to the participants. The pension
benefits in the table reflect the limitation under Section 401(a)(17) of the
Code on the maximum amount of annual compensation ($150,000 effective February
1, 1994 and $160,000 effective February 1, 1997 (the "Code Limitation")), that
can be utilized for determining benefits under the Pension Plan.
<TABLE>
Years of Credited Service at Retirement
--------------------------------------------------------------------------------------------------------------
Highest Five Year 5 10 15 20 25 30 35
-------- -------- -------- -------- ------- ------- -------
Average Annual
Compensation*
------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$100,000 $ 6,674 $13,347 $20,021 $26,694 $33,368 $40,041 $46,715
110,000 7,424 14,847 22,271 29,694 37,118 44,541 51,965
120,000 8,174 16,347 24,521 32,694 40,868 49,041 57,215
130,000 8,924 17,847 26,771 35,694 44,618 53,541 62,466
140,000 9,674 19,347 29,021 38,694 48,368 58,041 67,715
150,000 10,424 20,847 31,271 41,694 52,118 62,541 72,965
160,000 10,724 21,447 32,171 42,694 53,618 64,341 75,065
</TABLE>
-----------------------
* Annual compensation is the amount reportable on a participant's Form
W-2 for federal income tax purposes, and consists of the amounts
reported in the table included under "Summary of Compensation in Fiscal
Years 1998, 1997 and 1996 as salary, bonus, other annual compensation
and all other compensation.
Credited years of service for benefit accruals under the Pension Plan,
as of December 31, 1998, for the following executive officers are:
Brian A. Moorstein 15 years
Rodney J. Peckham 13 years
Gary E. Schafer 9 years
A participant's annual pension payable as of his or her normal
retirement date at age 65 will be equal to 1% of that portion of the
participant's "final average compensation" (as defined in the Pension Plan)
which is equal to the "social security integration level" (as defined in the
Pension Plan) in effect for the year in which the participant retires, plus
1-1/2% of that portion of the participant's final average compensation in excess
of the social security integration level, multiplied by the number of years of
credited service not to exceed 35 years. A reduced pension benefit is payable
upon (i) early retirement at or after age 55, (ii) death, under certain
circumstances, and (iii) disability if the participant has completed at least
five years of vesting service. A reduced pension benefit is also payable, at the
election of a participant who terminates employment after completing at least
five years of vesting service, at any time at or after age 55. Generally, the
payment of benefits will be in the form of a straight life annuity for
participants who are not married and a joint and survivor annuity for those who
are married.
Agreements Relating to a Change In Control
Under the Company's Incentive Compensation and Retention Program (the
"Program"), adopted in November 1996, an aggregate of $1,500,000 of bonus
compensation became payable to certain employees of the Company, in part in
connection with the Company's emergence from bankruptcy and in part on a
discretionary basis during Fiscal Year 1997. One-half of this amount was paid in
August 1997 and the balance was paid in late January 1998. This program also
provides that certain key employees, including Mr. Schafer, will be entitled to
receive termination awards if terminated "without cause" (as defined in the
Program) after a "change in control" of the Company and within two years after
the date of confirmation of the Company's Plan of Reorganization (July 9, 1997).
A termination award would be equal to 150% of the affected employee's base
salary at the time of the termination. Since a "change in control" was defined
under the Program to include, among other things, the confirmation of the
Company's Plan of Reorganization, termination awards will be payable to such key
employees if their employment is terminated "without cause" at any time prior to
July 9, 1999. The Executive Employment Agreements with Messrs. Moorstein and
Peckham provide for the payment of a termination award in the event of a change
of control (as defined) if the executive is terminated or his role is diminished
within two years following a change of control. The termination award due the
affected executive will be 200% of the affected executive's base salary plus an
amount equal to the average of the annual incentive bonuses paid to the
executive over the three completed years preceding the date of termination.
Indemnity Agreements
The Company is party to an indemnity agreement with each of its
directors and certain of its executive officers which provides that the
indemnitee will be entitled to receive indemnification, which may include
advancement of expenses, to the full extent permitted by law for all expenses,
judgements, fines, penalties and settlement payments incurred by the indemnitee
in actions brought against the indemnitee in connection with any act taken in
the indemnitee's capacity, and within the indemnitee's scope of authority, as a
director or executive officer of the Company. These agreements provide for the
appointment of independent legal counsel to determine whether a director or
executive officer is entitled to indemnity after a change in control. It also
requires the Company to use reasonable efforts to maintain specified levels of
directors' and officers' liability insurance for so long as an indemnitee may be
subject to any possible, threatened or pending action, except that the Company
will not be obligated to pay annual premiums to do so in excess of 150% of the
annualized rate of premiums paid during Fiscal Year1997.
Compensation Committee Interlocks and Insider Participation
The Board of Directors established the Compensation Committee in
December 1997, after the end of Fiscal Year 1997, to oversee all issues of
executive compensation. Mr. Robert N. Dangremond, former President and Chief
Executive Officer of the Company, participated in discussion of the Board of
Directors concerning executive compensation. No other officer or employee of the
Company served as a member of the Compensation Committee during Fiscal Year
1998.
Directors' Fees and Benefits
In October 1997, the Board of Directors of the Company adopted the 1997
Directors Compensation Plan (the "Directors Plan"), which was approved by the
shareholders in August 1998 at the Annual Meeting of Shareholders. The Directors
Plan became effective on December 19, 1997 and will terminate on December 31,
2007, unless earlier terminated by the shareholders of the Company. Directors of
the Company who are not also officers or employees of the Company or its
subsidiaries are eligible to participate in the Directors Plan (each a
"Participant").
Each Participant will receive for services as a director a payment of
$3,000 for each fiscal quarter during each fiscal year of the Company from 1998
through 2007, subject to a prorated adjustment if the Participant was not a
director at the time of each meeting of the Board of Directors held during such
fiscal quarter. Each Participant will also receive a $1,000 fee for each meeting
of the Board of Directors he or she attends in each fiscal year from 1998
through 2007 in excess of six meetings during such fiscal year. Each Participant
who also serves as Chairperson of the Board of Directors or of any committee
thereof will also receive an additional fee of $375 for each fiscal quarter of
such fiscal years.
A total of 450,000 shares of the Common Stock are available, and have
been reserved, for issuance under the Directors Plan pursuant to stock options
granted or to be granted, and share awards made or to be made, under the
Directors Plan. The Directors Plan provides for the automatic grant of a fixed
number of stock options and the automatic making of share awards having a fixed
fair market value to each Participant. If any stock option or share award made
under the Directors Plan is canceled or forfeited, the shares subject to the
stock option or share award will again be available for issuance under the
Directors Plan.
The Directors Plan authorizes the Company to grant non-qualified stock
options, but not incentive stock options (within the meaning of Section 422 of
the Code). On the date that an individual becomes a Participant, he or she will
automatically be granted an option to purchase 12,000 shares of the Common Stock
(an "Initial Option"). On the third anniversary of such initial grant and on
each anniversary date thereafter, provided that a Participant is still a
director, he or she will automatically be granted an option to purchase an
additional 2,500 shares. Each option will become exercisable as to one-third of
the shares subject to such option on the date of grant and on each of the first
two anniversary dates of the date of grant. Options will be exercisable for a
term of 10 years or until earlier terminated, as described below.
The exercise price of an option granted under the Directors Plan will
be the Fair Market Value (as defined in the Directors Plan) of the Common Stock
on the date of grant, except that the exercise price of any Initial Option will
in no event be less than $12.88 per share. The exercise price of an option,
together with any required taxes, must be paid in full at the time of exercise
in cash, by the delivery of shares of the Common Stock (subject to certain
conditions) or a combination of cash and shares.
Each Participant will receive for services as a director, for each
fiscal quarter during each fiscal year of the Company from 1998 through 2007, an
award of that number of shares of the Common Stock (rounded to the nearest whole
number) as equals $3,000 divided by the Fair Market Value of a share of the
Common Stock as of the last business day of such fiscal quarter, subject to a
prorated adjustment if the Participant was not a director at the time of each
meeting of the Board of Directors held during such fiscal quarter. Although due
pursuant to the Directors Plan, no shares of Common Stock were issued to any of
the Company's directors during Fiscal Year 1998.
Pursuant to the Directors Plan, as of February 11, 1999, Margaret
Bertelsen Hampton (a former Director), Mr. Gregory, Mr. Kjorlien and Mr. Matlin
are due 670, 2,758, 2,838 and 1,422 shares respectively, in respect of their
services as directors of the Company during Fiscal Year 1998 and Fiscal Year
1997 based on a Fair Market Value ranging from $4.77 to $14.00 per share.
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
At the close of business on February 11, 1999, there were issued and
outstanding 4,385,770 shares of the Common Stock, par value $0.01 per share, of
the Company (the "Common Stock"). Each share is entitled to one vote. There was
no other class of voting securities outstanding at that date.
To the knowledge of the Company, as of February 11, 1999, no person
owned beneficially (for purposes of Rule 13d-3 under the Securities Act of 1934)
more than 5% of the outstanding shares of the Common Stock except as set forth
in the following table. Except as noted below, each such person has sole voting
and investment power with respect to all shares.
Name and Address of Amount and Nature of Percent of
Beneficial Ownership Beneficial Owner1 Class1
----------------------------------- --------------------- ----------
Daystar L.L.C.2 1,381,070 31.04%
411 Theodore Fremd Avenue
Rye, NY 10580
Credit Suisse First Boston, Inc.3 1,011,714 22.74%
11 Madison Avenue
New York, NY 10010
BankAmerica Corporation4 759,129 17.06%
555 California Street
San Francisco, CA 94104
Grace Brothers, Ltd.5 412,124 9.26%
1560 Sherman Avenue
Suite 900
Evanston, Il 60201
- -------------------------------
1 On July 23, 1997, pursuant to a Plan of Reorganization, the Company
emerged from bankruptcy proceedings commenced by the Company in
September 1995 under Chapter 11 of the United States Bankruptcy Code.
Pursuant to such Plan of Reorganization, which had been approved by the
Company's shareholders and creditors and confirmed by the bankruptcy
court, all general unsecured claims of the Company were converted into
100% of the Common Stock, based on a ratio of 50 shares for each $1,000
of allowed unsecured claim. Holders of the Company's pre-bankruptcy
common stock and preferred stock were issued warrants to purchase an
aggregate of 87,756 shares of the Common Stock exercisable at a
purchase price of $23.00 per share during the period ending July 23,
1999, and their prior holdings were canceled.
2 Based on Schedule 13D, dated February 13, 1998. Daystar L.L.C. serves
as General Partner of Daystar Special Situations Fund, L.P. (the
"Fund), a Delaware limited partnership, which owns 784,936 (17.9% of
the outstanding) shares of the Common Stock, and as such has full
discretionary authority to vote and dispose of such shares. Daystar
L.L.C. also acts, with full discretionary authority, as investment
advisor to clients who own in the aggregate 585,376 (13.4% of the
outstanding) shares of the Common Stock. The managing directors of
Daystar L.L.C., who are jointly responsible for managing the Fund and
such client advisory accounts, are Bruce W. Gregory, a director of the
Company, Warren J. Malone, Michael C. Murr and John C. Sites, Jr. Mr.
Gregory also is due 2,758 shares of the Common Stock awarded to him by
the Company pursuant to the Directors Plan and holds options to
purchase 12,000 shares of the Common Stock granted to him pursuant to
the Directors Plan, of which options to purchase 8,000 shares are
currently exercisable and options to purchase 4,000 shares are not
currently exercisable. He holds such shares and stock options for the
benefit of Daystar L.L.C., which is deemed to be the beneficial owner
of such shares and stock options.
3 Based on Schedule 13D, dated October 16, 1997, indicating indirect
ownership by Credit Suisse First Boston, Inc. of 435,178 shares owned
directly by Credit Suisse First Boston Management Corporation and
571,167 shares owned directly by Credit Suisse First Boston
Corporation. Mr. Matlin, a Managing Director at Credit Suisse First
Boston, Inc. is due 1,369 shares of the Common Stock awarded to him by
the Company pursuant to the Directors Plan and holds options to
purchase 12,000 shares of the Common Stock granted to him pursuant to
the Directors Plan, of which options to purchase 4,000 shares are
currently exercisable and options to purchase 8,000 shares are not
currently exercisable. He holds such shares and stock options for the
benefit of Credit Suisse First Boston, Inc.
4 Based on Schedule 13G, dated February 5, 1998 indicating that
BankAmerica Corporation may be deemed to beneficially own shares which
are owned directly by its subsidiary, BankAmerica Investment
Corporation.
5 Based on Schedule 13G, dated January 27, 1998.
The following table sets forth information as of February 11, 1999 with
respect to the beneficial ownership of the Common Stock by each director, each
of the executive officers named in the Summary Compensation Table (see above)
and all directors and executive officers as a group. Except as noted below, each
such person has sole voting and investment power with respect to all shares.
Name and Address of Amount and Nature Percent of
Beneficial Owner of Beneficial Ownership1 Class1
- ---------------------------- ------------------------ ----------
Bruce W. Gregory 1,381,0702 31.04%
James E. Kjorlien 27,6783 *
David Matlin 1,011,7144 22.74%
Brian A. Moorstein 17,8505 *
Rodney J. Peckham 18,2505 *
Gary E. Schafer 2,4385 *
All directors and executive
officers as a
group (6 persons) 2,459,0006 55.26%
-------------------------------
*Less than 1%.
1 See footnote 1 to the preceding table
2 See footnote 2 to the preceding table. Includes 8,000 shares of Common
Stock subject to stock options granted to Mr. Gregory pursuant to the
Directors Plan, which are currently exercisable and does not include
4,000 shares subject to stock options granted under the Directors Plan
which are not currently exercisable.
3 Includes 11,519 shares of the Common Stock owned by Edison Capital LLC,
a company controlled by Mr. Kjorlien. Includes 2,838 shares of Common
Stock awarded to Mr. Kjorlien by the Company pursuant to the Directors
Plan. Includes 8,000 shares of Common Stock subject to stock options
granted to Mr. Kjorlien pursuant to the Directors Plan, which are
currently exercisable and does not include 4,000 shares subject to
stock options granted under the Directors Plan which are not currently
exercisable.
4. See footnote 3 to the preceding table. Includes 4,000 shares of Common
Stock subject to stock options granted to Mr. Matlin pursuant to the
Directors Plan, which are currently exercisable and does not include
8,000 shares subject to stock options granted under the Directors Plan
which are not currently exercisable.
5 Includes 100 shares of Common Stock owned by Mr. Moorstein and 500
shares of Common Stock owned by Mr. Peckham. Includes 17,500 shares for
Messrs. Moorstein and Peckham and 2,438 shares for Mr. Schafer issuable
on exercise of currently exercisable options under the Company's
Executive Stock Option Plan. Does not include 17,750 shares of the
Common Stock subject to stock options granted to each of Mr. Moorstein
and Mr. Peckham and 2,437 shares subject to stock options granted to
Mr. Schafer pursuant to the Company's Executive Stock Option Plan, none
of which are currently exercisable.
6 Includes shares issuable on exercise of currently exercisable options
under the Company's Executive Stock Option Plan and the Directors Plan.
Does not include an aggregate of 16,000 shares of the Common Stock
subject to stock options granted to the Company's three directors
pursuant to the Directors Plan or an aggregate of 37,937 shares subject
to stock options granted to the Company's three executive officers
pursuant to the Executive Stock Option Plan, none of which are
currently exercisable.
For purposes of the preceding table, each of the directors and
executive officers is deemed to be the beneficial owner of shares which may be
acquired by him or her within 60 days through the exercise of options, if any,
and such shares are deemed to be outstanding for the purpose of computing the
percentage of the Common Stock beneficially owned by him or her and by the
directors and executive officers as a group. Such shares, however, are not
deemed to be outstanding for the purpose of computing the percentage of the
Common Stock beneficially owned by any other person.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report:
1 and 2.
Financial statements and financial statement schedules - See Index
Financial Statements and Financial Statement Schedules in Item 8 of
this Annual Report.
3. Listing of Exhibits:
2. First Amended Plan of Reorganization (Exhibit 1 to
Company's Current Report on Form 8-K dated July 9, 1997).
3.1(a) Articles of Restatement setting forth the Amended and
Restated Articles of Incorporation of the Company, as
filed with the Secretary of State of Georgia on November
19, 1990 (Exhibit 3(i)1. to the Company's Quarterly Report
on Form 10-Q for the quarter ended July 31, 1994).
3.1(b) Articles of Correction, as filed with the Secretary of
State of Georgia on December 18, 1990 (Exhibit 3(i)2. to
the Company's Quarterly Report on Form 10-Q for the
quarter ended July 31, 1994).
3.1(c) Articles of Amendment to the Articles of Incorporation of
the Company, as filed with the Secretary of State of
Georgia on April 5, 1994 (Exhibit 3.1(d) to the Company's
Annual Report on Form 10-K for the year ended October 30,
1994).
3.1(d) Amendment Pursuant to Reorganization of the Articles of
Incorporation of Forstmann & Company, Inc., dated July 23,
1997 (Exhibit 3 to the Company's Quarterly Report on Form
10-Q for the quarter ended August 3, 1997).
3.1(e)* Articles of Amendment of the Articles of Incorporation of
the Company, filed with the Secretary of State of Georgia
on September 8, 1998.
3.2(a) Amended and Restated By-Laws of the Company as of October
9, 1997 (Exhibit 3.2(a) to the Company's Annual Report on
Form 10-K for the year ended November 2, 1997).
4.1(a) Registration Rights Agreement, dated as of July 23, 1997,
between the Company and the holders of Common Stock named
therein. (Exhibit 4.4 to the Company's Quarterly Report on
Form 10-Q for the quarter ended August 3, 1997).
4.1(b)* Amendment No.1 to Registration Rights Agreement, dated as
of November 25, 1998, between the Company and the holders
of the Common Stock named therein.
4.2 Warrant Agreement, dated as of July 23, 1997, between the
Company and Norwest Bank Minnesota, N.A., as warrant
agent (Exhibit 4.2 to the Company's Quarterly Report on
Form 10-Q for the quarter ended August 3, 1997).
4.4(a)*** Loan Agreement, dated as of July 23, 1997, between the
Company and Schlaforst Inc.
4.4(b)*** Promissory Note, dated as of July 23, 1997, between the
Company and Schlaforst Inc.
4.4(c)*** Security Agreement, dated as of July 23, 1997, between the
Company and Schlaforst Inc.
10.1(a)(i) Amended and Restated Loan and Security Agreement, dated as
of September 14, 1998, among the Company, the lenders
named therein, and BankAmerica Business Credit, Inc., as
agent (the "Agent") (Exhibit 4 to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended August
2, 1998).
10.1(a)(ii) Waiver and Amendment No. 1 to the Loan Agreement, dated as
of February 8, 1999, among the Company, the lenders
named therein, and BankAmerica Business Credit, Inc., as
agent (the "Agent").
10.1(b)(i) Trademark Security Agreement, dated as of July 23, 1997,
between the Company and the Agent (Exhibit 10.1(b) to the
Company's Quarterly Report on Form 10-Q for the quarterly
period ended August 3, 1997).
10.1(b)(ii) Trademark Security Agreement, dated as of September 14,
1998, between FAI and the Agent (Exhibit 4 to the Company's
Quarterly Report on Form 10-Qfor the quarter ended August
2, 1998).
10.1(c) Patent Security Agreement, dated as of July 23, 1997,
between the Company and the Agent (Exhibit 10.1(c) to the
Company's Quarterly Report on Form 10-Q for the quarterly
period ended August 3, 1997).
10.1(d) Pledge Agreement, dated as of July 23, 1997, between the
Company and the Agent (Exhibit 10.1(d) to the Company's
Quarterly Report on Form 10-Q for the quarterly period
ended August 3, 1997).
10.1(e) Deed to Secure Debt, dated as of July 23, 1997, between the
Company and the Agent, with respect to the owned real
property located in Laurens County, Georgia (Exhibit
10.1(e) to the Company's Quarterly Report on Form 10-Q for
the quarterly period ended August 2, 1997).
10.1(f) Deed to Secure Debt, dated as of July 23, 1997, between the
Company and the Agent, with respect to the owned real
property located in Baldwin County, Georgia (Exhibit
10.1(f) to the Company's Quarterly Report on Form 10-Q for
the quarterly period ended August 5, 1997).
10.1(g) Deed to Secure Debt, dated as of July 23, 1997, between the
Company and the Agent, with respect to the owned real
property located in Jefferson County, Georgia (Exhibit
10.1(g) to the Company's Quarterly Report on Form 10-Q for
the quarterly period ended August 3, 1997).
10.1(h) Pledge Agreement, dated September 14, 1998, between FAI and
the Agent (Exhibit 4 to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended August 2, 1998).
10.1(i) Pledge Agreement dated as of September 14, 1998, between
the Company and the Agent (Exhibit 4 to the Company's
Quarterly Report on Form 10-Q for the quarterly period
ended August 2, 1998).
10.2** Incentive Plan for Senior Managers, effective as of July
23, 1997 (Exhibit 10.2 to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended August 3,
1997).
10.3** Incentive Plan for Key Employees, effective as of July 23,
1997 (Exhibit 10.3 to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended August 3,1 997).
10.4** Executive Stock Option Plan, effective as of July 23, 1997
(Exhibit 10.4 to the Company's Quarterly Report on Form
10-Q for the quarterly period ended August 3, 1997).
10.5 Environmental Cost Sharing and Indemnity Agreement dated
as of July 18, 1997, among the Company, Tift County
Development Authority and Burlen Corporation (Exhibit
10.5 to the Company's Quarterly Report on Form 10-Q for
the quarterly period ended August 3, 1997).
10.6(a) Lease dated January 31, 1995 between 1155 Avamer Realty
Corp., and the Company (Exhibit 10.1(a) to the Company's
Quarterly Report on Form 10-Q for the quarter ended January
29, 1995).
10.6(b) Lease Takeover Amendment, dated January 31, 1995 between
1155 Avamer Realty Corp., and the Company (Exhibit 10.1(b)
to the Company's Quarterly Report on Form 10-Q for the
quarter ended January 29, 1995).
10.6(c) First Amendment to Lease, dated as of December 27, 1995
between 1155 Avamer Realty Corp., and the Company (Exhibit
10.1(h) to the Company's Annual Report on Form 10-K for
the year ended October 29, 1995).
10.6(d) Lease Surrender Agreement, dated as of August 31, 1998
between 1155 Avamer Realty Corp., and the Company (Exhibit
10 to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended August 2, 1998).
10.7(a) Form of Indemnity Agreement, effective as of October 9,
1997, between the Company and certain of its corporate
officers (Exhibit 10.7(a) to the Company's Annual Report
on Form 10-K for the year ended November 2, 1997).
10.7(b) Form of Indemnity Agreement, effective as of October 9,
1997, between the Company and its directors (Exhibit
10.7(b) to the Company's Annual Report on Form 10-K for
the year ended November 2, 1997).
10.8 Forstmann & Company, Inc. Incentive Compensation and
Retention Program, effective as of November 14, 1996
(Exhibit 10.8 to the Company's Annual Report on Form 10-K
for the year ended November 3, 1996).
10.9(a) Agreement for Financial Consulting Services between Jay
Alix & Associates and the Company, dated July 31, 1995
(Exhibit 10.10(k) to the Company's Annual Report on Form
10-K for the year ended October 29, 1995).
10.9(b) Letter of Acknowledgment in Agreement dated August 18,
1995, between Jay Alix & Associates and the Company,
outlining changes to "Agreement for Financial Consulting
Services" dated July 31, 1995 (Exhibit 10.10(l) to the
Company's Annual Report on Form 10-K for the year ended
October 29, 1995).
10.9(c) Second Amendment to Agreement for Financial Consulting
Services, dated December 20, 1996 (Exhibit 10.10(m) to the
Company's Annual Report on Form 10-K for the year ended
November 3, 1996).
10.10(a)* Agreement of Lease between 498 Seventh, LLC and the
Company, dated as of September 15, 1998.
10.10(b)* First Amendment of Lease between 498 Seventh, LLC and the
Company, dated December 30, 1998.
10.11(*)(***) Employment Agreement, dated as of January 26, 1998
between Brian A. Moorstein and the Company.
10.11(*)(***) Employment Agreement, dated as of January 26, 1998
between Rodney J. Peckham and the Company.
10.13(*)(***) 1997 Director's Compensation Plan as approved by the
Company's shareholders during its Annual Meeting held on
August 14, 1998.
21* Information Regarding Subsidiaries of the Registrant.
27* Financial Data Schedule.
(b) The Company did not file a Current Report on Form 8-K during the fourth
quarter of its fiscal year ended November 1, 1998.
* Filed herewith.
** Management or Compensatory Plan or Arrangements.
*** Not filed herewith. Registrant has filed herewith an Undertaking
to Furnish Copy of Agreements Upon Request.
<PAGE>
September 18, 1997
Undertaking to Furnish Copy of
Agreements Upon Request
Loan Agreement, dated as of July 23, 1997,
Between the Company and Schlafhorst Inc.
Promissory Note, dated as of July 23, 1997,
Between the Company and Schlafhorst Inc.
Security Agreement, dated as of July 23, 1997,
Between the Company and Schlafhorst Inc.
The total amount of the debt securities to which the above-referenced agreements
relate does not exceed 10% of the total assets of the registrant and,
consequently, the registrant is not filing the agreements pursuant to Paragraph
(b) (4) (iii) of Item 601 of Regulation S-K. The registrant will provide the
Securities and Exchange Commission with a copy of such agreements upon request.
Sincerely,
FORSTMANN & COMPANY, INC.
By /s/Rodney Peckham
---------------------
Rodney Peckham
EVP & CFO
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: February 11, 1999 By: /s/ Rodney J. Peckham
----------------------
Rodney J. Peckham
Executive Vice President Finance,
Administration and Strategic Planning
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.
Signature Title Date
- --------------------------- -------------------------- -----------------
/s/ Brian A. Moorstein President February 11, 1999
- ------------------------ (Principal
Brian A. Moorstein Executive
Officer)
/s/ Rodney J. Peckham Executive Vice President February 11, 1999
- ------------------------ Finance, Administration
Rodney J. Peckham and Strategic Planning
(Principal Financial
Officer)
/s/ Gary E. Schafer Vice President February 11, 1999
- ------------------------ and Corporate
Gary E. Schafer Controller Controller
(Principal Financial
Accounting Officer)
/s/ Bruce W. Gregory Director February 11, 1999
- ------------------------
Bruce W. Gregory
/s/ James E. Kjorlien Director February 11, 1999
- ------------------------
James E. Kjorlien
/s/ David T. Matlin Director February 11, 1999
- ------------------------
David T. Matlin
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------
EXHIBITS
Filed with the
ANNUAL REPORT ON FORM 10-K
for
For the Fiscal Year ended November 1, 1998
of
FORSTMANN & COMPANY, INC.
Commission File Number: 1-9474
<PAGE>
EXHIBIT INDEX
Sequential
Exhibit No. Description Page No.
- ----------- ----------- ----------
2. First Amended Plan of Reorganization (Exhibit 1 to
Company's Current Report on Form 8-K dated
July 9, 1997). *
3.1(a) Articles of Restatement setting forth the Amended and
Restated Articles of Incorporation of the Company, as
filed with the Secretary of State of Georgia on November
19, 1990 (Exhibit 3(i)1. to the Company's Quarterly Report
on Form 10-Q for the quarter
ended July 31, 1994). *
3.1(b) Articles of Correction, as filed with the Secretary of
State of Georgia on December 18, 1990 (Exhibit 3(i)2.
to the Company's Quarterly Report on Form
10-Q for the quarter ended July 31, 1994). *
3.1(c) Articles of Amendment to the Articles of Incorporation of
the Company, as filed with the Secretary of State of
Georgia on April 5, 1994 (Exhibit 3.1(d) to the Company's
Annual Report on Form 10-K for the
year ended October 30, 1994). *
3.1(d) Amendment Pursuant to Reorganization of the Articles of
Incorporation of Forstmann & Company, Inc., dated July 23,
1997 (Exhibit 3 to the Company's Quarterly Report on Form
10-Q for the quarter
ended August 3, 1997). *
3.1(e) Articles of Amendment of the Articles of Incorporation of
the Company, as filed with the Secretary of the State of
Georgia on September 8, 1998. 122
3.2(a) Amended and Restated By-Laws of the Company
as of October 9, 1997 (Exhibit 3.2(a) to the Company's
Annual Report on Form 10-K for the year ended November 2,
1997). *
<PAGE>
EXHIBIT INDEX
Sequential
Exhibit No. Description Page No.
- ---------- ----------- ----------
4.1(a) Registration Rights Agreement, dated as of July 23, 1997,
between the Company and the holders of Common Stock named
therein (Exhibit 4.4 to the Company's Quarterly Report on
Form 10-Q for the quarter
ended August 3, 1997). *
4.1(b) Amendment No. 1 to Registration Rights Agreement,
dated as of November 25, 1998, between the Company
and the holders of Common Stock named therein. 125
4.2 Warrant Agreement, dated as of July 23, 1997,
between the Company and Norwest Bank Minnesota,
N.A., as warrant agent (Exhibit 4.2 to the Company's
Quarterly Report on Form 10-Q for the quarter
ended August 3, 1997). *
4.4(a) Loan Agreement, dated as of July 23, 1997, between
the Company and Schlaforst Inc. *
4.4(b) Promissory Note, dated as of July 23, 1997, between
the Company and Schlaforst Inc. *
4.4(c) Security Agreement, dated as of July 23, 1997, between
the Company and Schlaforst Inc. *
10.1(a)(i) Amended and Restated Loan and Security Agreement, dated as
of September 14, 1998, among the Company, the lenders named
therein, and BankAmerica Business Credit, Inc., as agent
(the "Agent") (Exhibit 4 to the Company's Quarterly Report
on Form 10-Q for the quarterly
period ended August 2, 1998). *
10.1(a)(ii)Waiver and Amendment No. 1 to the Loan Agreement, dated as
of February 8, 1999, among the Company, the lenders
named therein, and BankAmerica Business Credit, Inc., as
agent (the "Agent"). 129
10.1(b)(i) Trademark Security Agreement, dated as of July 23, 1997,
between the Company and the Agent (Exhibit 10.1(b) to the
Company's Quarterly Report on Form 10-Q for the quarterly
period ended
August 3, 1997). *
<PAGE>
EXHIBIT INDEX
Sequential
Exhibit No. Description Page No.
- ----------- ----------- ----------
10.1(b)(ii)Trademark Security Agreement, dated as of September 14,
1998, between FAI and the Agent (Exhibit 4 to the Company's
Quarterly Report on Form 10-Q for the quarter
ended August 2, 1998). *
10.1(c) Patent Security Agreement, dated as of July 23, 1997,
between the Company and the Agent (Exhibit 10.1(c) to the
Company's Quarterly Report on Form 10-Q for the quarterly
period ended August 3, 1997). *
10.1(d) Pledge Agreement, dated as of July 23, 1997, between the
Company and the Agent (Exhibit 10.1(d) to the Company's
Quarterly Report on Form 10-Q
for the quarterly period ended August 3, 1997). *
10.1(e) Deed to Secure Debt, dated as of July 23, 1997, between the
Company and the Agent, with respect to the owned real
property located in Laurens County, Georgia (Exhibit
10.1(e) to the Company's Quarterly Report on Form 10-Q for
the quarterly period ended August 2, 1997). *
10.1(f) Deed to Secure Debt, dated as of July 23, 1997, between the
Company and the Agent, with respect to the owned real
property located in Baldwin County, Georgia (Exhibit
10.1(f) to the Company's Quarterly Report on Form 10-Q for
the quarterly period
ended August 5, 1997). *
<PAGE>
EXHIBIT INDEX
Sequential
Exhibit No. Description Page No.
- ------------ ------------- ----------
10.1(g) Deed to Secure Debt, dated as of July 23, 1997, between the
Company and the Agent, with respect to the owned real
property located in Jefferson County, Georgia (Exhibit
10.1(g) to the Company's Quarterly Report on Form 10-Q for
the quarterly period ended August 3, 1997). *
10.1(h) Pledge Agreement, dated September 14, 1998, between FAI and
the Agent (Exhibit 4 to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended August 2, 1998). *
10.1(i) Pledge Agreement dated as of September 14, 1998, between
the Company and the Agent (Exhibit 4 to the Company's
Quarterly Report on Form 10-Q for the
quarterly period ended August 2, 1998). *
10.2 Incentive Plan for Senior Managers, effective as of
July 23, 1997 (Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarterly
period ended August 3, 1997). *
10.3 Incentive Plan for Key Employees, effective as of
July 23, 1997 (Exhibit 10.3 to the Company's Quarterly
Report on Form 10-Q for the quarterly period
ended August 3,1 997). *
10.4 Executive Stock Option Plan, effective as of
July 23, 1997 (Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for the quarterly
period ended August 3, 1997). *
10.5 Environmental Cost Sharing and Indemnity Agreement
dated as of July 18, 1997, among the Company, Tift
County Development Authority and Burlen Corporation
(Exhibit 10.5 to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended
August 3, 1997). *
<PAGE>
EXHIBIT INDEX
Sequential
Exhibit No. Description Page No.
- ----------- ----------- ----------
10.6(a) Lease dated January 31, 1995 between 1155 Avamer Realty
orp., and the Company (Exhibit 10.1(a) to the Company's
Quarterly Report on Form 10-Q for the quarter ended
January 29, 1995). *
10.6(b) Lease Takeover Amendment, dated January 31, 1995
between 1155 Avamer Realty Corp., and the Company
(Exhibit 10.1(b) to the Company's Quarterly Report
on Form 10-Q for the quarter ended January 29, 1995). *
10.6(c) First Amendment to Lease, dated as of December 27, 1995
between 1155 Avamer Realty Corp., and the Company (Exhibit
10.1(h) to the Company's Annual Report
on Form 10-K for the year ended October 29, 1995). *
10.6(d) Lease Surrender Agreement, dated as of August 31, 1998
between 1155 Avamer Realty Corp., and the Company (Exhibit
10 to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended August 2, 1998). *
10.7(a) Form of Indemnity Agreement, effective as of October 9,
1997, between the Company and certain of its corporate
officers (Exhibit 10.7(a) to the Company's Annual Report
on Form 10-K
for the year ended November 2, 1997). *
10.7(b) Form of Indemnity Agreement, effective as of October 9,
1997, between the Company and its Directors (Exhibit
10.7(b) to the Company's Annual Report on Form 10-K for
the year ended November
2, 1997). *
10.8 Forstmann & Company, Inc. Incentive Compensation
and Retention Program, effective as of
November 14, 1996 (Exhibit 10.8 to the Company's
Annual Report on Form 10-K for the year ended
November 3, 1996). *
<PAGE>
EXHIBIT INDEX
Sequential
Exhibit No. Description Page No.
- ----------- ------------ ----------
10.9(a) Agreement for Financial Consulting Services between
Jay Alix & Associates and the Company, dated July 31, 1995
(Exhibit 10.10(k) to the Company's Annual Report
on Form 10-K for the year ended November 3, 1996). *
10.9(b) Letter of Acknowledgment in Agreement dated
August 18, 1995, between Jay Alix & Associates
and the Company, outlining changes to "Agreement
for Financial Consulting Services" dated July 31, 1995
(Exhibit 10.10(l) to the Company's Annual Report
on Form 10-K for the year ended October 29, 1995). *
10.9(c) Second Amendment to Agreement for Financial Consulting
Services, dated December 20, 1996 (Exhibit 10.10(m) to the
Company's Annual Report on Form 10-K for the year ended
November 3, 1996). *
10.10(a) Agreement of Lease between 498 Seventh, LLC
and the Company, dated as of September 15, 1998. 138
10.10(b) First Amendment of Lease between 498 Seventh, LLC
and the Company, dated December 30, 1998. 269
10.11 Employment Agreement, dated as of January 26, 1998
between Brian A. Moorstein and the Company. 273
10.11 Employment Agreement, dated as of January 26, 1998
between Rodney J. Peckham and the Company. 281
10.13 1997 Director's Compensation Plan as approved by
the Company's shareholders during its Annual
Meeting held on August 14, 1998.
21 Information Regarding Subsidiaries of the Registrant.
27 Financial Data Schedule.
(b) The Company did not file a Current Report on Form 8-K during the fourth
quarter of its fiscal year ended November 1, 1998.
<PAGE>
Exhibit 3.1(e)
ARTICLES OF AMENDMENT
of the
ARTICLES OF INCORPORATION
of
FORSTMANN & COMPANY, INC.
To the Secretary of State:
Pursuant to the provisions of the Georgia Business Corporation
Code, Section 14-2- 1006, Forstmann & Company, Inc. amends its Articles of
Incorporation, and for that purpose, submits the following statement:
FIRST: The name of the corporation is FORSTMANN & COMPANY,
INC. (the "Corporation").
SECOND: Article V of the Articles of Incorporation of the
Corporation is amended in its entirety to read as follows:
"The Corporation shall have authority to issue a
total of Thirty-Six Million (36,000,000) shares of stock, of which
Thirty-Five Million (35,000,000) shares shall be Common Stock having a
par value of one cent ($.01) per share and One Million (1,000,000)
shares shall be Preferred Stock having a par value of one cent ($.01)
per share.
PREFERRED STOCK
Shares of the Preferred Stock may be issued from time
to time in series, and the Board of Directors of the Corporation is
authorized, subject to the limitations provided by law, to establish
and designate one or more series of the Preferred Stock, to fix the
number of shares constituting each series, and to fix the designations,
powers, preferences and relative, participating, optional or other
special rights, qualifications, limitations and restrictions thereof,
if any, of each series, and the variations and relative rights,
preferences, limitations and restrictions as between series, and to
increase and decrease the number of shares constituting each series.
The authority of the Board of Directors of the Corporation with respect
to each series shall include, but shall not be limited to, the
authority to determine the following:
(a) the designation of such series, if any;
(b) the number of shares initially constituting any
such series and any increase or decrease (to a number not less than the
number of outstanding shares of such series) of the number of shares
constituting such series theretofore fixed;
(c) the rate or rates of, and the conditions on and
the times at which, dividends on the shares of such series shall be
paid, the preference or relation which such divi dends shall bear to
the dividends payable on any other class or series of stock of the
Corporation, and whether or not such dividends shall be cumulative and,
if so, the date or dates from and after which they shall accumulate;
(d) whether or not the shares of such series shall be
redeemable, and, if so, the terms and conditions of such redemption,
including, without limitation, the date or dates on or after which such
shares shall be redeemable and the amount per share which shall be
payable on such redemption, which amount may vary under different
conditions and at different redemption dates;
(e) the rights to which the holders of the shares of
any such series shall be entitled on the voluntary or involuntary
liquidation, dissolution or winding up, or on any distribution of the
assets, of the Corporation, which rights may be different in the case
of a voluntary liquidation, dissolution or winding up than in the case
of such an involuntary event;
(f) whether or not the shares of any such series
shall have voting rights in addition to the voting rights provided by
law and, if so, the terms and conditions thereof, including, without
limitation, the right of the holders of such shares to vote an a
separate class, either alone or with the holders of shares of one or
more other series of the Preferred Stock and the right to have more
than one vote per share;
(g) whether or not a sinking fund or a purchase fund
shall be provided for the redemption or purchase of the shares of such
series and, if so, the terms and conditions thereof;
(h) whether or not the shares of such series shall be
convertible into, or exchangeable for, shares of any other class or
series of the same or any other class of stock of the Corporation and,
if so, the terms and conditions of conversion or exchange, including,
without limitation, any provision for the adjustment of the conversion
or exchange rate or the conversion or exchange price; and
(i) any other relative rights, preferences and
limitations.
COMMON STOCK
(a) Subject to the preferential dividend rights of
the Preferred Stock, as determined by the Board of Directors of the
Corporation pursuant to the foregoing provisions of this Article V, the
holders of shares of the Common Stock shall be entitled to receive such
dividends as may be declared by the Board of Directors of the
Corporation.
(b) Subject to the preferential liquidation rights of
the Preferred Stock (including dividends and distributions upon the
dissolution of the corporation) and except as determined by the Board
of Directors of the Corporation pursuant to the foregoing provisions of
this Article V, in the event of any voluntary or involuntary
liquidation, dissolution or winding up of, or any distribution of the
assets of, the Corporation, the holders of shares of the Common Stock
shall be entitled to receive all of the net assets of the Corporation
available for distribu tion to its shareholders ratably in proportion
to the number of shares of the Common Stock held by them.
(c) Except as otherwise required by law or by the
provisions of these Articles of Incorporation, the holders of shares of
the Common Stock shall be entitled to vote on all matters at all
meetings of the shareholders of the Corporation, and shall be entitled
to one vote for each share of the Common Stock entitled to vote at such
meeting, voting together as one class with the holders of the Preferred
Stock who are entitled to vote."
THIRD: Section 1 of Article IX of the Articles of
Incorporation of the Corporation is amended in its entirety to read as follows:
"1. The Corporation shall have a minimum of two and a maximum
of seven directors. The Board of Directors of the Corporation may, from
time to time, within the minimum and maximum, change the number of
directors."
FOURTH: The foregoing amendments were recommended to the
shareholders of the Corporation by the Board of Directors of the Corporation and
duly approved and adopted by the shareholders of the Corporation at a meeting
thereof duly called and held on August 14, 1998, in accordance with the
provisions of Section 14-2-1003 of the Georgia Business Corporation Code.
IN WITNESS WHEREOF, the Corporation has caused these Articles
of Amendment to be executed and attested by its duly authorized officers this
8th day of September 1998.
/s/Rodney J. Peckham
---------------------------------
RODNEY J. PECKHAM
Executive Vice President
ATTEST:
By: /s/Laurence S. Markowitz
-------------------------
LAURENCE S. MARKOWITZ
Assistant Secretary
<PAGE>
Exhibit 4.1(b)
AMENDMENT NO. 1 TO
REGISTRATION RIGHTS AGREEMENT
AMENDMENT, dated as of November 25, 1998, to the Registration
Rights Agreement, dated as of July 23, 1997 (the "Agreement"), by and among
Forstmann & Company, Inc., a Georgia corporation (the "Company"), and the
holders of Registrable Common Stock (as defined in the Agreement) who are
signatories to the Agreement.
W I T N E S S E T H:
WHEREAS, pursuant to the Agreement, the Company was required
to file, not later than March 31, 1998, a shelf registration statement under the
Securities Act of 1933, as amended, covering the resale of the shares of
Registrable Common Stock held by the Holders (as defined in the Agreement);
WHEREAS, the Company has been unable to file a registration
statement on Form S-3 due to its inability to qualify for listing on The Nasdaq
Small Cap Market due to an insufficient number of shareholders; and
WHEREAS, the Company and the Holders desire to take steps to
enable the Holders to dispose of their shares of Registrable Common Stock more
easily, should they wish to do so, despite the Company's delay in registering
such shares and while the Company continues its efforts to effect a registration
of such shares on Form S-3;
NOW, THEREFORE, the parties agree that the Agreement is
amended as set forth below:
1. Definitions. Capitalized terms used in this Amendment have the meanings
given to them in the Agreement.
2. Assignment. Section 15 of the Agreement is amended to delete the
requirement that a Transferee hold at least 1% of the total number of
shares of Common Stock outstanding in order to enjoy registration
rights with respect to its shares, and to read in its entirety as
follows:
"15. Assignment.
The provisions of this Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective heirs,
successors and permitted assigns. Any Holders may assign to any permitted
Transferee (as permitted under applicable law) of its Registrable Common Stock
its rights and obligations under this Agreement, provided that such Transferee
shall agree in writing with the parties hereto prior to the assignment to be
bound by this Agreement as if it were an original party hereto, whereupon such
assignee shall for all purposes be deemed to be a Holder under this Agreement.
Except as provided above or otherwise permitted by this Agreement, neither this
Agreement nor any right, remedy, obligation or liability arising hereunder or by
reason hereof shall be assignable by any Holder without the prior written
consent of the other parties hereto. The Company may not assign this Agreement
or any right, remedy, obligation or liability arising hereunder or by reason
hereof."
3. Savings Clause. In all other respects, the Agreement shall continue
unchanged and in full force and effect.
4. Counterparts. This Amendment may be signed in any number of
counterparts, each of which shall be an original, with the same effect
as if the signatures thereto and hereto were upon the same instrument.
5. Governing Law. This Amendment and the Agreement as amended hereby shall
be governed by and construed in accordance with the laws of the State
of New York.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
IN WITNESS WHEREOF, the parties have executed this Amendment
as of the date first set forth above.
FORSTMANN & COMPANY, INC.
By:/s/ Rodney J. Peckham
Name:Rodney J. Peckham
Title:EVP & CFO
HOLDERS:
GRACE BROTHERS LTD.
By:/s/Brad Whitmore
Name:Brad Whitmore
Title:Director
CREDIT SUISSE FIRST BOSTON
SECURITIES CORP.
By:/s/ David J. Matlin
Name: David J. Matlin
Title:Managing Director
DAYSTAR SPECIAL SITUATIONS
FUND, L.P.
By: DAYSTAR L.L.C.
By:/s/ Bruce W. Gregory
Name:Bruce W. Gregory
Title:Partner
DAYSTAR L.L.C.
By:/s/ Bruce W. Gregory
Name:Bruce W. Gregory
Title:Partner
BANKAMERICA CORP.
By:/s/ Moria A. Cary
Name:Moria A. Cary
Title:Attorney-in-Fact
<PAGE>
Exhibit 10.1(a)(ii)
WAIVER AND AMENDMENT NO. 1
TO
LOAN AGREEMENT
WAIVER AND AMENDMENT NO. 1 dated as of February 8, 1999 among FORSTMANN
& COMPANY, INC., FORSTMANN APPAREL, INC. (collectively the "Borrowers"), the
financial institutions listed on the signature pages hereof (each a "Lender" and
collectively, the "Lenders") and BANKAMERICA BUSINESS CREDIT, INC., as agent
(the "Agent").
WHEREAS, the Borrowers, the Agent and the Lenders are parties to a
certain Amended and Restated Loan and Security Agreement, dated as of September
14, 1998 (the "Loan Agreement"), pursuant to which the Lenders have agreed,
subject to the terms and conditions therein set forth, to provide certain
financial accommodations to the Borrowers; and
WHEREAS, the Borrowers desire that the Lenders waive compliance with
certain provisions of the Loan Agreement and amend the Loan Agreement, and the
Lenders are willing, subject to the terms and conditions hereinafter set forth,
to do so;
NOW, THEREFORE, the Borrowers and the Lenders hereby agree as follows:
SECTION 1. CAPITALIZED TERMS. Capitalized terms used but not defined
herein shall have the respective meanings set forth in the Loan Agreement.
SECTION 2. WAIVER OF COMPLIANCE WITH CERTAIN PROVISIONS OF THE LOAN
AGREEMENT. Subject to the terms and provisions set forth herein, Lenders hereby
waive compliance with the provisions of Sections 9.24, 9.25, 9.26 and 9.30 of
the Loan Agreement solely for the Borrowers' Fiscal Year ending on November 1,
1998.
SECTION 3. AMENDMENTS
(a) Amendment to Section 1.1
(i) The definitions of "Adjusted
Tangible Net Worth", "Availability
Reserve" and "EBITDA" set forth in
Section 1.1 of the Loan Agreement
are hereby deleted and replaced with
the following definitions in proper
alphabetical order:
"'Adjusted Tangible Net Worth'
means, at any date, (a) the book
value (after deducting related
depreciation, obsolescence,
amortization, valuation, LIFO
reserve, and other proper reserves
as determined in accordance with
GAAP) at which the Adjusted Tangible
Assets would be shown on the
unconsolidated balance sheet of
Forstmann & Company, Inc., at such
date prepared in accordance with
GAAP; less (b) the amount at which
the Borrowers liabilities would be
shown on such balance sheet,
including as liabilities all
reserves for contingencies, and
other potential liabilities which
would be required to be shown on
such balance sheet in accordance
with GAAP."
"'Availability Reserve' means the
sum of $564,500 on and after May 3,
1999; $1,129,000 on and after June
4, 1999 and $1,693,520 on and after
July 2, 1999 or such lesser amount
as determined by the Agent in its
discretion."
"'EBITDA' means, for any period, the
sum of:
(i) The net income or loss of the
Borrowers (determined on a
consolidated basis in accordance
with GAAP) for such period; plus (or
minus):
(ii) to the extent that any of the items
referred to in any of the clauses
(A) through (H) below were deducted
or added in the calculation of such
net income:
(A) interest expense of the
Borrowers for such
period;
(B) federal, state, or local
income tax expense of the
Borrowers with respect to
operations for such
period;
(C) the amount of all
depreciation and
amortization for such
period;
(D) expenses related to the
relocation of machinery
and equipment, limited to
a total of $200,000 for
Fiscal Year 1999; (E)
LIFO adjustments for such
period;
(F) non-cash gains or losses
from the sale, disposal,
or impairment of property
(other than Inventory);
(G) restructuring charges,
limited to an aggregate
of $1,200,000 for Fiscal
Year 1999; and
(H) any items classified as a
non-cash charge at the
sole discretion of the
Agent for such period. "
(ii) The definition of "Maximum Revolver
Amount" set forth in Section 1.1 of
the Loan Agreement is hereby amended
by deleting the sum of "$85,000,000"
set forth therein and substituting
therefor the sum of "$70,000,000."
(b) Amendment to Section 2.1. The first sentence
of Section 2.1 of the Loan Agreement is
hereby amended by deleting the amount of
"$116,450,000" set forth therein and
substituting therefor the amount of
"$101,450,000."
(c) Amendment to Section 2.3. Section 2.3(c) is
hereby amended by adding the following three
sentences to the end thereof:
"Effective March 1, 1999, each
monthly installment shall be increased from an amount
equal to a Lender's Pro Rata Share of $374,405 to an
amount equal to such Lender's Pro Rata Share of
$450,000. Borrower shall execute and deliver to Agent
replacement notes for each Lender on or before March
15, 1999 and the references in the Loan Documents to
"Term Loan Notes" shall be deemed to be references to
such replacement notes. Each Lender shall deliver its
old notes to Agent for cancellation and return to the
Borrowers, after Agent's receipt of the replacement
notes."
(d) Amendment to Section 4.2. Section 4.2 of the
Loan Agreement is hereby amended by deleting
the second sentence thereof in its entirety
and substituting the following therefor:
"If the Revolving Credit Facility is
terminated at any time prior to April 23, 2000,
whether pursuant to this Section or pursuant to
Section 11.2, the Borrowers jointly and severally
agree to pay to the Agent, for the account of the
Lenders, an early termination fee equal to one half
of one percent (.50%) of the sum of the Maximum
Revolver Amount plus the then outstanding principal
balance of the Term Loans."
(e) Amendment to Section 4.5. Section 4.5 of the
Loan Agreement is hereby amended by adding
the following as clause "(d)" to the end of
such Section 4.5:
"(d) In the event that any appraisal or
update thereof obtained pursuant to Section
6.5 indicates (as determined by Agent) an
increase in the ratio of the outstanding
principal balance of the Term Loans to the
orderly liquidation value of the Borrower's
Equipment (determined as of the date of the
appraisal or update, as applicable) such
that such ratio is greater than .831 to 1.0,
then Borrowers shall repay the Term Loans in
an amount required to reduce such ratio to
.831 to 1.0. Any such prepayment shall be
made in six equal monthly installments
beginning on the first day of the month
following the Agent's receipt of the
applicable appraisal or update and applied
to the principal balance of the Term Loans
in inverse order of maturity. If any such
appraisal or update indicates a ratio of
.931 to 1.0 or greater, Borrowers may
request a re-appraisal by another appraisal
firm acceptable to Agent. The values set
forth in the two appraisals shall be
averaged together to determine if any
prepayment is required under this Section
4.5(d). In the absence of an Event of
Default, Lenders agree that no appraisal or
update will be requested before August,
1999.
(f) Amendment to Section 6.11. Section 6.11(c)
is hereby amended to read in its entirety as
follows:
"(c) No Borrower shall, without the Agent's
prior written consent, sell, lease as a
lessor, or otherwise dispose of any of such
Borrower's Equipment; provided, however,
that such Borrower may dispose of obsolete
or unusable Equipment having an orderly
liquidation value no greater than $50,000
individually, or $500,000 in the aggregate
for all Borrowers in any Fiscal Year, or
$2,500,000 in the aggregate for all
Borrowers during the term of this Agreement,
without the Lenders' consent, subject to the
conditions set forth in the next sentence.
In the event any of such Equipment is sold,
transferred or otherwise disposed of
pursuant to the proviso contained in the
immediately preceding sentence or otherwise,
then such Borrower shall deliver all of the
cash proceeds of any such sale, transfer or
disposition to the Agent, which proceeds
shall be applied first, to the reduction of
the Term Loans (in the inverse order of
maturity) up to the orderly liquidation
value of the Equipment sold, transferred or
disposed of, secondly, to the repayment (in
inverse order) of any amounts due under
Section 4.5(d); and thirdly, any remaining
proceeds shall be applied 60% to the Term
Loans in inverse order of maturity and 40%
to repayment of Revolving Loans."
(g) Amendment to Section 7.2. Section 7.2(e) is
hereby amended by deleting the reference to
Section "9.26" set forth in clause (i)
thereof and substituting therefor "9.24."
(h) Amendment to Section 9.24. Section 9.24 of
the Loan Agreement is hereby deleted in its
entirety and following is substituted
therefor:
"9.24 Minimum EBITDA. The sum of the
Borrowers EBITDA less Capital Expenditures
and MIS Expenditures for the period from the
first day of a Fiscal Year (beginning with
the 1999 Fiscal Year) through the last day
of each fiscal quarter set forth below
occurring in such Fiscal Year shall not be
less than the respective amounts set forth
opposite such fiscal quarter, on a
consolidated basis:
Fiscal Quarter Ending Amount
--------------------- ------------
January, 1999 ($4,500,000)
April, 1999 ($2,400,000)
July, 1999 $1,250,000
October, 1999 $3,500,000
January, 2000 ($4,000,000)
April, 2000 ($2,000,000)
(i) Amendment to Section 9.25. Section 9.25 of
the Loan Agreement is hereby amended in its
entirety to read as follows:
"9.25 Adjusted Tangible Net Worth. The
Borrowers will maintain Adjusted Tangible
Net Worth for all Borrowers' determined as
of the last day of each fiscal month set
forth below, of not less than the following
amounts, on a consolidated basis:
Month Amount
-------------- -----------
January, 1999 $20,500,000
February, 1999 $20,000,000
March, 1999 $21,500,000
April, 1999 $21,500,000
May, 1999 $23,500,000
June, 1999 $25,000,000
July, 1999 $25,000,000
August, 1999 $24,500,000
September, 1999 $24,000,000
October, 1999 $23,500,000
November, 1999 and each month end $22,000,000
thereafter
(j) Amendment to Section. 9.26. Section 9.26 of
the Loan Agreement is hereby deleted in its
entirety and the following substituted
therefor:
"9.26 [Intentionally Omitted]."
(k) Amendment to Section. 9.30. Section 9.30 of
the Loan Agreement is hereby deleted in its
entirety and the following substituted
therefor:
"9.30 [Intentionally Omitted]."
SECTION 4. ADDITIONAL AGREEMENTS AND UNDERTAKINGS.
(a) Borrowers hereby irrevocably request that
upon the effective date of this Agreement,
Lenders make a Revolving Loan to Borrowers
in the amount of $5,645,000, the proceeds of
which shall be applied by Agent as a
principal repayment of the Term Loans, in
inverse order of maturity.
(b) Notwithstanding anything in the Loan
Documents to the contrary, Borrowers agree
that at any time that Availability is less
than $1,693,520 (with Availability
calculated for this purpose without
reference to the Availability Reserve),
interest on the amount by which Availability
is less than $1,693,520 shall be calculated
at a fluctuating rate of Base Rate plus
2.00% (and on the basis of a year of 360
days and actually days elapsed).
(c) Borrowers agree to deliver to Agent within
30 days of the Agent's written request any
amendments or modifications to the Mortgages
and/or title policies requested by Agent (if
any).
SECTION 5. EFFECTIVENESS. The waiver and amendment made herein shall
become effective when (i) the Lenders (or Majority Lenders) shall have duly
executed and delivered this Agreement and counterparts hereof shall have been
duly executed and delivered to the Agent by the Borrowers; (ii) Borrowers shall
have paid a fee in the amount of $200,000 to Agent for the account of the
Lenders, provided, however, that Borrowers may elect to make payment of such fee
in four equal monthly installments beginning March 31, 1999 but such fee shall
be fully earned on the date hereof; and (iii) Borrowers shall have paid a
documentation fee for Agent's sole account in the amount of $3,500.
SECTION 6. COUNTERPARTS AND GOVERNING LAW. This Agreement may be
executed in counterparts, each of which shall be an original, and all of which,
taken together, shall constitute a single instrument. This Agreement shall be
governed by, and construed in accordance with the law of the State of New York.
SECTION 7. REFERENCES TO LOAN AGREEMENT. From and after the
effectiveness of this Agreement and the waivers and agreements contemplated
hereby, all references in the Loan Agreement to "this Agreement", "hereof",
"herein", and similar terms shall mean and refer to the Loan Agreement as
certain provisions thereof are waived or supplemented by this Agreement, and all
references in other documents to the Loan agreement shall mean such agreement as
certain provisions thereof are waived or supplemented by this Agreement.
SECTION 8. INVALIDITY. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
all applicable laws and regulations. If, however, any provision of this
Agreement shall be prohibited by or invalid under any such law or regulation, it
shall be deemed modified to conform to the minimum requirements of such law or
regulation, or if for any reason it is not deemed so modified, it shall be
ineffective and valid only to the extent of such prohibition or invalidity
without the remainder thereof or any of the remaining provisions of this
Agreement being prohibited or invalid.
SECTION 9. RATIFICATION AND CONFIRMATION. The Loan Agreement is hereby
ratified and confirmed and, except as herein waived or otherwise agreed, remains
unmodified and in full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
FORSTMANN & COMPANY, INC.
By:/s/Rodney J. Peckham
-------------------------
Title:EVP & CFO
FORSTMANN APPAREL, INC.
By:/s/Rodney J. Peckham
---------------------
Title:EVP & CFO
BANKAMERICA BUSINESS CREDIT, INC.
Individually and as Agent
By:/s/Michael J. Bedore
--------------------
Title: Senior Account Officer
THE CIT GROUP/COMMERCIAL SERVICES, INC.
By:/s/Kenneth H. Wendler
--------------------
Title: Vice President
IBJ WHITEHALL BUSINESS CREDIT CORP. f/k/a
IBJ SCHRODER BUSINESS CREDIT, INC. (successor to IBJ
SCHRODER BANK AND TRUST, CO., INC.)
By:/s/Edward A. Jesser, III
------------------------
Title: Senior Vice President
JACKSON NATIONAL LIFE
INSURANCE COMPANY
By: PPM FINANCE, INC.
By:
Title:
LA SALLE BUSINESS CREDIT INC.
By:
Title:
PNC BANK NATIONAL ASSOCIATION
By:
Title:
<PAGE>
Exhibit 10.10(a)
AGREEMENT OF LEASE
BETWEEN
498 SEVENTH, LLC, LANDLORD,
AND
FORSTMANN & CO., INC., TENANT
Dated: September 15, 1998
<PAGE>
TABLE OF CONTENTS
Article Page
1. Rent..................................................... 1
----
2. Use and Occupancy........................................ 1
-----------------
3. Tenant Alterations....................................... 2
------------------
4. Maintenance.............................................. 5
-----------
5. Window Cleaning.......................................... 6
---------------
6. Requirements of Law, Fire Insurance, Floor Loads......... 6
------------------------------------------------
7. Subordination............................................ 8
-------------
8. Property--Loss, Damage, Reimbursement, Indemnity......... 9
------------------------------------------------
9. Destruction, Fire and Other Casualty..................... 10
------------------------------------
10. Eminent Domain........................................... 13
--------------
11. Assignment, Mortgage, Etc................................ 13
--------------------------
12. Electric Current......................................... 19
----------------
13. Access to Premises....................................... 21
------------------
14. Occupancy................................................ 22
---------
15. Bankruptcy............................................... 22
----------
16. Default.................................................. 23
-------
17. Remedies of Landlord and Waiver of Redemption............ 24
---------------------------------------------
18. Fees and Expenses........................................ 25
-----------------
19. Building Alterations and Management...................... 25
-----------------------------------
20. No Representations by Landlord........................... 25
------------------------------
21. End of Term.............................................. 26
-----------
22. Quiet Enjoyment.......................................... 26
---------------
23. Failure to Give Possession............................... 26
--------------------------
24. No Waiver................................................ 27
---------
25. Waiver of Trial by Jury.................................. 27
-----------------------
26. Inability to Perform..................................... 27
--------------------
27. Bills and Notices........................................ 28
-----------------
28. Services Provided by Landlord............................ 28
-----------------------------
29. Captions................................................. 29
--------
30. Definitions.............................................. 30
-----------
31. Adjacent Excavation; Shoring............................. 30
----------------------------
32. Rules and Regulations.................................... 31
---------------------
33. Security Deposit......................................... 31
----------------
34. Successors and Assigns................................... 33
----------------------
35. Rental Payments.......................................... 33
---------------
36. Tax Escalation........................................... 35
--------------
37. Option to Expand......................................... 37
----------------
38. Air Conditioning......................................... 39
----------------
39. Brokerage................................................ 39
---------
40. Building Directory....................................... 40
------------------
41. Exculpatory Clause....................................... 40
------------------
42. Submission to Jurisdiction, Etc.......................... 40
--------------------------------
43. Modifications Requested by Mortgagee, Etc................ 41
------------------------------------------
44. Tenant's Work............................................ 41
-------------
45. Insurance................................................ 43
---------
46. Estoppel Certificate..................................... 43
--------------------
47. Holdover................................................. 44
--------
48. Acceptance of Keys....................................... 44
------------------
49. Tenant's Access to the Demised Premises.................. 44
---------------------------------------
50. Hazardous Materials...................................... 44
-------------------
51. Option to Extend......................................... 45
----------------
52. Landlord's Contribution.................................. 47
-----------------------
53. Landlord's Work.......................................... 48
---------------
54. Building Directory....................................... 49
------------------
55. Signage.................................................. 49
-------
Exhibit A - Demising Wall Plan
Exhibit B - Landlord's Work
Exhibit C - Mortgagee - Non-Disturbance Agreement Exhibit D - Certificate of
Occupancy Exhibit E - Current Cleaning Specifications Exhibit F - Alteration
Rules Exhibit G - Letter of Credit Exhibit H - Seventeenth (17th) Floor Rights
<PAGE>
AGREEMENT OF LEASE, made as of this ___ day of September, 1998, between
498 SEVENTH, LLC, a limited liability company duly organized and existing under
the laws of New York, having an office c/o George Comfort & Sons, Inc., 200
Madison Avenue, New York, New York 10016 ("Landlord"), and FORSTMANN & CO.,
INC., a corporation duly organized and existing under the laws of Georgia,
qualified to do business in the State of New York and having a place of business
at 1155 Avenue of the Americas, New York, New York 10036 ("Tenant").
W I T N E S E T H:
Landlord hereby leases to Tenant and Tenant hereby hires from Landlord
a portion of that floor known as the seventeenth (17th) floor as shown hatched
on Exhibit A annexed hereto (the "premises" or "demised premises") in the
building known as 498 Seventh Avenue ("Building" or "building") in the Borough
of Manhattan, City of New York, for the term of approximately ten (10) years and
four (4) months ("Term"), or until the Term shall sooner cease and expire as
hereinafter provided, to commence on the "Commencement Date" (as defined in
Article 30) and to end on the last day of the calendar month in which occurs
that date that is ten (10) years and four (4) months after the Commencement Date
(the "Expiration Date"), both dates inclusive, at a fixed annual rental ("Fixed
Rent") as set forth in Article 35, which Tenant agrees to pay in lawful money of
the United States which shall be legal tender in payment of all debts and dues,
public and private, at the time of payment, in equal monthly installments in
advance on the first day of each month during the Term, at the office of
Landlord or such other place as Landlord may designate, without any set off or
deduction whatsoever except as otherwise provided in this lease, except that
Tenant shall pay the first full monthly installment for all of the premises on
the execution hereof.
The parties hereto, for themselves, their heirs, distributees,
executors, administrators, legal representatives, successors and assigns, hereby
covenant as follows:
1. Rent
Tenant shall pay the rent as above and as hereinafter provided.
2. Use and Occupancy
(A) Tenant shall use and occupy the demised premises for executive,
administrative, sales (at wholesale only and not to the general public) and
general offices and a showroom of Tenant, and for no other purpose.
(B) Notwithstanding anything contained in this lease to the contrary,
Tenant covenants and agrees that Tenant will not use the demised premises or any
part thereof, or permit the demised premises or any part thereof to be used, (i)
for a retail banking, trust company, or safe deposit business, (ii) as a retail
savings bank, or as a savings and loan association, or as a loan company, (iii)
for the sale of travelers checks or foreign exchange, (iv) as a news and cigar
stand, as such, (v) as a restaurant or bar, (vi) for the sale of confectionery,
beverages, sandwiches, ice cream, baked goods or any other food, (vii) by or for
any foreign consulate or agency or mission, (viii) as a betting parlor or
gambling place, (ix) for a medical office or rendition of any health or related
services, (x) by or for a labor union, (xi) by or for a pawnbroker or public
finance (personal loan) business, (xii) by or for an employment or placement
agency, (xiii) as a check cashing establishment, (xiv) as a funeral
establishment, (xv) as or for a "close out" store for low-priced merchandise,
(xvi) by or for any domestic or foreign, state or municipal governmental or
quasi-governmental office, department, agency or facility, or any authority or
other entity which is affiliated therewith or controlled thereby, (xvii) as a
school of any kind, (xviii) for the conduct of any business which results in the
presence of the general public in the demised premises, except by prior
appointment, provided, however this subdivision (xviii) shall not be deemed to
prohibit so-called "open house during market weeks", (xix) as a messenger
service, except in connection with Tenant's own messengering needs, (xx) as a
manufacturing, photographic or reproduction service or business, (xxi) as a
mailing or telephone answering service, (xxii) as or for a retail operation at
the premises, (xxiii) for the conduct of any public auction, gathering, meeting,
or exhibition, (xxiv) for the conduct of a retail stock brokerage office or
business, or (xxv) storage for retail sale of any product or material in the
demised premises.
(C) Notwithstanding the foregoing, Tenant shall be permitted to
install, in accordance with Law and only if permitted by the certificate of
occupancy for the Building, (i) dining facilities, but only for the exclusive
use of Tenant's own employees and Tenant's guests, and (ii) a telephone room
and/or a messenger center exclusively for Tenant's own internal needs. Landlord
shall not be obligated to provide cleaning services to any portion of the
premises used for the storage, preparation, service or consumption of food or
for any other non-office use.
(D) Except to the extent performed by Tenant's own employees, Tenant
shall not obtain or accept for use in the demised premises towel, floor
polishing, lighting maintenance, cleaning or other similar services from any
party not theretofore approved by Landlord (which approval will not be
unreasonably withheld or delayed). Such services shall be furnished only at such
hours, in such places within the demised premises and pursuant to such
regulations as Landlord reasonably prescribes.
(E) Notwithstanding the foregoing, Tenant shall be permitted to
operate, in accordance with Law, two (2) handlooms and prepare its swatches in
the demised premises, all solely as an incidental use, and in no event to exceed
an area of 300 rentable square feet.
3. Tenant Alterations
(A) Tenant shall not make or perform, or permit the making or
performance of, any alterations, installations, improvements, additions or other
physical changes in or about the demised premises (collectively, "Alterations")
(other than nonstructural Alterations within the premises costing less than
$25,000 for any such Alteration or series of related Alterations that do not
require any governmental permit and not adversely, in Landlord's good faith
judgment, affecting any of the building's systems and purely cosmetic or
decorative changes such as wall coverings and floor covering, provided that in
any and all such cases Tenant has given Landlord prior notice thereof) without
Landlord's prior written consent. Landlord agrees not unreasonably to withhold
or delay, its consent to any Alterations that (i) are nonstructural, (ii) do not
affect the Building's exterior, (iii) do not adversely affect the Building's
systems or facilities, (iv) do not affect any part of the Building other than
the demised premises, (v) do not adversely affect any service required to be
furnished by Landlord to Tenant or to any other tenant or occupant of the
Building, and (vi) do not reduce the value or utility of the Building; provided
that such Alterations are performed only by contractors, subcontractors or
mechanics as may be approved by Landlord (which approval will not be
unreasonably withheld or delayed) except as to electrical, plumbing, mechanical,
heating, ventilating and air conditioning trades, provided, however Landlord
will maintain from time to time and provide Tenant on request a list of
currently approved contractors and subcontractors for the Building (with not
fewer than three (3) firms for each trade except that with respect to
electrical, plumbing, mechanical, heating, ventilating and air conditioning
trades, the list will contain not fewer than four (4) firms for each such
trade). All Alterations shall be done at Tenant's expense and at such times and
in such manner as Landlord may from time to time reasonably designate pursuant
to the Alteration Rules annexed as Exhibit F. Prior to making any Alterations,
Tenant (a) shall submit to Landlord detailed plans and specifications, including
layout, architectural, mechanical and structural drawings (except that if the
proposed Alterations are minor, Tenant shall only be required to deliver plans
therefor if good construction practice dictates that plans be prepared, and in
any event such plans need only be prepared in such detail as is reasonably
warranted by the nature of the work), for each proposed Alteration and shall not
commence any such Alteration without first obtaining Landlord's written approval
of such plans and specifications (which approval will not be unreasonably
withheld or delayed to the extent that Landlord is required not unreasonably to
withhold or delay approval of the Alteration itself), (b) shall, at its expense,
obtain all permits, approvals and certificates required by any governmental or
quasi-governmental bodies and deliver duplicates thereof to Landlord, and (c)
shall furnish to Landlord certificates of policies of worker's compensation
insurance (covering all persons to be employed by Tenant and Tenant's
contractors and subcontractors in connection with such Alteration) and
comprehensive public liability (including property damage coverage) insurance in
such amounts and as otherwise provided in Article 45(A). Landlord will use
reasonable and good faith efforts to respond to requests for plan approval
within seven (7) days (except that with respect to engineering plans the time
period shall be ten (10) days) with regard to an initial submission or material
modification and five (5) days with regard to an immaterial modification. If
Landlord fails to respond to a request for approval within the applicable time
period and provided Tenant has given Landlord a second request therefor (which
second request shall not be given prior to five (5) days after Landlord's
receipt of the initial request in the case of the aforesaid seven (7) day
period, seven (7) days after Landlord's receipt in the case of the aforesaid ten
(10) day period and three (3) days after Landlord's receipt in the case of the
aforesaid five (5) day period) containing in bold-faced, 20 point type the
legend "Failure to respond is deemed approved pursuant to Paragraph 3(A) of the
lease", Landlord's approval shall be deemed given unless Landlord responds
within three (3) business days after Landlord's receipt of such second request.
As to engineering plans, the aforesaid time periods for Landlord to respond
shall be conditioned upon Tenant furnishing copies thereof to Edwards & Zuck or
such other engineering firm as to which Landlord may from time to time advise
Tenant. The grounds for any disapproval must be stated in reasonable detail.
Promptly after completion of each Alteration, Tenant, at Tenant's expense, shall
furnish Landlord with (x) final "as built" plans and specifications for each
Alteration (if "as built" plans exist and, if not, with final plans and
specifications with field notations certified by Tenant's architect) showing the
Alterations, (y) Building Department filing documents, permits and final
approvals and other evidence reasonably satisfactory to Landlord that the
Alterations are in compliance with all applicable legal requirements, and (z)
evidence reasonably satisfactory to Landlord that all laborers, materialmen and
mechanics have been paid, including duly executed and acknowledged releases of
liens against the demised premises, the Building, and the materials and
improvements therein from the general contractor and all subcontractors involved
with the installation covering all of the Alterations. Landlord will cooperate
with Tenant, at Tenant's expense, to the extent reasonably requested by Tenant
to facilitate Tenant's compliance with subdivisions (b) and (y) above. All
Alterations shall be made and performed in accordance with the Alteration Rules;
all materials and equipment to be incorporated in the demised premises as a
result of all Alterations shall be of good quality; and no materials or
equipment incorporated into the premises shall be subject to any lien,
encumbrance, chattel mortgage, title retention or security agreement. Tenant
shall not, at any time prior to or during the Term, directly or indirectly
employ, or permit the employment of, any contractor, mechanic or laborer in the
demised premises, whether in connection with any Alteration or otherwise, if, in
Landlord's sole but reasonable discretion, such employment will interfere or
cause any conflict with other contractors, mechanics, or laborers engaged in the
construction, maintenance or operation of the Building by Landlord, Tenant or
others. In the event of any such interference or conflict, Tenant, upon demand
of Landlord, shall cause all contractors, mechanics or laborers causing such
interference or conflict to leave the Building immediately.
(B) No approval of any plans or specifications by Landlord or consent
by Landlord allowing Tenant to make any Alterations or any inspection of
Alterations made by or for Landlord shall in any way be deemed to be an
agreement by Landlord that the contemplated Alterations comply with any legal
requirements or insurance requirements or the certificate of occupancy for the
Building nor shall it be deemed to be a waiver by Landlord of the compliance by
Tenant of any provision of this lease.
(C) Tenant shall promptly reimburse Landlord for all reasonable,
out-of-pocket fees, costs and expenses including, but not limited to, those of
attorneys, architects and engineers, reasonably incurred by Landlord in
connection with the review of Tenant's plans and specifications for any
Alteration and inspecting the Alterations to determine whether the same are
being or have been performed in accordance with the approved plans and
specifications therefor and with all legal requirements and insurance
requirements and other requirements of this lease, but excluding so-called
supervisory fees.
(D) If any mechanic's lien is filed against the demised premises, or
the Building of which the same forms a part, for work claimed to have done for,
or materials furnished to, Tenant, whether or not done pursuant to this article,
the same shall be discharged by Tenant within forty-five (45) days after notice
to Tenant, at Tenant's expense, by filing the bond required by law. All fixtures
(except trade fixtures) and all paneling, partitions, railings and like
installations, installed in the premises at any time, either by Tenant or by
Landlord in Tenant's behalf, shall, upon installation, become the property of
Landlord and shall remain upon and be surrendered with the demised premises
unless, in the case of Non-Standard Alterations, as hereinafter defined,
Landlord elects, by notice to Tenant at the time it approves the same, to
relinquish Landlord's rights thereto and to have them removed by Tenant, in
which event the same shall be removed, from the premises by Tenant prior to the
expiration of this lease, at Tenant's expense. "Non-Standard Alterations" means
non-building standard installations such as vaults, kitchens (excluding
pantries, air conditioning and private bathrooms, but including plumbing running
through the ceiling and/or floor in the space of any other tenant or occupant or
public space), stairways, raised concrete floors, and/or other installations
which in Landlord's reasonable judgment are not reasonably useful for an
ordinary office purposes. Nothing in this Article shall be construed to give
Landlord title to or to prevent Tenant's removal of trade fixtures, moveable
office furniture, furnishings and equipment, but upon removal of any such items
from the premises or upon removal of such Non-Standard Alterations as may be
required by Landlord, Tenant shall immediately, at its expense, repair and
restore the premises to good order and condition in Landlord's reasonable
judgment, and repair any damage to the demised premises or the Building due to
such removal. All property permitted or required to be removed by Tenant at the
end of the Term remaining in the premises after Tenant's removal shall be deemed
abandoned and may, at the election of Landlord, either be retained as Landlord's
property or may be removed from the premises by Landlord, at Tenant's expense.
4. Maintenance
Tenant shall, throughout the Term, take good care of the demised
premises and the fixtures and appurtenances therein. Tenant shall be responsible
for all damage or injury to the demised premises or any other part of the
Building and the systems and equipment thereof, whether requiring structural or
nonstructural repairs, caused by or resulting from the negligence or wilful
misconduct of Tenant, or which arise out of any work, labor, service or
equipment done for or supplied to Tenant (excluding defects by Landlord in
Landlord's Work in the demised premises) or any subtenant or arising out of the
installation, use or operation of the property or equipment of Tenant or any
subtenant (except to the extent caused by Landlord's negligence or wilful
misconduct. (As used herein, the phrase "Tenant's negligence or wilful
misconduct" includes also the negligence or wilful misconduct of Tenant's or any
subtenant's contractors, employees, agents, invitees (while in the premises) or
licensees and the phrase "Landlord's negligence or wilful misconduct" includes
also the negligence or wilful misconduct of Landlord's employees, contractors or
agents.) Tenant shall also repair all damage to the Building and the demised
premises caused by the moving of Tenant's fixtures, furniture and equipment.
Tenant shall promptly make, at Tenant's expense, all repairs in and to the
demised premises for which Tenant is responsible, using only contractors
approved by Landlord (which approval will not be unreasonably withheld or
delayed). Any other repairs in or to the Building or the facilities and systems
thereof for which Tenant is responsible shall be performed by Landlord at
Tenant's expense to the extent that such expense is commercially reasonable.
Except for those obligations of Tenant, Landlord shall maintain in good working
order and repair the exterior and the structural portions of the Building,
including the structural portions of the demised premises, the public portions
of the Building interior and the Building plumbing, mechanical and electrical
systems installed by Landlord and serving the demised premises. With respect to
the heating, ventilating and air conditioning ("HVAC") system, Landlord is
responsible for maintenance of the base Building system and the HVAC machinery
installed by Landlord (except to the extent damaged by Tenant's negligence or
wilful misconduct), and Tenant is responsible for the maintenance of the HVAC
distribution system and the HVAC machinery installed by Tenant (except to the
extent damaged by Landlord's negligence or wilful misconduct). Landlord shall
also make all repairs necessitated by Landlord's negligence or wilful
misconduct. Tenant agrees to give prompt notice of any defective condition in
the premises for which Landlord may be responsible hereunder as soon as Tenant
or its employees has actual knowledge thereof. There shall be no allowance to
Tenant for diminution of rental value and no liability on the part of Landlord
by reason of inconvenience, annoyance or injury to business arising from
Landlord or others making repairs, alterations, additions or improvements in or
to any portion of the Building or the demised premises or in and to the
fixtures, appurtenances or equipment thereof. It is specifically agreed that
Tenant shall not, except as expressly provided in this lease, be entitled to any
setoff or reduction of rent by reason of any failure of Landlord to comply with
the covenants of this or any other article of this lease. Tenant agrees that,
except as expressly provided in this lease, Tenant's sole remedy at law in such
instance will be by way of an action for damages for breach of contract. The
provisions of this Article 4 shall not apply in the case of fire or other
casualty, which is dealt with in Article 9 hereof.
5. Window Cleaning
Tenant will not clean nor require, permit, suffer or allow any window
in the demised premises to be cleaned from the outside in violation of Section
202 of the Labor Law or any other applicable law or of the Rules of the Board of
Standards and Appeals, or of any other Board or body having or asserting
jurisdiction.
6. Requirements of Law, Fire Insurance, Floor Loads
(A) Prior to the commencement of the Term, if Tenant is then in
possession, and at all times thereafter, Tenant, at Tenant's sole cost and
expense, shall (except as otherwise expressly provided in this lease) promptly
comply with all present and future laws, orders and regulations of all state,
federal, municipal and local governments, departments, commissions and boards
and any direction of any public officer pursuant to law, and all orders, rules
and regulations of the New York Board of Fire Underwriters, Insurance Services
Office, or any similar body (collectively, "Laws") that impose any violation,
order or duty upon Landlord or Tenant with respect to the demised premises or
the Building if arising out of Tenant's particular use or manner of use thereof
(as opposed to mere generic office use). The preceding sentence shall apply only
to Laws relating to the physical aspect of the demised premises (and shall
exclude illegal conditions created by Landlord in performing Landlord's Work in
the demised premises) as opposed to Laws relating to Tenant's conduct of
business therein, with which it is Tenant's sole obligation to comply. Landlord
shall cause the public portions of the Building (together with those portions of
the Building systems and structural elements of the Building that are not
affected by Tenant's Alterations or other actions) to comply with Laws to the
extent necessary for Tenant safely and lawfully to occupy the premises for
general office use. Nothing herein shall require Tenant to make structural
repairs or structural alterations unless Tenant has, by its manner of use of the
demised premises or method of operation therein, violated any such Laws. Tenant
may, after securing Landlord to Landlord's reasonable satisfaction against all
damages, interest, penalties and expenses, including, but not limited to,
reasonable attorney's fees, by cash deposit or by surety bond in an amount and
in a company reasonably satisfactory to Landlord, contest and appeal any such
Laws provided that the same is done with all reasonable promptness and provided
such appeal shall not subject Landlord to prosecution for a criminal offense or
constitute a default under any lease or mortgage under which Landlord may be
obligated, or cause the demised premises or any part thereof to be condemned or
vacated. Except to the extent this lease makes the same the express obligation
of Landlord, Tenant shall not do or permit any act or thing to be done in or to
the demised premises that is contrary to Law or that invalidates or is in
conflict with public liability, fire or other policies of insurance at any time
carried by or for the benefit of Landlord with respect to the demised premises
or the Building, or that shall or might reasonably subject Landlord to any
liability or responsibility to any person or for property damage. Tenant shall
not keep anything in the demised premises except as now or hereafter permitted
by the Fire Department, Board of Fire Underwriters, Fire Insurance Rating
Organization or other authority having jurisdiction, and then only in such
manner and such quantity so as not to increase the rate for fire insurance
applicable to the Building, nor use the premises in a manner which will increase
the insurance rate for the Building or any property located therein over that in
effect prior to the commencement of Tenant's occupancy. Tenant shall pay all
costs, expenses, fines, penalties or damages to the extent imposed upon Landlord
by reason of Tenant's failure to comply with the provisions of this Article and
if, by reason of such failure, the fire insurance rate shall, at the beginning
of this lease or at any time thereafter, be higher than it otherwise would be,
then Tenant shall reimburse Landlord, as additional rent hereunder, for that
portion of all fire insurance premiums thereafter paid by Landlord which shall
have been charged because of such failure by Tenant. In any action or proceeding
wherein Landlord and Tenant are parties, a schedule or "make-up" of rates for
the Building or demised premises issued by the New York Fire Insurance Exchange,
or other body making fire insurance rates applicable to said premises shall be
conclusive evidence of the facts therein stated and of the several items and
charges in the fire insurance rates then applicable thereto. Tenant shall not
place a load upon any floor of the demised premises exceeding the floor load per
square foot area which it was designed to carry and which is allowed by Law
unless Tenant at Tenant's expense adequately reinforces the floor so as to
comply with Law. Landlord reserves the right to reasonably prescribe the weight
and position of all safes, business machines and mechanical equipment. Such
installations shall be placed and maintained by Tenant, at Tenant's expense, in
settings sufficient, in Landlord's reasonable judgment, to absorb and prevent
vibration, noise and annoyance.
(B) All work performed or installations made by Tenant (or by Landlord
at Tenant's request) in and to the demised premises shall be done in a fashion
such that the demised premises and the Building shall be in compliance with the
requirements of Local Law 5 of 1973 of The City of New York, as heretofore and
hereafter amended ("Local Law 5"). The foregoing shall include, without
limitation, (i) relocation of existing fire detection devices, alarm signals
and/or communication devices necessitated by the alteration of the demised
premises, and (ii) installation of such additional fire control or detection
devices as may be required by Laws as a result of Tenant's particular use or
manner of use of the demised premises (as opposed to mere generic office use).
In addition, Tenant shall cause the demised premises to be connected to the
Building "Class E" system (Landlord agrees to provide tie-in points for Tenant's
"Class E" panels on each floor of the demised premises) and Landlord shall, at
Tenant's reasonable expense, arrange to have the demised premises and Tenant
added to the "Class E" computer. Except to the extent caused by Tenant's
negligence or willful misconduct, Landlord shall be responsible for the
maintenance and repair of the Building "Class E" system outside of the demised
premises and "Class E" computer.
(C) Except to the extent caused by Landlord's negligence or wilful
misconduct, Landlord shall not be responsible for any damage to Tenant's fire
control or detection devices nor shall Landlord have any responsibility for the
maintenance or replacement thereof. Tenant shall indemnify Landlord from and
against all loss, damage, cost, liability or expense (including, without
limitation, reasonable attorneys' fees and disbursements) suffered or incurred
by Landlord by reason of the installation and/or operation by Tenant, its
agents, contractors, employees or licensees, or those of Tenant's subtenants, of
any such devices.
(D) All work and installations required to be undertaken by Tenant
pursuant to this Article shall be performed at Tenant's sole cost and expense
and in accordance with the applicable provisions of this lease.
(E) The fact that Landlord shall have heretofore consented to any
Alterations made by Tenant in the demised premises shall not relieve Tenant of
its obligations pursuant to this Article with respect to such Alterations.
(F) If any utility company or governmental or quasi-governmental
authority requires any work, installation or improvement to be made to the
Building in connection with any Alteration performed by Tenant, the installation
or operation of equipment or machinery in the demised premises or for any other
reason relating to Tenant's particular use or manner of use of the demised
premises (as opposed to mere generic office use), Tenant shall reimburse
Landlord for the cost of such work, installation or improvement on demand unless
the necessity therefor arose solely by reason of a violation not created by
Tenant, its employees, contractors, agents or subtenants.
(G) Except as otherwise expressly provided in this lease, Tenant shall
be responsible, at Tenant's expense, for causing Tenant's Work and other
Alterations in the demised premises to comply with the Americans with
Disabilities Act as in effect from time to time, and any state or local
variations thereof (collectively, "ADA"). As part of Landlord's Work in the
demised premises or the floor containing the demised premises, Landlord will
cause the existing core bathrooms, the elevator servicing the demised premises,
their call buttons and signage, hall lanterns, fire wardens, manual pull
stations and core door hardware, if required, on such floor to comply with
current ADA requirements.
7. Subordination
(A) This lease is subject and subordinate to all ground or underlying
leases and to all mortgages which may now or hereafter affect such leases or the
real property of which demised premises are a part and to all renewals,
modifications, consolidations, replacements and extensions of any such
underlying leases and mortgages. This clause shall be self-operative and no
further instrument of subordination shall be required by any ground or
underlying lessor or by any mortgagee, affecting any lease or the real property
of which the demised premises are a part. In confirmation of such subordination,
Tenant shall execute promptly any certificate that Landlord may reasonably
request. Notwithstanding the foregoing, Landlord agrees to use reasonable
efforts to obtain from any future mortgagee and ground lessor (not including the
Fee Mortgage, as defined in Paragraph (B) below, which is dealt with in such
Paragraph (B)) for Tenant's benefit an agreement in recordable form and in
substance customarily adopted by the holder of the mortgage or ground lease (a
"Holder"), as the case may be, to the effect that, in the event of any
foreclosure of such mortgage or the termination of such ground lease, as the
case may be, the Holder will not make Tenant a party defendant to such
foreclosure or termination (unless required by applicable law) nor disturb its
possession under this lease, provided Tenant shall not be in default hereunder
beyond any applicable grace period under this lease for the curing of such
default (a "Non-Disturbance Agreement"). To the extent not so provided by
applicable law, in the event of the enforcement by a Holder of the remedies
provided for by law or by a ground lease or a mortgage, if the Holder or any
successors or assigns shall, at its or their sole option, succeed to the
interest of Landlord under this lease whether through eviction, possessory or
foreclosure action or a deed in lieu of foreclosure and this lease shall not be
terminated or affected by such foreclosure or any such proceedings, Tenant shall
attorn to and recognize the Holder (or its successors or assigns) as its
landlord upon the terms, covenants, conditions and agreements contained in this
lease to the same extent and in the same manner as if this lease were a direct
lease between the Holder (or its successors or assigns) and Tenant, except that
the Holder (or its successors or assigns), whether or not it shall have
succeeded to the interest of Landlord under this lease, shall not (i) have any
liability for refusal or failure to perform or complete any work required to be
performed by Landlord under this lease or any workletter annexed hereto to
prepare the demised premises for Tenant's occupancy, or any liability under any
guaranty or indemnification with respect to such work, or otherwise have any
obligation to prepare the demised premises for occupancy in accordance with the
provisions of this lease, (ii) be liable for any act, omission or default of any
prior landlord under this lease, (iii) be subject to any offsets, claims or
defenses which shall have heretofore accrued to Tenant against any prior
landlord under this lease, except for any offset against rental expressly
provided for in this lease, and (iv) be bound by any rent or additional rent
which Tenant might have paid to any prior landlord for more than one (1) month
in advance. If there is any inconsistency between the provisions of the
preceding sentence and those of the Non-Disturbance Agreement entered into by
Tenant and a Holder, then, as between Tenant and such Holder, the terms of the
Non-Disturbance Agreement will prevail.
(B) This lease, and all rights of Tenant hereunder, are and shall be
subject and subordinate in all respects to the mortgage dated March 27, 1997,
between Landlord, as mortgagor, and Lehman Brothers Holdings Inc. d/b/a Lehman
Capital, a division of Lehman Brothers Holdings Inc., as mortgagee, and the
liens created or continued thereby and to each and every advance made or
hereafter to be made under such mortgage, and to all renewals, modifications,
spreaders, consolidations, replacements and extensions thereof, including any
increases in the principal sums secured thereby, and any increases in the rates
of interest provided therein (collectively, the "Fee Mortgage"), and to each and
all of the rights of the mortgagee thereunder. This Paragraph shall be
self-operative and no further instrument of subordination shall be required. In
confirmation of such subordination, Tenant shall promptly execute and deliver
any certificate that the holder of the Fee Mortgage may reasonably request at no
expense to Tenant. Landlord agrees to use reasonable efforts to obtain and
deliver to Tenant a Non-Disturbance Agreement from the holder of the Fee
Mortgage in the form as set forth in Exhibit C attached hereto simultaneously
with Landlord's execution and delivery of this lease. If Landlord fails timely
to deliver to Tenant such Non- Disturbance Agreement from the holder of the Fee
Mortgage, Tenant shall have the right, exercisable no later than forty (40) days
from the date of this lease (as to which date time is of the essence), but not
after such Non-Disturbance Agreement has been delivered, to cancel and terminate
this lease by notice to Landlord. Upon the giving of such notice of cancellation
and termination, this lease shall terminate and come to an end, and the parties
shall not have any further rights or obligations hereunder. Landlord represents
that as of the date of this lease there are no mortgages encumbering the fee
interest in the Building other than the Fee Mortgage and that there are no
underlying leases.
8. Property--Loss, Damage, Reimbursement, Indemnity
Landlord and its agents shall not be liable for any damage to property
of Tenant or of others entrusted to employees of the Building, nor for loss of
or damage to any property of Tenant by theft or otherwise, nor for any injury or
damage to persons or property resulting from any cause of whatsoever nature,
unless caused by or due to the negligence or wilful misconduct of Landlord.
Landlord and its agents will not be liable for any such damage caused by other
tenants or persons in, upon or about the Building or caused by operations in
construction of any private, public or quasi public work. If at any time any
windows of the demised premises are closed, darkened or bricked up for a period
of ten (10) or fewer business days for any reason whatsoever including, but not
limited to Landlord's own acts (or permanently closed, darkened or bricked up,
if required by Law or, in the case of lot line windows, in the event of
construction of adjacent improvements), Landlord shall not be liable for any
damage Tenant may sustain thereby (except to the extent resulting from
Landlord's negligence or wilful misconduct) and Tenant shall not be entitled to
any compensation therefor nor abatement or diminution of rent nor shall the same
release Tenant from its obligations hereunder nor constitute an eviction.
Subject to Article 9(H), (I) and (K) Tenant shall indemnify and save harmless
Landlord against and from all liabilities, obligations, damages, penalties,
claims, costs and expenses for which Landlord shall not be reimbursed by
insurance, including reasonable attorneys' fees, paid, suffered or incurred as a
result of any breach by Tenant, Tenant's agents, contractors, employees,
invitees, or licensees, of any covenant or condition of this lease, or the
negligence or wilful misconduct of Tenant; provided, however, that Tenant's
liability with respect to its invitees shall extend only to such invitees'
conduct within the premises or when acting in accordance with Tenant's
instructions outside of the premises. Tenant's liability under this lease
extends to the acts and omissions of any subtenant (not including any subtenant
holding by or through Landlord), and any agent, contractor, employee, invitee
(except as set forth above) or licensee of any subtenant. In case any action or
proceeding is brought against Landlord by reason of any such claim, Tenant, upon
written notice from Landlord, will, at Tenant's expense, resist or defend such
action or proceeding by counsel approved by Landlord in writing, such approval
not to be unreasonably withheld or delayed, and counsel for the insurance
carrier being deemed approved.
9. Destruction, Fire and Other Casualty
(A) If the demised premises or any part thereof shall be damaged by
fire or other casualty, Tenant, reasonably promptly after obtaining knowledge
thereof, shall give immediate notice thereof to Landlord and this lease shall
continue in full force and effect except as hereinafter set forth.
(B) If thirty (30%) percent or less of the demised premises are damaged
or rendered untenantable by fire or other casualty, the damages thereto shall be
repaired by and at the expense of Landlord and the rent shall be apportioned
from the day following the casualty, until Landlord notifies Tenant that such
repair is substantially completed (or until Tenant uses the same for any purpose
or commences occupancy thereof for the conduct of any business, if sooner),
according to the part of the premises that is tenantable.
(C) If more than thirty (30%) percent of the demised premises are
damaged or rendered untenantable (or Tenant is denied access thereto) by fire or
other casualty and Tenant does not use any of the demised premises for any
purpose, then the rent shall be proportionately paid up to the time of the
casualty and thenceforth shall cease until the date when the premises or the
affected portion shall have been repaired and restored by Landlord and Tenant
may lawfully occupy the same for the conduct of its business (or until Tenant
uses the same for any purpose or commences occupancy thereof for the conduct of
any business, if sooner), but subject to Landlord's right to elect not to
restore the same as hereinafter provided.
(D) If more than thirty (30%) percent of the demised premises are
rendered untenantable or (whether or not the demised premises are damaged in
whole or in part) if the Building shall be so substantially damaged that
Landlord shall decide to demolish it or to rebuild it, then, in either of such
events, Landlord may elect to terminate this lease (provided Landlord does not
discriminate solely against Tenant) by written notice to Tenant, given within
ninety (90) days after such fire or casualty, specifying a date for the
expiration of this lease, which date shall not be more than sixty (60) days
after the giving of such notice, (provided, however, if the demised premises or
access thereto have not been affected by such casualty Tenant shall have the
right by written notice to Landlord given no later than thirty (30) days from
receipt of Landlord's notice (time being of the essence) to postpone the date
specified by Landlord for the expiration of this lease to a date (to be
specified in Tenant's notice) which shall not be later than one hundred eighty
(180) days from the date of Landlord's notice of termination or the date
originally set forth as the expiration date of this lease, whichever is sooner),
and upon the date specified in Landlord's or Tenant's notice, as the case may
be, the Term shall expire as fully and completely as if such date were the date
set forth above for the termination of this lease and Tenant shall forthwith
quit, surrender and vacate the premises without prejudice, however, to
Landlord's rights and remedies against Tenant under the lease provisions in
effect prior to such termination, and any rent owing shall be paid up to such
date and any payments of rent made by Tenant which were on account of any period
subsequent to such date shall be returned to Tenant. Unless Landlord or Tenant
shall serve a termination notice as provided for herein, Landlord shall make the
repairs and restorations with all reasonable expedition, subject to delays due
to adjustment of insurance claims, labor troubles and causes beyond Landlord's
reasonable control. After any such casualty, Tenant shall cooperate with
Landlord's restoration by removing from the premises, as promptly as reasonably
possible, all of Tenant's salvageable inventory and movable equipment,
furniture, and other property. Tenant's liability for rent shall resume ten (10)
days after written notice from Landlord that the premises are substantially
ready for Tenant's lawful occupancy for normal business purposes.
(E) Tenant acknowledges that Landlord will not carry insurance on
Tenant's furniture and furnishings or any fixtures, equipment or personal
property of Tenant removable by Tenant and agrees that Landlord will not be
obligated to repair any damage thereto or replace the same.
(F) Tenant hereby waives the provisions of Section 227 of the Real
Property Law and agrees that the provisions of this Article shall govern and
control in lieu thereof.
(G) Supplementing the foregoing provisions of this Article,
(i) if an independent contractor chosen by Landlord estimates that Landlord's
portion of any restoration necessitated by damage or destruction to the demised
premises by fire or other casualty (collectively "Casualty") cannot be
substantially completed within six (6) months after that date when adjustment
with the insurance carrier(s) has been completed and Landlord has in fact
received the insurance proceeds (the "Insurance Date") (which estimate shall be
obtained and delivered to Tenant within forty-five (45) days after the
Casualty), Tenant may terminate this lease by notice sent to Landlord within
thirty (30) days after receipt of Landlord's notice (time being of the essence),
(ii) if Landlord's portion of any restoration necessitated by Casualty has not
been substantially completed within six (6) months after the Insurance Date of
the applicable Casualty, then Tenant may terminate this lease by notice sent to
Landlord within thirty (30) days after the expiration of such six (6) month
period (time being of the essence), or (iii) if, within eighteen (18) months
prior to the Expiration Date, the demised premises are materially damaged by
Casualty, Tenant may terminate this lease by giving written notice to Landlord
thereof within thirty (30) days after such damage or Casualty. In any such
event, this lease shall terminate on the date such notice is sent provided,
however, if this lease is terminated as a result of a Casualty that does not
affect the demised premises or access thereto, Tenant shall have the right in
its notice to specify a date for termination of this lease not later than one
hundred eighty (180) days from the date of the Casualty, or to the date
originally set forth as the expiration date of this lease, whichever is sooner.
On or before such effective date, Tenant shall vacate and surrender possession
of the demised premises in the condition required by this lease, Fixed Rent and
other amounts payable under this lease shall be prorated as of such effective
date. Notwithstanding the foregoing, the six (6) month period referred to in
subparagraph (ii) above shall be extended by up to an additional six (6) months
to the extent such restoration is delayed by reason of circumstances of the
nature set forth in Article 26 or otherwise beyond Landlord's reasonable
control.
(H) Anything hereinbefore contained in this Article to the contrary
notwithstanding, Landlord and Tenant shall each endeavor to secure an
appropriate clause in, or an endorsement upon, each fire or extended coverage or
rent or business interruption insurance policy obtained by it and covering the
Building, the demised premises or the personal property, fixtures and equipment
located therein or thereon, pursuant to which the respective insurance companies
waive subrogation or permit the insured, prior to any loss, to agree with a
third party to waive any claim it might have against such third party. The
waiver of subrogation or permission for waiver of any claim hereinbefore
referred to (which the parties each confirm to each other is available as of the
date of this lease) shall extend to the agents of each party and its employees
and, in the case of Tenant, shall also extend to its related corporations and
all other persons and entities occupying or using the demised premises in
accordance with the terms of this lease and, in the case of Landlord, shall also
extend to all general and limited partners and members of Landlord. If, and to
the extent that such waiver or permission can be obtained only upon payment of
an additional charge, then, except as provided in the following two paragraphs,
the party benefiting from the waiver or permission shall pay such charge upon
demand, or shall be deemed to have agreed that the party obtaining the insurance
coverage in question shall be free of any further obligations under the
provisions hereof relating to such waiver or permission.
(I) If Landlord is unable at any time to obtain one of the provisions
referred to in Paragraph (H) of this Article in any of its insurance policies,
Landlord shall cause Tenant to be named in such policy or policies as one of the
insureds, but if any additional premium shall be imposed for the inclusion of
Tenant as such an insured, Tenant shall pay such additional premium upon demand
or Landlord shall be excused from its obligations under this Article with
respect to the insurance policy or policies for which such additional premiums
would be imposed. If Tenant is named as one of the insureds in any of Landlord's
policies in accordance with the foregoing, Tenant shall endorse promptly to the
order of Landlord, without recourse, any check, draft or order for the payment
of money representing the proceeds of any such policy or any other payment
growing out of or connected with such policy and Tenant hereby irrevocably
waives any and all rights in and to such proceeds and payments.
(J) If Tenant is unable at any time to obtain one of the provisions
referred to in Paragraph (H) of this Article in any of its insurance policies,
Tenant shall cause Landlord, its partners and members to be named in such policy
or policies as one of the insureds, but if any additional premium shall be
imposed for the inclusion of Landlord as such an insured, Landlord shall pay
such additional premium upon demand or Tenant shall be excused from its
obligations under Paragraph (H) of this Article with respect to the insurance
policy or policies for which such additional premiums would be imposed. If
Landlord, its partners and members are named as one of the insureds in any of
Tenant's policies in accordance with the foregoing, Landlord and such partners
and members shall endorse promptly to the order of Tenant, without recourse, any
check, draft or order for the payment of money representing the proceeds of any
such policy or any other payment growing out of or connected with such policy
and Landlord hereby irrevocably waives any and all rights in and to such
proceeds and payments.
(K) Subject to Paragraphs (H), (I) and (J) of this Article, and insofar
as may be permitted by the terms of the insurance policies carried by it, each
party hereby releases the other with respect to any claim (including a claim for
negligence) which it might otherwise have against the other party for loss,
damage or destruction with respect to its property by fire or other casualty
(including rental value or business interest, as the case may be) occurring
during the Term.
10. Eminent Domain
(A) If the whole or any part of the demised premises in excess of 10%
of the aggregate rentable area thereof shall be acquired or condemned by eminent
domain for any public or quasi public use or purpose, then and in that event,
the Term shall cease and terminate from the date of title vesting in such
proceeding and Tenant shall have no claim for the value of any unexpired portion
of the Term and Tenant hereby assigns to Landlord Tenant's entire interest in
any such award.
(B) Tenant shall be entitled to claim, prove and receive in any
condemnation proceeding such awards as may be allowed for moving expenses,
fixtures and other property installed by it at its sole cost and expense in the
demised premises, provided such awards do not adversely affect the awards for
Landlord's interest in the Land (as hereinafter defined) and Building. In the
event of a temporary taking of the use of the demised premises, Tenant may, if
it elects, remain liable in accordance with the terms of this lease, and in such
case there shall be no abatement of rent, but Landlord shall assign to Tenant
any award made for such temporary taking of the use of the demised premises. Any
such election on the part of Tenant shall be exercised by the service of written
notice on Landlord within thirty (30) days after the actual taking of such use
for a temporary period.
11. Assignment, Mortgage, Etc.
(A) Except as otherwise expressly permitted in this Article 11, Tenant,
for itself, its heirs, distributees, executors, administrators, legal
representatives, successors and assigns, expressly covenants that it shall not
assign, mortgage or encumber this agreement, nor underlet, or suffer or permit
the demised premises or any part thereof to be used by others, without the prior
written consent of Landlord in each instance. A transfer of a fifty percent
(50%) or more beneficial interest in Tenant, whether such transfer occurs at one
time, or in a series of related transactions, and whether of stock, partnership
interest or otherwise, by any party in interest shall be deemed an assignment of
this lease, but not including transfers (i) resulting from the death of a
shareholder or partner of Tenant, or (ii) to or among the existing shareholders
or partners of Tenant, their immediate families or trusts for the benefit
thereof, or (iii) on a recognized national securities exchange. If this lease is
assigned, or if the demised premises or any part thereof is underlet or occupied
by anybody other than Tenant, Landlord may collect rent from the assignee,
under-tenant or occupant, and apply the net amount collected to the rent herein
reserved, but no such assignment, underletting, occupancy or collection shall be
deemed a waiver of this covenant, or the acceptance of the assignee,
under-tenant or occupant as tenant, or a release of Tenant from the further
performance by Tenant of covenants on the part of Tenant herein contained. The
consent by Landlord to an assignment or underletting shall not in any wise be
construed to relieve Tenant from obtaining the consent in writing of Landlord to
any further assignment or underletting with respect to an undertenant or other
occupant in accordance with this lease.
(B) Tenant shall neither: (i) publicly advertise the availability of
the premises or any part thereof at a rental rate less than the rental rate at
which Landlord is then offering to lease comparable space in the Building, or
(ii) if Landlord has available or expects to have available within the next six
(6) months space of approximately the same size, assign this lease to or sublet
to or permit the occupancy of all or any part of the demised premises by any
other party which is then a tenant, subtenant, licensee or occupant of any space
in the Building or which has negotiated with Landlord for space in the Building
within the six (6) month period preceding the date of Landlord's receipt of
"Tenant's Notice" as defined in Paragraph (C).
(C) If Tenant wishes to assign this lease, sublet all or any part of
the demised premises or permit the demised premises to be occupied by any other
party (occupancy by a third party being deemed, for the purposes of this Article
11, to be a sublease), Tenant shall first notify Landlord ("Tenant's Notice"),
specifying (i) if the proposed transaction is an assignment or a sublease of all
or substantially all of the demised premises or a sublease of a portion of the
demised premises for all or substantially all of the remaining term of this
lease (each, a "Major Sublease"), all of the bona fide material business terms
(the "Business Terms") on which Tenant would be willing to consummate such
transaction, including, without limitation, any separate consideration therefor,
the rental rate to be paid (including any escalation and base years or
additional rent payable), the term thereof (including any renewal options and
the anticipated commencement date (which shall not be earlier than sixty (60)
days after receipt of Tenant's Notice) and expiration date thereof), any work to
be performed or paid for by Tenant, whether in the affected space or in order to
make the affected space maintainable as an independent unit, the amount and
duration of any rent concessions, the cost and extent of any so-called
"take-over" obligations to be assumed by Tenant and any other conditions
(including, without limitation, the commencement and expiration dates thereof),
and (ii) if the transaction is neither an assignment nor a Major Sublease (in
which case it would be a "Minor Sublease"), a copy of the executed documents
consummating such Minor Sublease and information regarding the name of and
character of the business of the sublessee, a summary of the Business Terms and
current information as to the financial responsibility and standing of the
proposed sublessee. Tenant shall also provide Landlord with such other
information in connection with a sublease as it reasonably requests. If only a
portion of the demised premises is to be sublet, Tenant's Notice shall be
accompanied by a reasonably accurate floor plan, indicating the space to be
sublet. The portion of the demised premises to which such proposed assignment or
sublease is to be applicable is hereinafter referred to as the "Space."
(D) Landlord may, within forty-five (45) days after its receipt of
Tenant's Notice in connection with an assignment (other than pursuant to
Paragraph (O) hereof) or a Major Sublease (other than pursuant to Paragraph (N)
hereof), by notice to Tenant ("Landlord's Notice"), require (i) if the proposed
transaction was an assignment or a Major Sublease for all or substantially all
of the demised premises, that Landlord and Tenant enter into an agreement
terminating this lease entirely, or (ii) if the proposed transaction was a Major
Sublease of a portion of the demised premises, that Landlord and Tenant enter
into an agreement terminating this lease with respect to the Space, on the terms
set forth in Paragraph (E). If Landlord fails to exercise such option, it shall
not unreasonably withhold, delay or condition its consent to the proposed
assignment or Major Sublease, once Tenant submits documentation similar to that
required to be submitted in connection with a Minor Sublease and provided that
the negotiated final assignment or Major Sublease is consummated within six (6)
months of the date of Tenant's Notice at a net effective sales price or constant
net effective subrental (taking into account all applicable Business Terms), as
the case may be, of not less than ninety-two and one-half (92.5%) percent of
that specified in Tenant's Notice (calculated on a present value basis with the
interest factor being the then-current "prime" or "base" rate of Citibank, N.A.
("Prime Rate")). If the negotiated final assignment or Major Sublease is to be
at a net effective sales price or constant net effective subrental, as the case
may be, of less than ninety-two and one-half (92.5%) percent of that specified
in Tenant's Notice, or if the proposed transaction is not consummated within six
(6) months of the date of Tenant's Notice, or if at any time thereafter during
the Term Tenant wishes to enter into another assignment or Major Sublease, then
Tenant shall be required to send another Tenant's Notice with respect thereto
and Landlord shall have the same right of recapture with respect thereto as
above specified.
(E) If Landlord requires that this lease be terminated with respect to
all or a portion of the demised premises pursuant to Paragraph (D), then (i) (if
the transaction is a Major Sublease of less than all or substantially all of the
demised premises) (a) Tenant at its expense shall perform the work necessary to
separate the Space from the balance of the demised premises, and (b) Landlord
shall at Tenant's expense install a separate submeter to measure the consumption
of electricity in the Space (or, in the alternative, the parties shall agree on
an equitable method to allocate electricity charges between the Space and the
balance of the demised premises), and (ii) Landlord and Tenant shall execute and
deliver an agreement (a) if the proposed transaction was an assignment or a
Major Sublease of all or substantially all of the demised premises, terminating
this lease as of the proposed commencement date set forth in Tenant's Notice, or
(b) if the proposed transaction was a Major Sublease of less than all or
substantially all of the demised premises terminating this lease with respect to
the Space as of the proposed commencement date set forth in Tenant's Notice or
such later date as Tenant shall vacate and surrender the demised premises to
Landlord in accordance with the terms of this lease, and in such case and on
such date there shall be a pro rata reduction of the Fixed Rent and Tenant's
Proportionate Share of Taxes based on the relative sizes of the Space and the
initial demised premises.
(F) If the proposed transaction was a Minor Sublease, then Landlord
shall not unreasonably withhold, delay or condition its consent thereto.
(G) No permitted or consented to assignment of this lease (including,
without limitation, pursuant to Paragraph (O) of this Article) shall be
effective or valid unless and until Tenant delivers to Landlord duplicate
originals of the instrument of assignment duly executed and acknowledged, in
recordable form (wherein the assignee assumes the performance of Tenant's
obligations under this lease from and after the date of the assignment) and all
related and accompanying documents.
(H) In the event of any such assignment, Landlord and the assignee may
modify this lease in any manner, without notice to Tenant or Tenant's prior
consent, without thereby terminating Tenant's liability for the performance of
its obligations under this lease, except that any such modification which, in
any way, increases any of such obligations shall not, to the extent of such
increase only, be binding upon Tenant.
(I) No permitted or consented to sublease of all or any part of the
demised premises (not including a Sublease, but including, without limitation,
pursuant to Paragraph (N) of this Article) or modification of a sublease shall
be effective or valid unless and until Tenant delivers to Landlord duplicate
originals of the instrument of sublease (containing the provisions required by
Paragraph (J) of this Article) and all related and accompanying documents. Any
such sublease shall be subject and subordinate to this lease.
(J) Any such sublease shall contain substantially the following
provisions:
(i) "In the event of a default under any underlying
lease of all or any portion of the premises demised hereby which results in the
termination of such lease, the subtenant hereunder shall, at the option of the
lessor under any such lease ("Under lying Lessor"), attorn to and recognize the
Underlying Lessor as landlord hereunder and shall, promptly upon the Underlying
Lessor's request, execute and deliver all instruments necessary or appropriate
to confirm such attornment and recognition. Not withstanding such attornment and
recognition, the Underlying Lessor shall not (a) be liable for any previous act
or omission of the landlord under this sublease, (b) be subject to any offset
which shall have accrued to the subtenant hereunder against said landlord, or
(c) be bound by any modification of this sublease or by any prepayment of more
than one month's rent, unless such modification or prepayment shall have been
previously approved in writing by the Underlying Lessor. The subtenant hereunder
hereby waives all rights under any present or future law to elect, by reason of
the termination of such underlying lease, to terminate this sublease or
surrender possession of the premises demised hereby.
(ii) This sublease may not be assigned or modified
or the premises demised hereunder further sublet, in whole or in part, without
the prior written consent of the Underlying Lessor in accordance with the terms
of the Underlying Lease."
(K) Landlord's consent to any assignment or sublease shall neither
release Tenant from its liability for the performance of Tenant's obligations
hereunder during the balance of the Term nor constitute its consent to any (i)
further assignment of this lease or of any permitted sublease or (ii) further
sublease of all or any portion of the premises demised hereunder or under any
permitted sublease. If a sublease to which Landlord has consented is assigned or
modified or all or any portion of the premises demised thereunder is sublet
without the consent of Landlord in each instance obtained then, Tenant shall
immediately terminate such sublease, or arrange for the termination thereof, and
proceed expe ditiously to have the occupant thereunder dispossessed.
(L) Tenant shall pay to Landlord, promptly upon demand therefor, all
reasonable out-of-pocket costs and expenses (including, without limitation,
reasonable attorneys' fees and disbursements) incurred by Landlord in connection
with any assignment of this lease or assignment or modification of any sublease
or sublease of all or any part of the demised premises.
(M) If Landlord gives its consent to any assignment of this lease or
assignment of any sublease or to any sublease or if Tenant otherwise enters into
any assignment or sublease permitted hereunder, Tenant shall, in consideration
therefor, pay to Landlord, as and when received by Tenant:
(i) in the case of an assignment, fifty (50%) percent of the
amount, if any, by which (a) all sums and other considerations paid to Tenant by
or on behalf of the assignee for or by reason of such assignment (including, but
not limited to, sums paid for the sale of Tenant's fixtures, equipment,
furniture, furnishings or other personal property, less in the case of a sale
thereof, the then fair market value thereof) exceeds (b) the amount of any
rental concessions and work allowance granted by Tenant or costs incurred by
Tenant in preparing the demised premises for the assignee's occupancy (amortized
on a straight line basis, without interest, over the initial Term if there is
any deferral of sums or other consideration to be paid to Tenant), and all
reasonable and customary out-of-pocket expense reasonably incurred by Tenant
directly relating to such assignment for so-called take-over costs, advertising
costs, brokerage commissions, architect's and legal fees, but only to the extent
such commissions, expenses and fees are reasonable and actually paid to
independent and unrelated third parties, as evidenced by receipted bills
furnished to Landlord and amounts paid to Landlord pursuant to Paragraph (L)
hereof; and
(ii) in the case of a sublease, fifty (50%) percent of the
amount, if any, by which (a) any rents, additional charges or other
consideration payable under or by reason of the sublease to Tenant by or on
behalf of the subtenant (including, but not limited to, sums paid for the sale
or rental of Tenant's fixtures, equipment, furniture or other personal property
paid for solely by Tenant, less, in the case of a sale thereof, the then fair
market value thereof) exceeds (b) the sum of (x) the Fixed Rent and additional
rent accruing during the term of the sublease in respect of the Space (at the
rate per square foot payable by Tenant hereunder) pursuant to the Term and (y)
the amount of any rental concessions and work allowance granted by Tenant or
costs incurred by Tenant in physically separating the Space from the rest of the
demised premises or otherwise in preparing the Space for the subtenant's
occupancy (amortized on a straight line basis, without interest, over the
initial term of the sublease), and all reasonable and customary out-of-pocket
expenses reasonably incurred by Tenant directly relating to such subletting for
so-called take-over costs, advertising costs, brokerage commissions, architect's
and legal fees, but only to the extent such commissions, expenses and fees are
reasonable and actually paid to independent and unrelated third parties, as
evidenced by receipted bills furnished to Landlord and amounts paid to Landlord
pursuant to Paragraph (L) hereof.
(N) Tenant may, without Landlord's prior written consent, but upon not
less than fifteen (15) days' prior written notice to Landlord, permit any
corporations or other business entities which control, are controlled by, or are
under common control with Tenant (herein referred to as a "related corporation")
to sublet or use all or part of the demised premises for any of the purposes
permitted to Tenant, subject however to compliance with Tenant's obligations
under this lease (other than Paragraphs (C), (D), (E), (F) and (M) of this
Article) provided that (i) Tenant shall not be in default beyond applicable
notice and cure periods in the performance of any of its obligations under this
lease, (ii) prior to such subletting or use Tenant furnishes Landlord with the
name of any such related corporation, together with a certification of Tenant's
chief financial officer, and such other proof as Landlord may reasonably
request, that such subtenant is a related corporation of Tenant, and (iii) in
the reasonable, good faith judgment of Landlord the proposed subtenant is of a
character such as is in keeping with the then existing character of the
Building. Within ten (10) days after Landlord's request from time to time, an
officer of Tenant shall certify to Landlord that such subtenant remains a
related corporation of Tenant, failing which the provisions of Paragraph (M)
shall apply retroactive to the date of Landlord's such request. Such subletting
shall not be deemed to vest in any such related corporation any right or
interest in this lease or the demised premises nor shall it relieve, release,
impair or discharge any of Tenant's obligations hereunder. For the purposes
hereof, "control" shall be deemed to mean ownership of more than fifty (50%)
percent of all of the voting stock of such corporation or more than fifty (50%)
percent of all of the legal and equitable interest in any other business
entities.
(O) Tenant may, without Landlord's prior written consent, and without
complying with Paragraphs (C), (D), (F) and (M) above, but upon not less than
fifteen (15) days' prior written notice to Landlord, assign or transfer its
entire interest in this lease and the leasehold estate hereby created to a
related corporation or a successor entity of Tenant (as hereinafter defined);
provided, however, that (i) Tenant shall not be in default beyond applicable
notice and cure periods in the performance of any of its obligations under this
lease, (ii) the proposed occupancy shall not increase the office cleaning
requirements (if any) over those if Tenant had continued its occupancy or impose
an extra burden (except for a de minimis amount) upon the building equipment or
building services, and (iii) the proposed assignee shall not be entitled,
directly or indirectly, to diplomatic or sovereign immunity and shall be subject
to the service of process in, and the jurisdiction of the courts of New York
State. A "successor entity" as used in this Paragraph (O) shall mean (a) an
entity into which or with which Tenant, its successors or assigns, is merged or
consolidated, in accordance with applicable statutory provisions for the merger
or consolidation, provided that, by operation of law or by effective provisions
contained in the instruments of merger or consolidation, the liabilities of the
entities participating in such merger or consolidation are assumed by the entity
surviving such merger or consolidation, or (b) an entity acquiring this lease
and the term hereof and the estate hereby granted, the goodwill and all or
substantially all of the other property and assets of Tenant, its successors or
assigns, and assuming all or substantially all of the liabilities of Tenant, its
successors and assigns, or (c) an entity purchasing all or substantially all of
the voting stock or other equity interests in Tenant, or (d) any successor to a
successor entity becoming such by either of the methods described in
subdivisions (a) and (b) above; provided that in each such case (x) such merger
or consolidation, or such acquisition and assumption, or such purchase, as the
case may be, is for a good business purpose and not principally for the purpose
of transferring the leasehold estate created hereby, and (y) immediately after
giving effect to any such merger or consolidation, or such acquisition and
assumption, or such purchase, as the case may be, the entity surviving such
merger or created by such consolidation or acquiring such assets and assuming
such liabilities, or purchasing such stock, as the case may be, shall have a
demonstrable tangible net worth, as determined in accordance with generally
accepted accounting principles, consistently applied, and certified to Landlord
by an independent certified public accountant, at least equal to the higher of
that of Tenant on the day immediately prior to the date of merger, consolidation
or acquisition, as the case may be, or that of Tenant on the date Tenant
executes this lease which Tenant represents and warrants to be not less than
$48,000,000.00. The acquisition by Tenant, its successors or assigns, of all or
substantially all of the assets, together with the assumption of all or
substantially all of the obligations and liabilities of any corporation, shall
be deemed to be a merger for the purposes of this Article.
(P) Notwithstanding anything to the contrary herein above contained, in
no event will there be permitted to be more than three (3) occupants (including
Tenant and its related corporations) in the demised premises that have separate
entrances.
(Q) In the event Tenant claims that Landlord has unreasonably withheld,
delayed or conditioned its consent under this Article 11 for more than thirty
(30) days after receipt of a request from Tenant, in those instances where
Landlord has agreed not to unreasonably withhold its consent, Tenant's sole
remedy shall be to have such dispute resolved by an informal hearing ("Hearing")
upon and subject to the terms and conditions hereinafter set forth in Article
41(B).
12. Electric Current
(A) Tenant covenants and agrees that at all times its use of electric
current shall not exceed the capacity of then existing feeders or risers to, or
wiring installations in, the Building and demised premises (which will not be
less than six (6) watts of electric current per rentable square foot, connected
load) and Tenant may not use any electrical equipment which, in Landlord's
opinion, reasonably exercised, will overload such installations or interfere
with the use thereof by other tenants of the Building.
(B) From and after the Commencement Date, Landlord agrees to furnish up
to six (6) watts of electric current per rentable square foot (connected load)
terminated at a disconnect switch within the demised premises for Tenant's use
in the demised premises (exclusive of that consumed by the "base building air
conditioning machinery" as hereinafter defined), upon and subject to the terms
and conditions set forth in this Article 12. Tenant is to be responsible for the
distribution of such electricity throughout the demised premises. From and after
the Commencement Date or such earlier date as Tenant takes possession of the
demised premises or any part thereof (whichever date first occurs being the
"Electric Commencement Date"), Tenant shall purchase all electric current
consumed in the demised premises (including, without limitation, such electric
energy as is consumed in connection with the operation of the ventilation and
air conditioning equipment servicing the demised premises) from Landlord or
Landlord's designated agent. Tenant will pay to Landlord as additional rent a
sum equal to (i) "Landlord's Cost Rate" (as that term is hereinafter defined)
plus 5%, for the relevant billing period, multiplied by (ii) the total kilowatt
hours recorded on Tenant's sub-meter or submeters during such billing period.
"Landlord's Cost Rate" shall mean the rate schedule at which Landlord purchases
electricity from the company providing electric service to the Building (the
"Electric Company") for the relevant billing period. Tenant's consumption of
electrical energy at the demised premises will be measured by submeters to be
installed by Landlord at Landlord's expense.
(C) Where more than one submeter measures Tenant's electric service
(including such electric energy as is consumed by the HVAC equipment servicing
the demised premises), the service rendered through each submeter may be
computed and billed as an aggregate total in accordance with the provisions
hereof. Bills therefor may be rendered monthly and shall be payable within ten
(10) days, as additional rent.
(D) Landlord shall not in any way be liable or responsible to Tenant
for any loss, damage or expense which Tenant may sustain or incur if either the
quantity or character of electric service is changed or is no longer available
or suitable for Tenant's requirements, except to the extent resulting from
Landlord's failure to pay the Electric Company or gross negligence or willful
misconduct (but, in no event, will Landlord have any responsibility for
consequential damages). Subject to Tenant's compliance with Articles 3 and 54
and all other applicable provisions of this lease, and provided Landlord has
available shaft space for risers, Landlord agrees, in principle, to install at
Tenant's sole reasonable expense additional risers to provide additional
electric capacity to the premises. Any such additional capacity must be obtained
by Tenant from the Electric Company without diminution of, or any other adverse
effect upon, the Building or the electrical capacity and electrical cost for the
balance of the Building. Any riser or risers necessary to supply Tenant's
electrical requirements in excess of those specified in Paragraph (B) will be
installed by Landlord at the sole reasonable cost and expense of Tenant and only
if, in Landlord's reasonable judgment, the same is reasonably practicable and
will not cause adverse damage or injury to the building or the operation thereof
or the demised premises, or cause or create a dangerous or hazardous condition.
In addition to the installation of such riser or risers, Landlord will also, at
the sole reasonable cost and expense of Tenant, install all other equipment
proper and necessary in connection therewith, subject to the aforesaid terms and
conditions. All of such costs and expense shall be paid by Tenant to Landlord
within ten (10) days after rendition of any bill or statement to Tenant
therefor, as additional rent.
(E) Provided Landlord does not discriminate against Tenant, Landlord
may discontinue such service of electric current upon ninety (90) days (or such
lesser time as may be required by Law or the Electric Company) to Tenant without
being liable to Tenant therefor and without in any way affecting this lease or
the liability of Tenant hereunder or causing a diminution of Fixed Rent. Such
discontinuance is not to be deemed to be a lessening or diminution of service
within the meaning of any law, rule or regulation now or hereafter enacted,
promulgated or issued. If Landlord so discontinues furnishing electric current
to Tenant, Tenant shall arrange to obtain electric current directly from the
Electric Company. Such electric current may be furnished to Tenant by means of
the then existing building system feeders, risers and wiring to the extent that
the same are available, suitable and safe for such purposes. All meters and
additional panel boards, feeders, risers, wiring and other conductors and
equipment that may be required to obtain and to measure Tenant's consumption of
electric current directly from the Electric Company shall be installed and
maintained by Landlord, at Landlord's expense unless such discontinuance is
required by Law or the Electric Company in which event it shall be at Tenant's
expense. Provided Tenant proceeds promptly and diligently after receipt of
Landlord's notice to arrange to obtain and to measure Tenant's consumption of
electric current directly from the Electric Company, Landlord may not
discontinue electric service until Tenant is able to obtain service directly
from the Electric Company (unless Landlord is compelled to do so by Law or the
Electric Company).
(F) If any tax is imposed upon Landlord's receipt from the sale or
resale of electric energy to Tenant by any federal, state or municipal
authority, Tenant agrees to pay Landlord on demand Tenant's pro-rata share of
such taxes, as additional rent.
(G) Anything in Paragraph (C) to the contrary notwithstand ing, if the
Electric Commencement Date occurs prior to the installation and proper
calibration of the submeters, then Tenant shall pay Landlord for Tenant's
consumption of electricity in the demised premises amounts reasonably estimated
by Landlord's electrical consultant to be those that Tenant would pay if such
meters were fully operational not to exceed a rate of $1.50 per annum per
rentable square foot of the demised premises. In addition, if during any time
during the Term, it is determined that the submeters servicing the demised
premises are or were not properly calibrated or were malfunctioning, Tenant
shall pay Landlord an amount reasonably estimated by Landlord's electrical
consultant, based on Tenant's prior usage, to be the amount that would have been
payable by Tenant had such malfunction not occurred.
(H) Anything in this Article to the contrary notwithstanding, if Tenant
disputes any determination made by Landlord's electrical consultant or engineer
("Landlord's Electrical Consultant") pursuant to Paragraph (G), Tenant may
challenge such determination (but not any prior determination of Landlord's
Electrical Consultant), within thirty (30) days after receipt thereof (time
being of the essence), by submitting a different estimate made by Tenant's
reputable independent electrical engineer or qualified consultant ("Tenant's
Electrical Consultant"), which shall be paid by Tenant. If Landlord's Electrical
Consultant and Tenant's Electrical Consultant agree on a determination, such
agreement shall be conclusive upon the parties. If Landlord's Electrical
Consultant and Tenant's Electrical Consultant cannot agree, they shall select a
third reputable independent electrical engineer or qualified consultant, to be
paid equally by both parties, to make a binding determination with respect to
such dispute. If Landlord's Electrical Consultant and Tenant's Electrical
Consultant cannot select a third electrical engineer or consultant, the same
shall be selected by the Presiding Judge of the Appellate Division of the
Supreme Court of the State of New York, First Department. No delay in the
resolution of any such dispute shall affect the effective date of any such
determination.
13. Access to Premises
Landlord or Landlord's agents shall have the right (but shall not be
obligated) to enter the demised premises in any emergency at any time, and, at
other reasonable times upon reasonable advance notice (which may be telephonic
or oral), to examine the same and to make such repairs, replacements and
improvements as Landlord may deem necessary to the demised premises in
accordance with Landlord's rights or obligations under this lease or necessary
or reasonably desirable to any other portion of the Building. Landlord shall use
reasonable efforts to minimize interference with Tenant's occupancy while such
work is in progress and shall cooperate with Tenant as to the scheduling of such
work, but Landlord will not be required to use overtime labor unless required in
order to prevent material disruption to Tenant's operations. Tenant shall permit
Landlord to use and maintain and replace pipes and conduits in and through the
demised premises and to erect new pipes and conduits therein provided such pipes
and conduits are either boxed or concealed under floors, behind walls, in the
ceiling or in closets. Upon the completion of such work, repairs and
installations, there shall be no reduction (except to a de minimis extent not
exceeding seventeen (17) square feet per usable area in the demised premises and
the affected portions of the demised premises shall have been restored to
substantially their condition immediately prior to the performance of such work,
repairs or installations. Landlord may, during the progress of any work in the
demised premises, take all necessary materials and equipment into the demised
premises without the same constituting an eviction nor shall Tenant be entitled
to any abatement of rent while such work is in progress nor to any damages by
reason of loss or interruption of business or otherwise provided Landlord acts
in accordance with good construction practice and uses reasonable efforts to
minimize interference with Tenant. Throughout the Term, Landlord shall have the
right to enter the demised premises at reasonable hours upon notice for the
purpose of showing the same to prospective purchasers or mortgagees of the
Building, and during the last twelve (12) months of the Term for the purpose of
showing the same to prospective tenants. If Tenant is not present to open and
permit an entry into the premises, Landlord or Landlord's agents may enter the
same whenever such entry may be necessary or permissible by master key (or
forcibly in the event of an emergency) and, provided reasonable care is
exercised to safeguard Tenant's property, such entry shall not render Landlord
or its agents liable therefor, nor in any event shall the obligations of Tenant
hereunder be affected. If during the last month of the Term Tenant shall have
removed all of Tenant's property therefrom, Landlord may immediately enter,
alter, renovate or redecorate the demised premises without limitation or
abatement of rent, or incurring liability to Tenant for any compensation and
such act shall have no effect on this lease or Tenant's obligations hereunder.
14. Occupancy
(A) Tenant will not at any time use or occupy the demised premises in
violation of the certificate of occupancy issued for the Building (the "C/O"), a
copy of which is attached as Exhibit D. Landlord will not amend the C/O in any
way that would adversely affect Tenant's use of the premises for its permitted
use hereunder. Tenant has inspected the premises and agrees to accept them in
their "as is" condition on the Commencement Date, subject to completion of
Landlord's Work, and except for latent defects. In any event, except as
otherwise expressly provided herein, Landlord makes no representation as to the
condition of the premises and Tenant agrees to accept the same subject to
violations, whether or not of record, which have no adverse effect on Tenant's
occupancy of the demised premises.
(B) Landlord represents that, upon completion of Landlord's Work, the
premises will be in compliance with all Laws (including ADA) that are applicable
to space in such condition (i.e., not including Laws that are applicable by
reason of Tenant's Work or the fact that Tenant's Work has yet to be completed).
15. Bankruptcy
(A) Anything elsewhere in this lease to the contrary notwithstanding,
this lease may be cancelled by Landlord by the sending of a written notice to
Tenant within a reasonable time after the happening of any one or more of the
following events: (1) the commencement of a case in bankruptcy or under the laws
of any state naming Tenant as the debtor which, if involuntary, is not
discharged or stayed within sixty (60) days of the commencement thereof, or (2)
the making by Tenant of an assignment or any other arrangement for the benefit
of creditors under any state statute. Neither Tenant nor any person claiming
through or under Tenant, or by reason of any statute or order of court, shall
thereafter be entitled to possession of the demised premises but shall forthwith
quit and surrender the demised premises.
(B) It is stipulated and agreed that in the event of the termination of
this lease pursuant to Paragraph (A) hereof, Landlord shall forthwith,
notwithstanding any other provisions of this lease to the contrary, be entitled
to recover from Tenant as and for liquidated damages an amount equal to the
difference between the rent reserved hereunder for the unexpired portion of the
Term and the fair and reasonable rental value of the demised premises for the
same period. In computing such damages the difference between any installment of
rent becoming due hereunder after the date of termination and the fair and
reasonable rental value of the demised premises for the period for which such
installment was payable shall be discounted to the date of termination at the
Federal discount rate then in effect. If the premises or any part thereof be
relet by Landlord for the unexpired Term of this lease, or any part thereof,
before presentation of proof of such liquidated damages to any court, commission
or tribunal, the amount of rent reserved upon such reletting shall be deemed to
be the fair and reasonable rental value for the part or the whole of the
premises so relet during the term of the reletting. Nothing herein contained
shall limit or prejudice the right of Landlord to prove for and obtain as
liquidated damages by reason of such termination an amount equal to the maximum
allowed by any statute or rule of law in effect at the time when, and governing
the proceedings in which, such damages are to be proved, whether or not such
amount be greater, equal to or less than the amount of the difference referred
to above.
(C) Without limiting any of the foregoing provisions of this Article 15
or Articles 16 or 17 hereof, if, pursuant to the Bankruptcy Code of 1978, as the
same may be amended, Tenant is permitted to assign this lease in disregard of
the obligations contained in Article 11 hereof, Tenant agrees that adequate
assurance of future performance by the assignee permitted under such Code shall
mean the deposit of cash security with Landlord in an amount equal to the sum of
nine (9) months Fixed Rent then reserved hereunder plus an amount equal to all
additional rent payable under this lease for the calendar year preceding the
year in which such assignment is intended to become effective, which deposit
shall be held by Landlord, without interest, for the balance of the Term as
security for the full and faithful performance of all of the obligations under
this lease on the part of Tenant yet to be performed. If Tenant receives or is
to receive any valuable consideration for such an assignment of this lease,
sixty (60%) percent of such consideration shall be and become the sole and
exclusive property of Landlord and shall be paid over to Landlord directly by
such assignee. In addition, adequate assurance shall mean that any such assignee
of this lease shall have a net worth, exclusive of good will, equal to at least
fifteen (15) times the aggregate of the Fixed Rent reserved hereunder plus all
additional rent for the preceding calendar year as aforesaid.
16. Default
(A) If Tenant defaults in fulfilling any of the covenants of this lease
other than the covenant for the payment of rent or additional rent, or if any
execution or attachment shall be issued against Tenant or any of Tenant's
property whereupon the demised premises shall be taken or occupied by someone
other than Tenant; or if this lease be rejected under ss. 235 of Title 11 of the
U.S. Code (bankruptcy code), then, in any one or more of such events, upon
Landlord serving a written twenty (20) days notice upon Tenant specifying the
nature of said default and upon the expiration of said twenty (20) days, if
Tenant shall have failed to comply with or remedy such default, or if the said
default or omission complained of shall be of a nature that the same cannot be
completely cured or remedied within said twenty (20) day period, and if Tenant
shall not have diligently commenced curing such default within such twenty (20)
day period, and shall not thereafter with reasonable diligence and in good faith
proceed to remedy or cure such default, then Landlord may serve a written five
(5) days' notice of cancellation of this lease upon Tenant, and upon the
expiration of said five (5) days this lease and the Term shall end and expire as
fully and completely as if the expiration of such five (5) day period were the
day herein definitely fixed for the end and expiration of this lease and the
Term and Tenant shall then quit and surrender the demised premises to Landlord
but Tenant shall remain liable as hereinafter provided.
(B) If the notice provided for in Paragraph (A) hereof shall have been
given, and the Term shall expire as aforesaid, or if Tenant shall make default
in the payment of the rent reserved herein or any item of additional rent herein
mentioned or any part of either or in making any other payment herein required
for more than ten (10) days after notice from Landlord of such default in
payment, then and in any of such events Landlord may, without notice, re-enter
the demised premises and dispossess Tenant and the legal representative of
Tenant or other occupant of the demised premises by summary proceedings or
otherwise and remove their effects and hold the premises as if this lease had
not been made, and Tenant hereby waives the service of notice of intention to
re-enter or to institute legal proceedings to that end. If Tenant shall make
default hereunder prior to the date fixed as the commencement of any renewal or
extension of this lease, Landlord may cancel and terminate such renewal or
extension agreement by written notice.
17. Remedies of Landlord and Waiver of Redemption
In case of any such default, reentry, expiration and/or dispossess by
summary proceedings or otherwise, (a) the rent shall become due thereupon and be
paid up to the time of such reentry, dispossess and/or expiration, (b) Landlord
may relet the premises or any part or parts thereof, either in the name of
Landlord or otherwise, for a term or terms, which may at Landlord's option be
less than or exceed the period which would otherwise have constituted the
balance of the Term and may grant concessions or free rent or charge a higher
rental than that in this lease, and/or (c) Tenant or the legal representatives
of Tenant shall also pay Landlord, as liquidated damages for the failure of
Tenant to observe and perform Tenant's covenants herein contained, any
deficiency between the rent hereby reserved and/or covenanted to be paid and the
net amount, if any, of the rents collected on account of the lease or leases of
the demised premises for each month of the period which would otherwise have
constituted the balance of the Term. The failure of Landlord to relet the
premises or any part or parts thereof shall not release or affect Tenant's
liability for damages (provided that Landlord does not arbitrarily refuse to
relet). Landlord shall not be deemed to have arbitrarily refused to relet the
demised premises or any part or parts thereof if: (i) Landlord first rents any
other vacant space in the Building, (ii) Landlord refuses to rent all or any
part of the demised premises to any party which Landlord, in its discretion,
exercised in good faith, considers an unsuitable tenant for the Building or a
party with whose financial condition Landlord is dissatisfied, or (iii) Landlord
refuses to rent all or any part of the demised premises because a proposed
leasing transaction is, in Landlord's discretion, exercised in good faith,
financially or otherwise unsatisfactory to Landlord. In computing such
liquidated damages there shall be added to the said deficiency such
out-of-pocket expenses as Landlord may incur in connection with reletting, such
as reasonable legal expenses, reasonable attorneys' fees, brokerage, advertising
and for keeping the demised premises in good order or for preparing the same for
reletting. Any such liquidated damages shall be paid in monthly installments by
Tenant on the rent day specified in this lease and any suit brought to collect
the amount of the deficiency for any month shall not prejudice in any way the
rights of Landlord to collect the deficiency of any subsequent month by a
similar proceeding. Landlord, in putting the demised premises in good order or
preparing the same for re-rental may, at Landlord's option, make such
alterations, repairs, replacements, and/or decorations in the demised premises
as Landlord, in Landlord's sole judgment, considers advisable and necessary for
the purpose of reletting the demised premises, and the making of such
alterations, repairs, replacements, and/or decorations shall not operate or be
construed to release Tenant from liability hereunder as aforesaid. Landlord
shall in no event be liable in any way whatsoever for failure to relet the
demised premises (except that Landlord shall not arbitrarily refuse to relet),
or, in the event that the demised premises are relet, for failure to collect the
rent thereof under such reletting, and in no event shall Tenant be entitled to
receive any excess, if any, of such net rents collected over the sums payable by
Tenant to Landlord hereunder. In the event of a breach or threatened breach by
either party of any of the covenants or provisions hereof, the other party shall
have the right of injunction and the right to invoke any remedy allowed at law
or in equity as if re-entry, summary proceedings and other remedies were not
herein provided for. Mention in this lease of any particular remedy, shall not
preclude Landlord from any other remedy, in law or in equity. Tenant hereby
expressly waives any and all rights of redemption granted by or under any
present or future laws in the event of Tenant being evicted or dispossessed for
any cause, or in the event of Landlord obtaining possession of the demised
premises, by reason of the violation by Tenant of any of the covenants and
conditions of this lease, or otherwise.
18. Fees and Expenses
(A) If Tenant shall default (after notice and the expiration of any
applicable cure period) in the observance or performance of any term or covenant
on Tenant's part to be observed or performed under or by virtue of any of the
terms or provisions in any article of this lease, then, unless otherwise
provided elsewhere in this lease, Landlord may immediately or at any time
thereafter and without further notice perform the obligation of Tenant
thereunder and Tenant shall, within thirty (30) days after demand, reimburse
Landlord for its reasonable out-of-pocket costs incurred in connection therewith
as additional rent, provided, however Landlord agrees not to perform any work on
behalf of Tenant at Tenant's expense so long as Tenant shall have promptly
commenced and is diligently pursuing to completion the performance of such work.
If the Term shall have expired at the time of making of such expenditures or
incurring of such obligations, such sums shall be recoverable by Landlord as
damages.
(B) Whenever this lease provides that a party shall be responsible for
costs or expenses incurred by the other party, such responsibility shall be
limited to reasonable out-of-pocket costs and expenses.
(C) If any legal proceeding is brought by reason of the claimed default
of either party hereto, the prevailing party shall be entitled to reimbursement
by the other for its reasonable attorneys' fees.
(D) Any reservation of a right by Landlord to enter upon the demised
premises and to make or perform any repairs, alterations,or other work in, to,
or about the demised premises which, in the first instance, is the Tenant's
obligation pursuant to this lease, shall not be deemed to:
(i) impose any obligation on Landlord to do so;
(ii) render Landlord liable to Tenant or any third party
for the failure to do so; or
(iii) relieve Tenant from any obligation to indemnify Landlord
as otherwise provided elsewhere in this lease.
19. Building Alterations and Management
Landlord shall have the right at any time without the same constituting
an eviction and without incurring liability to Tenant therefor to change the
arrangement and/or location of public entrances, passageways, doors, doorways,
corridors, elevators, stairs, toilets or other public parts of the Building and,
upon reasonable prior notice to Tenant, to change the name, number or
designation by which the Building may be known. Except to the extent otherwise
expressly provided in this lease, there shall be no allowance to Tenant for
diminution of rental value and no liability on the part of Landlord by reason of
inconvenience, annoyance or injury to business arising from Landlord or other
tenants making any repairs in the Building or any such alterations, additions
and improvements. Furthermore, Tenant shall not have any claim against Landlord
by reason of Landlord's imposition of such reasonable controls on the manner of
access to the Building by Tenant's social or business visitors as Landlord may
deem necessary for the security of the Building and its occupants.
20. No Representations by Landlord
Neither Landlord nor Landlord's agents have made any representations or
promises with respect to the physical condition of the Building or the Land or
the demised premises, the rents, leases, expenses of operation or any other
matter or thing affecting or related to the premises except as herein expressly
set forth and no rights, easements or licenses are acquired by Tenant by
implication or otherwise except as expressly set forth in the provisions of this
lease. Tenant has inspected the Building and the demised premises and is
thoroughly acquainted with their condition and agrees to take the same "as is"
except as provided in Articles 14 and 53 and acknowledges that the taking of
possession of the demised premises by Tenant shall be conclusive evidence that
the said premises were in good and satisfactory condition at the time such
possession was so taken, except for completion of Landlord's Work and latent
defects. All understandings and agreements heretofore made between the parties
hereto are merged in this contract, which alone fully and completely expresses
the agreement between Landlord and Tenant, and any executory agreement hereafter
made shall be ineffective to change, modify, discharge or effect an abandonment
of it in whole or in part, unless such executory agreement is in writing and
signed by the party against whom enforcement of the change, modification,
discharge or abandonment is sought.
21. End of Term
Upon the expiration or other termination of the Term, Tenant shall quit
and surrender to Landlord the demised premises, broom clean, in good order and
condition, ordinary wear and damages which Tenant is not required to repair as
provided elsewhere in this lease excepted, and Tenant shall remove all its
personal property and other property required to be removed pursuant to Article
3(D). Tenant's obligation to observe or perform this covenant shall survive the
expiration or other termination of this lease.
22. Quiet Enjoyment
Landlord covenants and agrees with Tenant that upon Tenant paying the
rent and additional rent and observing and performing all the terms, covenants
and conditions, on Tenant's part to be observed and performed, Tenant may
peaceably and quietly enjoy the premises hereby demised, subject, nevertheless,
to the terms and conditions of this lease including, but not limited to, Article
41 hereof and to the ground leases, underlying leases and mortgages hereinbefore
mentioned.
23. Failure to Give Possession
If Landlord is unable to give possession of the demised premises on the
date of the commencement of the Term hereof, because of the holding-over or
retention of possession of any tenant, undertenant or occupants or, if the
demised premises are located in a building being constructed, because such
building has not been sufficiently completed to make the premises ready for
occupancy or because of the fact that a certificate of occupancy has not been
procured or for any other reason beyond Landlord's reasonable control, Landlord
shall not be subject to any liability for failure to give possession on said
date and the validity of this lease shall not be impaired under such
circumstances, nor shall the same be construed in any wise to extend the Term,
but the rent payable hereunder shall be abated and the performance of Tenant's
other obligations hereunder will be stayed (provided Tenant is not responsible
for Landlord's inability to obtain possession) until after Landlord shall have
given Tenant written notice that the premises are substantially ready for
Tenant's occupancy. If permission is given to Tenant to enter into the
possession of the demised premises or to occupy premises other than the demised
premises prior to the date specified as the commencement of the Term, Tenant
covenants and agrees that such occupancy shall be deemed to be under all the
terms, covenants, conditions and provisions of this lease, except as to the
covenant to pay rent. The provisions of this article are intended to constitute
"an express provision to the contrary" within the meaning of Section 223-a of
the New York Real Property Law.
24. No Waiver
(A) The failure by either party to seek redress for violation of, or to
insist upon the strict performance of, any covenant or condition of this lease
or of any of the Rules or Regulations set forth or hereafter adopted by Landlord
shall not prevent a subsequent act which would have originally constituted a
violation from having all the force and effect of an original violation. The
receipt by Landlord or the payment by Tenant of rent with knowledge of the
breach of any covenant of this lease shall not be deemed a waiver of such breach
and no provision of this lease shall be deemed to have been waived by Landlord
or Tenant unless such waiver be in writing signed by Landlord or Tenant, as the
case may be. No payment by Tenant or receipt by Landlord of a lesser amount than
the monthly rent herein stipulated shall be deemed to be other than on account
of the earliest stipulated rent, nor shall any endorsement or statement of any
check or any letter accompanying any check or payment as rent be deemed an
accord and satisfaction, and Landlord may accept such check or payment without
prejudice to Landlord's right to recover the balance of such rent or pursue any
other remedy in this lease provided. No act or thing done by Landlord or
Landlord's agents during the Term shall be deemed an acceptance of a surrender
of the premises, and no agreement to accept such surrender shall be valid unless
in writing signed by Landlord. No employee of Landlord or Landlord's agent shall
have any power to accept the keys of the premises prior to the termination of
this lease and the delivery of keys to any such agent or employee shall not
operate as a termination of this lease or a surrender of the premises.
(B) Supplementing the foregoing provisions of this Article 24, no
payment made pursuant hereto by Tenant to Landlord under protest shall be deemed
to be a waiver of Tenant's rights to contest either the amount of, or the
liability for, such payment.
25. Waiver of Trial by Jury
It is mutually agreed by and between Landlord and Tenant that the
respective parties hereto shall and they hereby do waive trial by jury in any
action, proceeding or counterclaim brought by either of the parties hereto
against the other on any matters whatsoever arising out of or in any way
connected with this lease, the relationship of Landlord and Tenant, Tenant's use
of or occupancy of the premises, and any emergency statutory or any other
statutory remedy. It is further mutually agreed that in the event Landlord
commences any summary proceeding for possession of the premises, Tenant will not
interpose any counterclaim of whatever nature or description in any such
proceeding including a counterclaim under Article 4 unless such waiver will
result under applicable law in the waiver of Tenant's right to bring such claim
in a separate proceeding.
26. Inability to Perform
(A) This lease and the obligation of Tenant to pay rent hereunder and
perform all of the other covenants and agreements hereunder on part of Tenant to
be performed shall in no wise be affected, impaired or excused (except to the
extent expressly set forth in this lease) because Landlord is unable to fulfill
any of its obligations under this lease or to supply or is delayed in supplying
any service expressly or impliedly to be supplied or is unable to make, or is
delayed in making any repair, additions, alterations or decorations or is unable
to supply or is delayed in supplying any equipment or fixtures if Landlord is
prevented or delayed from so doing by reason of strike or labor troubles or any
cause whatsoever beyond Landlord's reasonable control other than lack of funds,
including, but not limited to, government preemption in connection with a
National Emergency or by reason of any rule, order or regulation of any
department or subdivision thereof of any government agency or by reason of the
conditions of supply and demand which have been or are affected by war or other
emergency.
(B) Whenever Tenant, by the terms of this lease, shall be required to
make any alterations or repairs or perform or comply with any Laws, or any other
requirement of this lease other than those that can be performed by the payment
of money only, Tenant shall not be deemed to be in default in respect thereof
and Landlord shall not enforce or exercise any of Landlord's rights under this
lease if and so long as (i) Tenant, in good faith, uses diligent, reasonable
efforts to comply with and with due diligence proceeds to perform and meet all
the covenants, agreements and obligations relating thereto on Tenant's part to
be observed and performed hereunder, (ii) the non-performance or default shall
be caused by strikes, lockouts, non-availability of labor or materials, war or
national defense preemptions, governmental restrictions, acts of God, or other
causes beyond the reasonable control of Tenant, and (iii) Landlord is not
thereby subjected to criminal or civil liability or a default under any Building
mortgage or underlying lease.
27. Bills and Notices
All notices, bills, statements and other communications which either
party may be required or may desire to give to the other shall be in writing,
except as otherwise expressly provided in this lease. A notice of default which
Landlord may desire or be required to give to Tenant shall be deemed
sufficiently given or rendered if delivered to Tenant personally or sent by
registered or certified mail, return receipt requested, or nationally recognized
overnight courier providing a receipt, Attention: Chief Financial Officer,
addressed to Tenant at the Building or at the last known residence address or
business address of Tenant with a copy to: Christy & Viener, Attention: Laurence
S. Markowitz, and the time of the rendition of such bill or statement and of the
giving of such notice or communication shall be deemed to be the time when the
same is received by Tenant or delivery is refused. Any notice by Tenant to
Landlord must be served by registered mail, return receipt requested, or
nationally recognized overnight courier providing a receipt, Attention: Mr.
Peter Duncan, addressed to Landlord at the address first hereinabove given with
a copy to Stuart D. Byron, Esq. at Tenzer Greenblatt LLP, 405 Lexington Avenue,
New York, New York 10174, and shall be deemed delivered when received by
Landlord or delivery is refused. Either party shall have the right to designate
a different address for receipt of notice upon notice to the other. See also
Article 43 regarding notices to Mortgagee.
28. Services Provided by Landlord
(A) Throughout the Term, Landlord shall provide, at Landlord's cost
(except as otherwise provided in this lease):
(i) Necessary elevator facilities on business days from 8 a.m.
to 6 p.m. and Saturdays (except holidays as designated in Article 30) from 8
a.m. to 1 p.m. and have at least one elevator subject to call at all other
times.
(ii) Heat to the demised premises when and as required by Law,
on business days from 8 a.m. to 6 p.m. and Saturdays (except holidays as
designated in Article 30) from 8 a.m. to 1 p.m.
(iii) Water for ordinary lavatory and drinking purposes, but
if Tenant uses or consumes water for any other purposes (of which fact Landlord
shall be the sole judge), Landlord may install a water meter at Tenant's expense
which Tenant shall thereafter maintain at Tenant's expense in good working order
and repair to register Tenant's water consumption and Tenant shall pay for water
consumed as shown on said meter as additional rent within thirty (30) days after
bills are rendered.
(iv) Cleaning service for the demised premises on business
days (provided the same are kept in order by Tenant) in accordance with building
standard cleaning specifications from time to time in effect. Landlord agrees
that its building standard cleaning specifications shall be substantially
similar to other comparable office buildings from time to time. A copy of the
current building standard cleaning specifications are attached hereto as Exhibit
E. Landlord shall remove or cause the removal and Tenant shall pay Landlord the
cost of removal of any of Tenant's refuse and rubbish and woolen scraps from the
Building other than ordinary office refuse and rubbish.
(v) Condenser water for the base building air conditioning at
all times during the Term subject to the terms and conditions of this lease.
Tenant shall pay Landlord for such condenser water at the rate of $80.00 per ton
per annum as the same may be increased by Landlord form time to time but not in
excess of the percentage increase in the Revised Consumer Price Index for Urban
Consumers, published by the Bureau of Labor Statistics of the United States
Department of Labor, for the City of New York, New York, All Items, (1982-1984 =
100) or a successor or substitute index appropriately adjusted, by comparing the
index for the month in which such cost is increased by Landlord over the index
for the month in which this lease is dated.
All services specifically required to be provided by Landlord in this lease
shall be provided by Landlord substantially in conformance with the standards of
comparable office buildings.
(B) For Tenant's use of heat, air conditioning, ventilation, freight
elevators and loading docks during other than the normal business hours above
set forth, Tenant shall reimburse Landlord for its actual out-of-pocket costs
for labor (including fringe benefits) and other direct expenses that Landlord
incurs by reason of overtime use by Tenant, plus 7.5%. There is a four-hour
minimum on non-business days.
(C) Landlord reserves the right to stop services of the heating,
elevators, plumbing, air conditioning, ventilation, power systems or cleaning or
other services, if any, when necessary by reason of accident or for repairs,
alterations, replacements or improvements necessary or desirable in the
reasonable judgment of Landlord for as long as may be reasonably required by
reason thereof; provided, however, that Landlord agrees to use commercially
reasonable efforts to cause such suspended service to be resumed as soon as
reasonably practicable, but Landlord will not be required to use overtime labor
in connection therewith unless Tenant's operations would be materially disrupted
thereby.
29. Captions
The Captions are inserted only as a matter of convenience and for
reference and in no way define, limit or describe the scope of this lease nor
the intent of any provisions thereof.
30. Definitions
(A) The term "office" or "offices," wherever used in this lease, shall
not be construed to mean premises used as a store or stores, for the sale or
display, at any time, of goods, wares or merchandise of any kind, as a
restaurant, shop, booth, bootblack or other stand, barber shop, for other
similar purposes, or for manufacturing other than as expressly provided and
limited in Article 2(E) hereof. The term "Landlord" means a landlord or lessor,
and as used in this lease means only the owner, or the mortgagee in possession,
for the time being of the Land and Building (or the owner of a lease of the
Building or of the Land and Building), so that in the event of any sale or sales
of the Land and/or Building or of this lease, or in the event of a lease of the
Building, or of the Land and Building, the said Landlord shall be and hereby is
entirely freed and relieved of all covenants and obligations of Landlord
hereunder thereafter accruing, and it shall be deemed and construed without
further agreement between the parties or their successors in interest, or
between the parties and the purchaser at any such sale, or the said lessee of
the Building, or of the Land and Building, that the purchaser or the lessee of
the Building has assumed and agreed to carry out any and all covenants and
obligations of Landlord hereunder. The words "re-enter" and "re-entry" as used
in this lease are not restricted to their technical legal meaning. The term
"business days" as used in this lease shall exclude Saturdays, Sundays and all
days observed by the State or Federal Government as holidays and those
designated as holidays by the applicable Building service union employees
service contract or by the applicable Operating Engineers contract with respect
to HVAC service.
(B) The following terms contained in this Article 30 shall have the
meanings hereinafter set forth as such terms are used throughout this lease,
including the exhibits, schedules and riders hereto (if any).
(i) "Tenant's Proportionate Share of Taxes"
shall be 2.03%.
(ii) "Commencement Date" shall mean such date as
Landlord substantially completes the work re
quired to be performed by Landlord pursuant
to items 1 through 8 of Exhibit B in and to
the demised premises and tenders vacant
possession thereof to Tenant free of
demolition debris, refuse and rubbish.
Landlord shall provide not less than ten
(10) days notice of the anticipated date of
such substantial completion.
(iii) "Broker" shall mean collectively Cushman &
Wakefield, Inc. and George Comfort & Sons.,
Inc.
(iv) "Base Tax Year" shall mean the calendar year
1999, which is in effect one-half of the
aggregate of the two (2) New York City
fiscal tax years, the first commencing July
1, 1998 and ending June 30, 1999, and the
second commencing July 1, 1999 and ending
June 30, 2000.
31. Adjacent Excavation; Shoring
If an excavation shall be made upon land adjacent to the demised
premises, or shall be authorized to be made, Tenant shall afford to the person
causing or authorized to cause such excavation license to enter upon the demised
premises for the purpose of doing such work as said person shall deem necessary
to preserve the wall of the Building from injury or damage and to support the
same by proper foundations without any claim for damages or indemnity against
Landlord, or diminution or abatement of rent.
32. Rules and Regulations
Tenant and Tenant's servants, employees, agents, visitors and licensees
shall observe faithfully and comply strictly with the Rules and Regulations and
such other and further reasonable Rules and Regulations as Landlord or
Landlord's agents may from time to time adopt. Landlord agrees to act reasonably
in its applications of the Rules and Regulations. Notice of any additional Rules
or Regulations shall be given in such manner as Landlord may elect. In case
Tenant disputes the reasonableness of any additional Rule or Regulation
hereafter made or adopted by Landlord or Landlord's agents, the parties hereto
agree to submit the question of the reasonableness of such Rule or Regulation
for decision to the New York office of the American Arbitration Association,
whose determination shall be final and conclusive upon the parties hereto. The
right to dispute the reasonableness of any additional Rule or Regulation upon
Tenant's part shall be deemed waived unless the same shall be asserted by
service of a notice in writing upon Landlord within twenty (20) days after the
giving of notice thereof. Nothing in this lease contained shall be construed to
impose upon Landlord any duty or obligation to enforce the Rules and Regulations
or terms, covenants or conditions in any other lease, as against any other
tenant and Landlord shall not be liable to Tenant for violation of the same by
any other tenant, its servants, employees, agents, visitors or licensees.
Landlord shall promulgate and enforce the Rules and Regulations in a
non-discriminatory manner with respect to all office tenants. To the extent that
the provisions of this lease conflict with the Rules and Regulations, the
provisions of this lease shall control.
33. Security Deposit
(A) Tenant has deposited with Landlord the sum of $825,000.00
(the "Security Deposit") in the form of a letter of credit as hereinafter set
forth as security for the faithful performance and observance by Tenant of the
terms, provisions and conditions of this lease. If Tenant defaults with respect
to any of the terms, provisions and conditions of this lease, including, but not
limited to, the payment of rent and additional rent (subject to any applicable
notice and/or cure periods), Landlord may draw upon the letter of credit, and/or
may use, apply and/or retain the proceeds thereof or any cash security so
deposited, to the extent required for the payment of any rent and additional
rent or any other sum as to which Tenant is in default or for any sum Landlord
may expend or be required to expend by reason of Tenant's default, including,
but not limited to, any damages or deficiency in the re-letting of the premises,
whether such damages or deficiency accrued before or after summary proceedings
or other re-entry by Landlord. If Tenant fully and faithfully complies with all
of the terms, provisions, covenants and conditions of this lease, the Security
Deposit, or so much thereof as Landlord shall not have applied as set forth
herein, shall be promptly returned to Tenant after the expiration or earlier
termination of this lease and after delivery of entire possession of the demised
premises to Landlord. In the event of a sale of the land and Building or leasing
of the Building, Landlord shall transfer the Security Deposit to the vendee or
lessee and Landlord shall thereupon be released by Tenant from all liability for
the return thereof; and Tenant agrees to look solely to the new Landlord for the
return of the Security Deposit, and it is agreed that the provisions hereof
shall apply to every transfer or assignment made of the Security Deposit to a
new Landlord. Tenant further covenants that it will not assign or encumber or
attempt to assign or encumber the Security Deposit and that neither Landlord nor
its successors or assigns shall be bound by any such assignment, encumbrance,
attempted assignment or attempted encumbrance.
(B) Tenant has delivered, as the Security Deposit, an irrevocable
letter of credit (the "Letter of Credit") in the amount of the Security Deposit
issued by a New York City commercial bank acceptable to Landlord in its sole but
good faith discretion, in the form of the letter of credit annexed hereto as
Exhibit G, to be held by Landlord as security in accordance with this Article.
The Letter of Credit shall (i) initially expire not less than one (1) year after
the date of issuance, (ii) provide for automatic renewals for periods of not
less than one (1) year, and (iii) have a final expiration date not less than
four (4) months after the Expiration Date. Tenant shall pay to Landlord, on
demand and as additional rent hereunder, all fees and charges paid by Landlord
to the bank issuing the Letter of Credit in connection with the transfer of the
same to any future owner or lessee of the Building. In addition to its right to
draw upon the Letter of Credit as stated in Paragraph (A) above, Landlord shall
also have the right to draw down all or any portion of the Letter of Credit if
Landlord receives notice that the date of expiry of the Letter of Credit will
not be extended by the issuing bank and Landlord may retain the same for the
Security Deposit, in which event after deducting all of Landlord's expenses,
Landlord will hold the net proceeds as cash security in accordance with this
Article. If Landlord shall have drawn down the Letter of Credit and applied all
or any portion thereof, then, upon Landlord's request, Tenant shall cause the
Letter of Credit to be amended, or cause an additional Letter of Credit to be
issued (in each case in compliance with this Article), so that the aggregate
balance of such Letter(s) of Credit shall equal the required amount of the
Security Deposit; and if Tenant fails to do so within five (5) business days
after demand, Landlord may obtain such Letter of Credit on Tenant's behalf and
all of Landlord's expenses in so doing, above the cash security then being held
by Landlord, shall be payable by Tenant on demand as additional rent.
(C) Tenant will be permitted to reduce the amount of the Security
Deposit by $165,000.00 after the expiration of the fortieth (40th) month of the
Term and by $110,000.00 after the expiration of each of the fifty-second (52nd),
sixty-fourth (64th) and eighty-eighth (88th) months of the Term provided that,
for each such reduction, Tenant has achieved a Positive Cash Flow (as defined
below), as certified by an officer of Tenant and an independent certified public
accountant acceptable to Landlord, for Tenant's most recent fiscal year.
"Positive Cash Flow" shall mean net income determined in accordance with
regularly prepared financial statements prepared in accordance with generally
accepted accounting principles but adding back depreciation and amortization and
deducting capital expenditures and principal payments of debt. Notwithstanding
anything to the contrary contained herein, no reduction in the Security Deposit
shall be permitted unless, at such time, no default exists under this lease on
Tenant's part. (However, if such a default exists and Tenant is therefore not
entitled to a particular reduction in the Security Deposit, and if such default
is thereafter cured by Tenant, Tenant will become entitled to such reduction at
that time provided that the conditions permitting such reduction are still in
effect; i.e., that Tenant had a Positive Cash Flow, certified as above set
forth, for the most recent fiscal year.) If the Security Deposit is then in
cash, Landlord will pay to Tenant the amount of any applicable reduction within
fifteen (15) business days after Tenant's request therefor accompanied by any
required certifications or other documentation. If the Security Deposit is a
Letter of Credit, then, upon receipt of any required certifications or other
documentation, Landlord will accept a Letter of Credit in the proper reduced
amount in exchange for the existing Letter of Credit, or will enter into an
amendment of the Letter of Credit reducing the amount thereof to the proper
reduced amount.
(D) To the extent that Landlord is holding the Security Deposit in
cash, Landlord will (i) accept a new Letter of Credit subject to all the terms
and conditions of this Article in substitution therefor, and (ii) deposit the
cash in an interest bearing account, and provided Tenant is not in default, all
interest, except for one (1%) percent per annum of the principal amount of the
Security Deposit (which shall be retained and applied by Landlord as a service
charge in connection with the maintenance of the security account) shall be paid
annually to Tenant.
34. Successors and Assigns
The covenants, conditions and agreements contained in this lease shall
bind and inure to the benefit of Landlord and Tenant and their respective heirs,
distributees, executors, administrators, successors, and, except as otherwise
provided in this lease, their assigns.
35. Rental Payments
(A) The annual Fixed Rent for the premises shall be as follows:
(i) for the one (1) year period commencing on the Commencement
Date, Four Hundred Twenty-Two Thousand Nine Hundred Seventy and 60/100
($422,970.60) Dollars per annum;
(ii) for the one (1) year period commencing on the first (1st)
anniversary of the Commencement Date, Four Hundred Thirty-Four Thousand Six
Hundred Two and 29/100 ($434,602.29) Dollars per annum;
(iii) for the one (1) year period commencing on the second
(2nd) anniversary of the Commencement Date, Four Hundred Forty-Six Thousand Five
Hundred Fifty-Three and 85/100 ($446,553.85) Dollars per annum;
(iv) for the one (1) year period commencing on the third (3rd)
anniversary of the Commencement Date, Four Hundred Ninety-One Thousand Seven
Hundred Fifty and 08/100 ($491,750.08) Dollars per annum;
(v) for the one (1) year period commencing on the fourth (4th)
anniversary of the Commencement Date, Five Hundred Five Thousand Two Hundred
Seventy-Three and 21/100 ($505,273.21) Dollars per annum;
(vi) for the one (1) year period commencing on the fifth (5th)
anniversary of the Commencement Date, Five Hundred Nineteen Thousand One Hundred
Sixty-Eight and 22/000 ($519,168.22) Dollars per annum;
(vii) for the one (1) year period commencing on the sixth
(6th) anniversary of the Commencement Date, Five Hundred Eighty-Two Thousand
Eight Hundred Nineteen and 35/100 ($582,819.35) Dollars per annum;
(viii) for the one (1) year period commencing on the seventh
(7th) anniversary of the Commencement Date, Five Hundred Ninety-Eight Thousand
Eight Hundred Forty-Six and 88/100 ($598,846.88) Dollars per annum;
(ix) for the one (1) year period commencing on the eighth
(8th) anniversary of the Commencement Date, Six Hundred Fifteen Thousand Three
Hundred Fifteen and 17/100 ($615,315.17) Dollars per annum; and
(x) for the period commencing on the ninth (9th) anniversary
of the Commencement Date to and including the Expiration Date, Six Hundred
Thirty-Two Thousand Two Hundred
Thirty-Six and 34/100 ($632,236.34) Dollars per annum.
(B) All payments other than Fixed Rent to be made by Tenant pursuant to
this lease shall be deemed additional rent and, in the event of any non-payment
thereof, Landlord shall have all rights and remedies provided for herein or by
law for non-payment of rent.
(C) All payments of Fixed Rent and additional rent (collectively,
sometimes called "rent" or "rental" herein) to be made by Tenant pursuant to
this lease shall be made by checks payable in U.S. funds drawn upon a New York
City bank which is a member of the New York Clearing House Association or any
successor thereto or at Tenant's election by wire transfer drawn on a New York
City bank.
(D) If Landlord receives from Tenant any payment less than the sum of
the Fixed Rent and additional rent then due and owing pursuant to this lease,
Tenant hereby waives its right, if any, to designate the items to which such
payment shall be applied and agrees that Landlord in its sole discretion may
apply such payment in whole or in part to any Fixed Rent, any additional rent or
to any combination thereof then due and payable hereunder.
(E) Unless Landlord shall otherwise expressly agree in writing,
acceptance of Fixed Rent or additional rent from anyone other than Tenant shall
not relieve Tenant of any of its obliga tions under this lease, including the
obligation to pay Fixed Rent and additional rent, and Landlord shall have the
right at any time, upon notice to Tenant, to require Tenant to pay the Fixed
Rent and additional rent payable hereunder directly to Landlord. Furthermore,
such acceptance of Fixed Rent or additional rent shall not be deemed to
constitute Landlord's consent to an assignment of this lease or a subletting or
other occupancy of the demised premises by anyone other than Tenant, nor a
waiver of any of Landlord's rights or Tenant's obligations under this lease.
(F) Landlord's failure to timely bill all or any portion of any amount
payable pursuant to this lease for any period during the Term shall neither
constitute a waiver of Landlord's right to ultimately collect such amount or to
bill Tenant at any subsequent time retroactively for the entire amount so
unbilled, which previously unbilled amount shall be payable within thirty (30)
days after being so billed.
(G) Provided this lease shall be in full force and effect, Tenant shall
be entitled to a credit against the installments of the Fixed Rents for the
second (2nd) to the fifth (5th) full calendar months commencing after the
Commencement Date, in the aggregate amount of One Hundred Forty Thousand Nine
Hundred Ninety and 20/100 ($140,990.20) Dollars which credit shall be applied in
four (4) equal installments at the rate of Thirty-Five Thousand Two Hundred
Forty-Seven and 55/100 ($35,247.55) Dollars per month commencing from the second
(2nd) to the fifth (5th) full calendar months after the Commencement Date;
All other terms and conditions of this lease shall be in full
force and effect during such periods, including, but not limited to, Articles 12
and 36.
(H) If on the Commencement Date, or at any time during the Term, the
Fixed Rent or additional rent reserved in this lease is not fully collectible by
reason of any federal, state, county or city law, proclamation, order or
regulation, or any direction of any public officer or body pursuant to law
(collectively, "Rent Law"), Tenant agrees to take such steps as Landlord may
request to permit Landlord to collect the maximum rents which may be legally
permissible from time to time during the effective period of such Rent Law (but
not in excess of the amounts reserved therefor under this lease). Upon the
termination of the effective period of such Rent Law, Tenant shall pay to
Landlord, to the extent permitted by the Rent Law, an amount equal to (i) the
Fixed Rent and additional rent which would have been paid pursuant to this lease
but for such legal rent restriction, less (ii) the Fixed Rent and additional
rent paid by Tenant to Landlord during the effective period of such Rent Law.
36. Tax Escalation
(A) For purposes hereof:
(i) "Real Estate Taxes" shall mean all the real estate taxes
and any general or special assessments, vault taxes, government levies,
municipal taxes, county taxes or any governmental charge, ordinary or
extraordinary, unforeseen as well as foreseen, of any kind or nature whatsoever
(exclusive of interest and penalties) levied, assessed or imposed by any
governmental authority having jurisdiction upon or with respect to the Building
and land upon which it is located ("Land") (including, without limitation,
assessments for public benefits to the Land or Building and Business Improvement
District taxes or assessments and similar impositions); provided, however, that
if, because of any change in the taxation of real estate, any increase or any
other tax or assessment, however denominated (including, without limitation, any
franchise, income, profit, sales, use, occupancy, gross receipts or rental tax)
is imposed upon Landlord or the owner of the Land or the Building, or the
occupancy, rents or income therefrom, in substitution for or in addition to any
of the foregoing Real Estate Taxes or for an increase in any of the foregoing
Real Estate Taxes, such increase or other tax or assessment shall be deemed part
of Real Estate Taxes computed as if Landlord's sole asset were the Land and the
Building. Anything contained herein to the contrary notwithstanding, Real Estate
Taxes shall not be deemed to include (a) any taxes on Landlord's income, (b)
franchise taxes, (c) estate, gift, transfer or inheritance taxes, (d) mortgage,
recording and capital gains taxes incurred with respect to a sale or refinancing
of the Building and/or Land, (e) any increase in Real Estate Taxes resulting
from physically adding space to the Building, or (f) any similar taxes imposed
on Landlord, unless such taxes are levied, assessed or imposed as a substitute
for the whole or any part of, or as a substitute for an increase in, the taxes,
assessments, levies, fees, charges and impositions that now constitute Real
Estate Taxes.
(ii) "Base Year Taxes" shall mean the Real Estate Taxes as
finally determined for the Base Tax Year.
(B) If the Real Estate Taxes for any year during the Term exceed the
Base Year Taxes, Tenant shall pay Landlord Tenant's Proportionate Share of Taxes
of such excess within thirty (30) days after Landlord shall furnish to Tenant a
statement (the "Tax Statement") setting forth the amount thereby due and payable
by Tenant. If Real Estate Taxes are payable by Landlord to the applicable taxing
authority in installments, then Landlord shall bill Tenant for Tenant's
Proportionate Share of Taxes of the excess Real Estate Taxes in corresponding
installments, such that Tenant's payment is due not later than thirty (30) days
prior to the date when Landlord is obligated to pay the Real Estate Taxes to the
applicable taxing authority. If the actual amount of Real Estate Taxes is not
known to Landlord as of the date of the Tax Statement, then Landlord may
nevertheless bill Tenant for such installment on the basis of a good faith
estimate, in which event Tenant shall pay the amount so estimated within thirty
(30) days after receipt of such bill, subject to prompt refund by Landlord, or
payment by Tenant, upon a supplemental billing by Landlord once the amount
actually owed by Tenant is determined. Except as provided in the immediately
preceding sentence, Landlord shall provide Tenant with a copy of the current tax
bill used in the preparation of the Tax Statement with such Tax Statement.
(C) If Landlord receives any refund of Real Estate Taxes for any year
subsequent to the Base Tax Year for which Tenant has made a payment pursuant
hereto, Landlord shall (after deducting from such refund all reasonable expenses
incurred in connection therewith) pay Tenant, within thirty (30) days after
receipt, Tenant's Proportionate Share of Taxes of the net refund. If Landlord
succeeds in reducing any assessed valuation for the Land and the Building prior
to the billing of Real Estate Taxes for any year subsequent to the Base Tax
Year, Tenant shall pay Landlord Tenant's Proportionate Share of Taxes of the
reasonable expenses so incurred by Landlord.
(D) If any year subsequent to the Base Tax Year is only partially
within the Term, all payments pursuant hereto shall be appropriately prorated,
based on the portion of such year which is within the Term. Except as limited by
Articles 9 and 10: (i) Tenant's obligation to make the payments required by
Paragraphs (B) and (C) shall survive the Expiration Date or any sooner
termination of this lease, and (ii) Landlord's obligation to make the payments
required by Paragraph (C) shall survive the Expiration Date or any sooner
termination of this lease pursuant to Articles 9 and 10.
(E) Each final Tax Statement (as opposed to an estimated Tax Statement)
given by Landlord pursuant to Paragraph (B) shall be binding upon Tenant unless,
within the earlier to occur of one (1) year after its receipt of such Tax
Statement and copy of the applicable bill or one (1) year after the end of the
Term, Tenant notifies Landlord of its disagreement therewith, specifying the
portion thereof with which Tenant disagrees. Pending resolution of such dispute,
Tenant shall, without prejudice to its rights, pay all amounts determined by
Landlord to be due, subject to prompt refund by Landlord (without interest) upon
any contrary determination.
(F) Landlord hereby notifies Tenant that Landlord has applied for
benefits under the Industrial and Commercial Incentive Program ("ICIP") for the
Building. In connection therewith, all of Tenant's construction managers,
contractors and subcontractors employed in connection with construction work at
the Building shall be contractually required by Tenant to comply with the New
York City Office of Labor Services/Construction Division ("OLS") requirements
applicable to construction projects benefiting from the ICIP. Such compliance,
as of the date hereof, includes the following: the submission and approval of a
Construction Employment Report, attendance at a pre-construction conference with
representatives of the OLS and adherence to the provisions of Article 22 of the
ICIP Rules and Regulations, the provisions of New York City Charter Chapter 13-B
and the provisions of Executive Order No. 50 (1980). Furthermore, at Landlord's
request, Tenant shall (i) report to Landlord the number of workers permanently
engaged in employment in the premises, the nature of each worker's employment
and, to the extent applicable, the New York City residency of each worker, (ii)
provide access to the premises to employees and agents of the Department (as
such term is defined in the ICIP Rules and Regulations) at all reasonable times,
and (iii) enforce the contractual obligations of Tenant's construction managers,
contractors and subcontractors to comply with the OLS requirements.
37. Option to Expand
(A) For purposes of this Article,
(i) rentable space consisting of all or part of the
seventeenth (17th) floor (collectively, "Expansion Space") in the Building shall
be deemed "Available" only if and when (a) such space becomes vacant, free of
occupants and tenancies and rights (the "Third Party Rights") of third parties
existing as of the date of this lease or (b) (x) the then existing tenant of any
such space has not exercised an option to renew or extend the term of its lease
and the time by which such tenant must exercise such option has expired and (y)
subject to Paragraph E below, if Landlord has given an Offer Notice (as defined
below) and Tenant has not given a Tenant's Acceptance Notice in response
thereto, the then existing occupant thereof is not negotiating with Landlord for
a lease or renewal thereof, and (z) all Third Party Rights and the rights of
CLAIRTEX CORP. with respect to such space have expired or been waived without
having been exercised, or (c) Landlord reasonably expects that, within the
succeeding six (6) months, the lease therefor will be terminated (whether by
agreement, summary dispossess proceeding or otherwise) and Landlord will receive
vacant possession thereof free of any claims and Third Party Rights and CLAIRTEX
CORP. All current Third Party Rights, rights of currently existing tenants to
renew and rights of Clairtex Corp. are set forth in Exhibit H. Except as
provided in this lease or unless Landlord has given an Offer Notice and Tenant
has not given a Tenant's Acceptance Notice in response thereto, Landlord agrees
not to grant any new rights to Expansion Space that may become Available unless
the same are subject and subordinate to the rights of Tenant under this Article.
(ii) "Business Terms" shall mean the material economic
business terms upon which Landlord is willing in its sole discretion to enter
into a lease for the Offered Space (as hereinafter defined), including, without
limitation, the rental rate to be paid, any escalation payment obligations and
the applicable base years, any other additional rent, any work to be performed
or paid for by Landlord, the amount and duration of any rent concessions, and
the cost and extent of any so-called "take-over" obligations to be assumed by
Landlord. The lease of any Offered Space shall be co-terminous with the lease of
the initial demised premises.
(iii) "Net Effective Rental" shall mean the constant net
effective rental payable for the Offered Space for the portion of the balance of
the Term covered thereby, taking into account all applicable Business Terms and
calculated on the basis of an interest factor of the then-current Prime Rate.
(B) Tenant's rights under this Article shall exist only if and so long
as (i) Tenant is not in default under this lease after notice and expiration of
any applicable grace period, and (ii) Tenant exercises such rights in the manner
and within the applicable time period set forth in Paragraph (C) hereinbelow,
and (iii) there are at least five (5) years then remaining in the Term (as the
same may have then been or may simultaneously be extended pursuant to Article
51), and (iv) Tenant shall itself and its related companies (as defined in
Article 11(N) hereof) be occupying at least eighty (80%) per cent of the entire
premises then demised hereunder. Notwithstanding anything to the contrary
contained herein, Landlord need not send Tenant an Offer Notice with respect to
any Available Expansion Space if Landlord in good faith then currently
contemplates leasing such Available Expansion Space as part of a larger block
either containing at least a full floor in the building contiguous to the
demised premises or at least 75,000 square feet anywhere in the building, in
addition to the Available Expansion Space.
(C) If and when any Expansion Space becomes Available, and provided
that the conditions contained in Paragraph (B) above are then being met,
Landlord shall promptly deliver a notice (the "Offer Notice") to Tenant offering
to lease such space (together, at Landlord's option, with any other space
(consisting of at least an additional full floor) that Landlord wishes to market
with such space (collectively, the "Offered Space")) and stating the Business
Terms of such offer. Tenant shall thereupon have the right, to be exercised by a
notice ("Tenant's Acceptance Notice") given to Landlord no later than the
fifteenth (15th) day after Landlord delivers such Landlord's Offer Notice (as to
which time shall be of the essence), to lease all but not part of the Offered
Space on the terms hereinafter set forth. Tenant shall not have the right to
lease less than all of the Offered Space. Not later than thirty (30) days from
the giving of Tenant's Acceptance Notice, Tenant shall deliver to Landlord a
letter of credit as required by Article 33, or an amendment to the existing
Letter of Credit complying with Article 33, in each case increasing the Security
Deposit by an amount (the "Additional Security Deposit") initially equal to the
aggregate sum of Landlord's anticipated costs in connection with the leasing of
the Offered Space to Tenant, including, but not limited to, any work to be
performed or paid for by Landlord in or to the Offered Space, brokerage
commissions, attorneys' fees, rent concessions, work allowances or credits,
so-called "take-over" obligations to be assumed by Landlord, and any other
costs, credits or allowances that Landlord may incur or grant. Subject to the
same conditions set forth in Article 33(C), Tenant will be permitted to reduce
the Additional Security Deposit by an amount equal to eleven (11%) percent of
the initial Additional Security Deposit on each of the first, second, third,
fourth and fifth anniversaries of the Expansion Space Commencement Date.
(D) If Tenant timely delivers Tenant's Acceptance Notice, then, as of
the date (the "Expansion Space Commencement Date") on which Landlord delivers
possession of the Offered Space to Tenant in the condition set forth in the
Business Terms, the Offered Space shall become part of the demised premises upon
all the terms and conditions set forth in Landlord's Offer Notice and otherwise
upon all the same applicable terms and conditions set forth in this lease with
respect to the initial demised premises. Tenant's Proportionate Share of Taxes
with respect to the Offered Space shall be the rentable square feet contained
therein divided by 811,046, expressed as a percentage. Landlord agrees to use
diligent efforts to cause the Expansion Space Commencement Date to occur as
promptly as reasonably practicable after Landlord receives vacant possession of
the Offered Space.
(E) If Tenant fails timely to deliver Tenant's Acceptance Notice with
respect to the Offered Space, Tenant shall be deemed to have waived its rights
with respect to such Offered Space and Landlord shall be free to lease such
Offered Space to any third party on such terms and conditions as Landlord shall
determine; provided, however, that if Landlord wishes to enter into a lease for
the Offered Space at less than 92.5% of the Net Effective Rental contained in
the initial or immediately prior Landlord's Offer Notice with respect to such
Offered Space, or Landlord wishes to enter into a lease for less than the entire
Offered Space contained in the initial or immediately prior Landlord's Offer
Notice, then Landlord shall give Tenant a new Landlord's Offer Notice (unless
Landlord is not required to do so pursuant to Paragraph (B) hereof)
incorporating Business Terms equivalent to those that triggered Landlord's
obligation to deliver the new Landlord's Offer Notice, and Tenant shall have the
right, to be exercised by Tenant's Acceptance Notice given to Landlord no later
than the tenth (10th) day after Landlord delivers such Landlord's Offer Notice
(as to which time shall be of the essence), to lease all but not part of the
Offered Space or the new Offered Space, as the case may be, on such new terms,
in the same manner as set forth above with respect to the initial Landlord's
Offer Notice.
(F) Promptly after Tenant's delivery of Tenant's Acceptance Notice,
Landlord and Tenant shall execute and deliver an agreement incorporating the
applicable Offered Space into the demised premises and setting forth the terms
of the leasing thereof; provided that the failure of the parties to enter into
such an agreement shall not affect their respective rights and obligations
hereunder.
(G) If any occupant of any Offered Space leased by Tenant as aforesaid
does not vacate its space by the expiration of the then-existing lease therefor,
Landlord shall, at its sole expense, diligently pursue all available legal
remedies in order to obtain vacant possession of such space, including, without
limitation, the expeditious commencement and diligent prosecution of a holdover
proceeding, and shall keep Tenant apprised of the status of such efforts. The
parties acknowledge that by reason of the practices and procedures of the Civil
Court of New York County, Landlord and Tenant Part, it may not be possible for
Landlord expeditiously to recover vacant possession of all or a portion of such
space from such occupant. Therefore, no such holdover by such occupant shall
entitle Tenant to recover damages or any other amount from Landlord or to
terminate this lease at any time, nor shall Landlord be required to make any
payment to, or enter into any agreement with, such occupant to facilitate or
accomplish the recovery of vacant possession of such space. The provisions of
this Paragraph are intended to constitute "an express provision to the contrary"
within the meaning of Section 223-a of the New York Real Property Law.
(H) Notwithstanding anything to the contrary contained herein, in the
event that any Expansion Space consisting of 2,500 or less rentable square feet
is leased by Tenant and added to this lease (the "Unit") and thereafter
Expansion Space becomes Available which is contiguous to the Unit and Tenant
does not give Landlord a Tenant's Acceptance Notice with respect thereto, then
Landlord at its option shall have the right to relocate Tenant from the Unit and
substitute any comparable space in the Building in place of the Unit.
38. Air Conditioning
(A) Whenever the System is in operation, Tenant shall use its
reasonable efforts to close the venetian blinds and/or drapes in the demised
premises. Tenant shall comply with reasonable regulations promulgated by
Landlord in connection with heating, ventilating and air conditioning the
Building.
(B) Landlord will install the base building air conditioning servicing
the demised premises in accordance with Exhibit B.
39. Brokerage
Tenant and Landlord each represents that it did not deal with any
broker or finder in connection with this lease other than the Broker. Tenant
shall indemnify Landlord against any liability and expense (including reasonable
attorney's fees) for any brokerage commission or finder's fee claimed by anyone
other than the Broker based on the actions of Tenant or its agents or
representatives. Landlord will pay Broker a commission pursuant to a separate
agreement between Landlord and Broker and shall indemnify Tenant against any
liability and expense (including reasonable attorney's fees) for any brokerage
commission or finder's fee claimed by anyone, including the Broker, based on the
actions of Landlord or its agents or representatives. The parties' liability
hereunder shall survive any expiration or termination of this lease.
40. Building Directory
The listing of any party's name other than Tenant's shall neither grant
such party any right or interest in this lease and/or the demised premises nor
constitute Landlord's consent to any assignment or sublease to or occupancy by
such party.
41. Exculpatory Clause
(A) Anything herein to the contrary notwithstanding, the liability of
Landlord and any prior landlord hereunder and the partners and members of
Landlord and any prior landlord hereunder for negligence, failure to perform
lease obligations or otherwise under or in connection with this lease shall be
limited to their respective interests in the Land and Building. Tenant shall
neither seek to enforce nor enforce any judgment or other remedy against any
other asset of Landlord or any prior landlord hereunder or any partner or member
of Landlord or any prior landlord hereunder or any party that holds any interest
in Landlord or any prior landlord hereunder.
(B) Anything in this lease to the contrary notwithstanding, wherever
any provision is made in this lease for Landlord's consent or approval, or
exercise of judgment or imposition of a requirement, rule, regulation or
designation, or any determination by Landlord's agent, such consent or approval
shall not be withheld or delayed unreasonably or in bad faith and such judgment
or imposition of a requirement, rule, regulation or designation or determination
of Landlord's agent, shall be exercised reasonably and in good faith. Tenant
hereby waives any claim against Landlord which it may have (including, without
limitation, a claim for damages) based upon any assertion that Landlord or its
agent unreasonably withheld or delayed any such consent or approval, or
exercised its judgment or imposed a requirement, rule, regulation or
determination or designation or otherwise acted unreasonably (but Tenant does
not waive any claim that Landlord acted in bad faith). Whenever Tenant alleges
that Landlord has acted unreasonably with respect to a matter arising under this
lease (but not in bad faith), Tenant's sole remedy therefor shall be to send a
notice to Landlord ("Hearing Notice"), specifying the matter with respect to
which it alleges that Landlord has acted unreasonably ("Dispute") and electing
to have the Dispute resolved by an informal hearing ("Hearing") upon and subject
to the terms and conditions hereinafter set forth:
(i) The Hearing shall be held at the offices of
the hearing officer, who shall be selected pursuant to the then existing rules
and procedures of the American Arbitration Association in New York City, and who
shall be an attorney, duly admitted in New York, with at least ten (10) years
experience in Manhattan office leasing ("Hearing Officer");
(ii) The Hearing shall be held within ten (10) days
after the Hearing Officer is designated pursuant to substantive and
procedural rules to be established by the Hearing Officer;
(iii) The determination by the Hearing Officer shall
be conclusive upon the parties and shall be made within seven (7)
days after the Hearing is completed; and
(iv) If Landlord is determined to have acted
properly, Tenant shall pay the fees of the Hearing Officer. If Landlord is
determined to have acted improperly, Landlord shall pay such fees.
42. Submission to Jurisdiction, Etc.
(A) Tenant hereby represents to Landlord that it is not entitled,
directly or indirectly, to diplomatic or sovereign immunity (or, in the
alternative, Tenant hereby irrevocably and unconditionally waives diplomatic
and/or sovereign immunity if Tenant is entitled thereto). This lease shall be
deemed to have been made in New York County, New York, and shall be construed in
accordance with the laws of the State of New York. All actions or proceedings
relating, directly or indirectly, to this lease shall be litigated only in
courts located within the County of New York. Tenant, any guarantor of the
performance of its obligations hereunder ("Guarantor") and their respective
successors and assigns hereby irrevocably subject themselves to the jurisdiction
of any state or federal court located within such county, waive the personal
service of any process upon them in any action or proceeding therein and agree
that such process may be served by certified or registered mail, return receipt
requested, directed to Tenant and any successor at Tenant's address hereinabove
set forth, to Guarantor and any successor at the address set forth in the
instrument of guaranty and to any assignee at the address set forth in the
instrument of assignment. Such service shall be deemed made when such process is
received or delivery thereof is refused.
(B) If any monies owing by Tenant under this lease are paid more than
ten (10) days after the date such monies are payable pursuant to the provisions
of this lease, Tenant shall pay Landlord interest thereon, at the lesser (the
"Interest Rate") of the then maximum lawful rate or four (4%) percent per annum
over the then-current Prime Rate from time to time in effect, for the period
from the date such monies were payable to the date such monies are paid.
(C) The submission of this lease to Tenant shall not constitute an
offer by Landlord to execute and exchange a lease with Tenant and is made
subject to Landlord's execution and delivery thereof.
(D) Landlord and Tenant each respectively represent that the person
executing this lease on its behalf is duly authorized to execute, acknowledge
and deliver this lease.
(E) The provisions of this Article shall survive the expiration of this
lease.
43. Modifications Requested by Mortgagee, Etc.
(A) If any present or prospective mortgagee of the Land or the Building
or any leasehold interest therein requires, as a condition precedent to
extending or issuing its loan, the modification of this lease in such manner as
does not lessen Tenant's rights or increase its obligations hereunder or lessen
Landlord's obligations or increase Landlord's rights (except, in each case, to a
de minimis extent), Tenant shall not delay or withhold its consent to such
modification and shall execute and deliver such confirming documents therefor as
such mortgage reasonably requires.
(B) From and after written request by Landlord, Tenant agrees to send a
copy of all notices of default given by Tenant to Landlord hereunder to the
holder of the Fee Mortgage and Tenant agrees to accept any cure of such default
by the holder of the Fee Mortgage, provided such cure is commenced promptly
after the holder of the Fee Mortgage obtains sufficient control over the
Building to do so and is diligently prosecuted thereafter (but nothing herein
shall require the holder of the Fee Mortgage to cure any such default).
44. Tenant's Work
(A) Tenant shall, at its expense, and in compliance with the further
provisions of this Article 44, the "Alteration Rules" annexed as Exhibit F and
other applicable provisions of this lease, make such Alterations in the demised
premises as Tenant may consider necessary or desirable to prepare the same for
Tenant's initial occupancy ("Tenant's Work"). In addition, Tenant shall, at
Tenant's expense, make all modifications and additions and replacements to the
alarm systems within the demised premises as may be necessitated by Tenant's
Work.
(B) Tenant shall have prepared by a licensed architect, at Tenant's
expense, and shall submit to Landlord for its approval, complete, detailed and
fully dimensioned architectural, electrical, mechanical and engineering plans
and drawings (1/8" scale), and specifications for Tenant's Work ("Tenant's
Plans"). Tenant's Plans shall conform to the existing physical condition of the
Building, the filed plans and specifications for the Building, and all
applicable laws and requirements of law and public authorities and the rules and
regulations implementing the same.
(C) Upon Landlord's written approval of Tenant's Plans, which shall not
be unreasonably withheld and which shall be granted or withheld within seven (7)
business days after Landlord's actual receipt thereof, Tenant, at its expense,
shall cause Tenant's Plans (including necessary mechanical plans and
specifications) to be filed with the governmental agencies having jurisdiction
thereof, in order to obtain, and shall obtain, all governmental permits,
approvals, licenses, authorizations, waivers, consents and certificates
(collectively "Permits") that may be required in connection with the performance
of Tenant's Work. Tenant's Plans shall be delivered to Landlord by personal
delivery and shall not be deemed received until actual receipt thereof as
evidenced by a signed and dated receipt. If Landlord does not respond within the
aforesaid seven (7) day period and provided that Tenant gives Landlord an
additional notice stating that Landlord has so failed to respond and stating
that if Landlord fails to respond within five (5) business days of receipt of
such additional notice that approval will be deemed granted, and Landlord
continues to fail to respond within such five (5) day period, Tenant's plans
will be deemed approved. Landlord shall with reasonable promptness sign the
applications for such Permits prepared by Tenant which require Landlord's
signature and shall otherwise cooperate with Tenant, at Tenant's reasonable
expense, in connection with Tenant's efforts to obtain the Permits and Tenant
shall indemnify and hold Landlord harmless against any claim, cost, liability or
expense resulting from any error, omission or other impropriety or deficiency in
any such application. Tenant's Work shall be governed by the provisions of
Articles 3 and 6 as modified and supplemented by this Article. Landlord shall
permit Tenant's contractors, subcontractors and suppliers to move construction
materials, supplies and equipment for Tenant's Work to the demised premises and
to remove construction waste and debris therefrom, by an elevator to be
designated by Landlord, at times appointed by Landlord after normal hours or on
other than business days, giving effect to other previously made appointments
and subject to payment of any applicable fees therefor, provided, however,
Tenant shall be allowed an aggregate of twenty (20) hours non-consecutive use of
freight elevator without cost during the course of Tenant's Work or during the
time that Tenant moves into the Building. Tenant shall, and shall cause its
contractors, subcontractors and suppliers to, comply with the Alteration Rules
and Landlord's reasonable directions for the coordination and control of
construction activities in the Building and the protection and security of the
Building and its systems, facilities and occupants.
(D) If, by reason of the existence of a violation in the Building that
was not caused by Tenant, its agents, contractors or employees, Tenant is
delayed in the substantial completion of Tenant's Work, the Commencement Date
will be delayed by one day for each day of any such delay in the substantial
completion of Tenant's Work directly and solely caused by the existence of such
violation. Landlord will, as promptly as reasonably practicable after receipt of
notice of any such violation from Tenant, use all reasonable efforts to remove
or cure any such violation.
45. Insurance
(A) During the Term Tenant shall pay for and keep in force general
liability policies in standard form protecting against any and all liability
occasioned by accident or occurrence, such policies to be written on an
occurrence basis, with such deductibles as are reasonably acceptable to Landlord
and by recognized and well-rated insurance companies, having a policyholder's
rating of no less than "A" and a financial size category of not less than "XII"
in the most current edition of Best's Insurance Reports and authorized to
transact business in the State of New York. The minimum limits of liability
shall be a combined single limit with respect to each occurrence in an amount of
not less than $5,000,000 for injury (or death) and damage to property (which may
be carried under a basic $1,000,000 policy and an umbrella policy for the
balance provided that at all times during the Term there is no less than
$5,000,000 coverage with respect to the demised premises and the Building). If
at any time during the Term it appears that public liability or property damage
limits in the City of New York for premises similarly situated, due regard being
given to the use and occupancy thereof, are higher than the foregoing limits,
then Tenant shall increase the foregoing limits accordingly. Landlord, its
managing agent and each mortgagee of whom Tenant has received notice shall be
named as additional insureds in the aforesaid insurance policies. Tenant shall
also secure and keep in force "all risk" property insurance, including loss by
fire and, by means of the standard extended coverage endorsement, loss or damage
by such other casualties as may be covered thereby, covering all of its personal
property, machinery, equipment, trade fixtures, goods, merchandise, furniture,
furnishings and other items removable by Tenant located in the demised premises
for the full replacement value thereof from time to time. All such policies
shall also provide that Landlord and each such mortgagee shall be afforded
thirty (30) days prior notice of cancellation of said insurance. Tenant shall
deliver Acord 27 certificates of insurance evidencing such policies or at
Landlord's request, duplicate originals of such policies. All premiums and
charges for the aforesaid insurance shall be paid by Tenant and if Tenant shall
fail to make such payment when due, Landlord may, after giving Tenant at least
ten (10) days notice, make it and the amount thereof shall be repaid to Landlord
by Tenant on demand and the amount thereof may, at the option of Landlord, be
added to and become a part of the additional rent payable hereunder. Tenant
shall not violate or permit to be violated any condition of any of said policies
and Tenant shall perform and satisfy the requirements of the companies writing
such policies.
(B) Landlord will maintain liability and casualty insurance in
conformity with that maintained with respect to other similar buildings in the
vicinity.
46. Estoppel Certificate
Each party, at any time, and from time to time, upon at least twenty
(20) days' prior notice by the other, shall execute, acknowledge and deliver to
the requesting party, and/or to any other person, firm or corporation specified
by the requesting party, a statement certifying that this lease is unmodified
and in full force and effect (or, if there have been modifications, that the
same is in full force and effect as modified and stating the modifications),
stating the dates to which the Fixed Rent and additional rent have been paid,
stating whether or not there exists any default by the requesting party under
this lease, and, if so, specifying each such default, and any other matters
reasonably requested by the requesting party or the recipient. Notwithstanding
the foregoing, neither party shall be required to furnish such a statement more
frequently than three (3) times per year and Landlord shall be entitled to give
such statement to the best of its knowledge and to take an exception for items
of additional rent that have not yet been billed.
47. Holdover
If Tenant holds over after the expiration of the Term, the parties
hereby agree that Tenant's occupancy of the demised premises after the
expiration of the Term shall be upon all of the terms set forth in this lease
except that Tenant shall pay as a use and occupancy charge for the holdover
period an amount equal to the higher of (A) an amount equal to two (2) times the
sum of (i) the pro rata Fixed Rent payable by Tenant during the last year of the
Term and (ii) the pro rata additional rent payable by Tenant during the last
year of the Term, (provided that for the first month of such holdover period the
multiplier shall be reduced to one and one-half (1 1/2), or (B) an amount equal
to the then market rental value for the demised premises. Such use and occupancy
charge shall be in lieu of consequential damages.
48. Acceptance of Keys
If Landlord or Landlord's managing or rental agent accepts from Tenant
one or more keys to the demised premises in order to assist Tenant in showing
the demised premises for subletting or other disposition or for the performance
of work therein for Tenant or for any other purpose, the acceptance of such key
or keys shall not constitute an acceptance of a surrender of the demised
premises nor a waiver of any of Landlord's rights or Tenant's obligations under
this lease including, without limitation, the provisions relating to assignment
and subletting and the condition of the demised premises.
49. Tenant's Access to the Demised Premises
Subject to Landlord's reasonable security regulations and circumstances
beyond Landlord's reasonable control, Tenant shall have access to the demised
premises twenty-four (24) hours per day, every day of the year.
50. Hazardous Materials
(A) Neither Landlord nor Tenant shall cause or permit "Hazardous
Materials" (as defined below) to be used, transported, stored, released,
handled, produced or installed in or from the demised premises or the Building,
except that inflammable or combustible (but not explosive) items may be brought
into and used within the demised premises or the Building as may be needed for
the maintenance and operation of equipment found in an office building, so long
as done in compliance with all laws and governmental requirements. The term
"Hazardous Materials" shall, for the purposes hereof, mean any flammable,
explosive or radioactive materials, hazardous or toxic substances or wastes,
asbestos or any material containing asbestos, and any other substance or
material defined as hazardous by any federal, state or local law, ordinance,
rule or regulation, including, without limitation, the Comprehensive
Environmental Response Compensation and Liability Act of 1980, as amended, the
Hazardous Materials Transportation Act, as amended, the Resources Conservation
and Recovery Act, as amended, the Superfund Amendment and Reauthorization Act of
1986, or by the regulations adopted and publications promulgated pursuant to
each of the foregoing. In the event of a breach of the provisions of this
Article by either party, the other party, in addition to all of its rights and
remedies under this lease and pursuant to Law, may require the violating party
to remove any such Hazardous Materials from the demised premises or the Building
in the manner prescribed for such removal by all requirements of Law. The
provisions of this Article shall survive the expiration or sooner termination of
this lease.
(B) Landlord warrants and represents that no Hazardous Material that is
required under presently existing Law to be removed will exist in the demised
premises on the Commencement Date. In the event of a breach of said
representation that is the sole cause of delaying Tenant's Work (other than if
caused by materials introduced to the demised premises by or on behalf of
Tenant), as Tenant's sole and exclusive remedy, and at Landlord's sole cost and
expense, Landlord shall cause such Hazardous Material to be removed in
accordance with all applicable Laws and the Commencement Date shall be delayed
by one day for each day that the completion of Tenant's Work is delayed solely
by reason of the presence or Hazardous Materials that Landlord is required to
remove.
51. Option to Extend
(A) So long as Tenant (together with its related corporations) is
occupying the entire demised premises, Tenant may elect to extend the Term for
all (but not a portion of) the premises, for one (1) additional consecutive
period of five (5) years commencing on the day following the initial Expiration
Date and ending on the fifth (5th) anniversary of the initial Expiration Date
(the "Extension Term"), unless sooner terminated pursuant to any of the terms,
conditions or covenants of this lease or pursuant to law, provided that:
(i) Tenant shall give Landlord notice by overnight
courier or registered mail, return receipt requested (hereinafter called
"Extension Notice") of its election to extend the Term for the Extension Term
not later than ten (10) months prior to the commencement of the Extension Term,
time being of the essence, and
(ii) Tenant is not in monetary or material non-
monetary default under this lease beyond any applicable notice or grace period
as of the time of the giving of an Extension Notice.
(B) (i) The Fixed Rent payable by Tenant to Landlord during the
Extension Term is to be a sum equal to 100% of the fair market rent for the
demised premises determined as of the first day of that calendar month which is
six (6) months prior to the commencement of the Extension Term (such date is
hereinafter called "Determination Date") and which determination shall be made
within a reasonable period of time after the occurrence of the Determination
Date pursuant to the provisions of Paragraph (C) hereof.
(iii) For the purposes hereof, fair market rent shall
take into account all relevant factors, including without limitation, the actual
condition of the demised premises as of the Determination Date, the base years
applicable to Article 36, and Tenant's options pursuant to this Article and
Article 37.
(C) (i) Landlord and Tenant shall endeavor to agree upon the fair
market rent for the demised premises during the thirty (30) day period following
the Determination Date. If Landlord and Tenant cannot reach an agreement within
thirty (30) days after the Determination Date, Landlord and Tenant respectively
shall select a reputable, qualified, licensed real estate broker with at least
ten (10) years experience in mid-town New York County office leasing, having an
office in mid-town New York County and familiar with the rentals then being
charged in the Building and in comparable buildings (respectively, "Landlord's
Broker" and "Tenant's Broker"), who shall confer promptly after their selection
by Landlord and Tenant and shall endeavor to agree upon the fair market rent of
the demised premises. If Landlord's Broker and Tenant's Broker cannot reach
agreement within sixty (60) days after the Determination Date, then, within
twenty (20) days thereafter, they shall designate a third reputable, qualified,
licensed real estate broker with at least ten (10) years experience in midtown
New York County office leasing, having an office in midtown New York County and
familiar with the rentals then being charged in the Building and in comparable
buildings (the "Independent Broker"). Upon the failure of Landlord's Broker and
Tenant's Broker to agree upon the designation of the Independent Broker, then
the Independent Broker shall be appointed by a Justice of the Supreme Court of
the State of New York upon ten (10) days notice, or by an other court in New
York County having jurisdiction and exercising functions similar to those
exercised by the Supreme Court of the State of New York. Concurrently with such
appointment, Landlord's Broker and Tenant's Broker respectively shall submit a
letter to the Independent Broker, with a copy to Landlord and Tenant, setting
forth such broker's estimate of the fair market rent of the demised premises
(respectively, "Landlord's Broker's Letter" and "Tenant's Broker's Letter").
(ii) If the fair market rent set forth in Landlord's Broker's Letter
and Tenant's Broker's Letter differ by less than $2.50 per rentable square foot
per annum, then the fair market rent shall not be determined by the Independent
Broker, and the Fixed Rent payable by Tenant for the Extension Term shall be the
average of the fair market rent set forth in Landlord's Broker's Letter and
Tenant's Broker's Letter. If the fair market rent set forth in Landlord's
Broker's Letter and Tenant's Broker's Letter differ by more than $2.50 per
rentable square foot per annum, the Independent Broker shall conduct such
investigations and hearings as he may deem appropriate and shall, within sixty
(60) days after the date of his designation, choose either the rental set forth
in Landlord's Broker's Letter or that set forth in Tenant's Broker's Letter to
be the fair market rent and such choice shall be binding upon Landlord and
Tenant. Landlord and Tenant shall each pay the fees and expenses of its
respective broker. The fees and expenses of the Independent Broker shall be
shared equally by Landlord and Tenant.
(D) In the event Landlord or Tenant initiates the arbitration process
and as of the commencement date of the Extension Term the amount of the fair
market rent has not been determined, Tenant shall continue to pay the Fixed Rent
and additional rent in effect under this lease for the last month of the initial
Term (without giving effect to any temporary abatement thereof) and when such
determination has been made, an appropriate retroactive adjustment in the Fixed
Rent shall be made as of the commencement date of the Extension Term.
(E) All of the same terms, conditions, covenants and agreements
contained in this lease are to continue in full force and effect during the
Extension Term, including, without limitation, Article 36 hereof, except (i) the
Fixed Rent shall be determined pursuant to Paragraph (B) of this Article, (ii)
the Base Tax Year for the Extension Term will be the last full tax fiscal year
in the initial term, (iii) Tenant will have no other or further right to extend
or renew the Term, (iv) Tenant agrees to accept the demised premises in their
condition existing as of the commencement date of the Extension Term, subject to
any obligations under this lease then existing and which have not then been
complied with by Landlord, (v) Exhibit B and Articles 35(G), 52 and 53 will be
deemed deleted and there is to be no Landlord's Contribution or rent concession,
credit or abatement.
(F) If Tenant does not duly and timely give an Extension Notice
pursuant to the provisions of Paragraph (A) hereof, this Article will have no
force or effect and be deemed deleted from this lease and Tenant's options
deemed waived.
(G) If this lease is extended for the Extension Term, then Landlord and
Tenant agree to execute, acknowledge and deliver an instrument confirming the
exercise of Tenant's right to extend the Term, the last day of the Extension
Term and setting forth the Fixed Rent for the Extension Term, as finally
determined, but failure to do so will not affect the respective rights and
obligations of the parties.
(H) If Tenant duly and timely exercises its right to extend the Term
for the Extension Term pursuant to this Article, the phrases "the term of this
lease" or "the term hereof" or "the Term," as used in this lease, are to be
construed to include, when practicable, the Extension Term.
52. Landlord's Contribution
Following Landlord's approval of Tenant's Plans and prior to Tenant's
commencement of Tenant's Work, Tenant shall provide Landlord with true and
complete copies of all contracts covering or related to Tenant's Work and
Reimbursable Costs (as hereinafter defined).
(A) Subject to the terms and conditions set forth below, Landlord
agrees to reimburse Tenant up to a maximum amount of $576,030.00 ("Landlord's
Contribution") for costs ("Reimbursable Costs") incurred by Tenant for leasehold
improvements made in and to the demised premises within the first year of the
Term as part of Tenant's Work. Up to but not exceeding fifteen (15%) percent of
Landlord's Contribution may be utilized for ordinary and reasonable
out-of-pocket costs and fees of Tenant's architect, engineer and construction
manager (provided that each of them are independent and not related to or
employees of Tenant or any of its affiliated or related entities), filing fees,
moving costs and built-in equipment and fixtures which Tenant does not have the
right to remove at the expiration or sooner termination of the Term. Landlord
agrees to disburse from time to time, but not more often than once in any thirty
(30) day period, within ten (10) business days of receipt of each Tenant's
request, that portion of Landlord's Contribution equal to ninety (90%) per cent
of the amount set forth in Tenant's requisition for Reimbursable Costs,
provided, however, that Landlord will not be obligated to make any advance if,
and for so long as, Tenant is in default under this lease after receipt of
written notice. Landlord will also not be obligated to make any advance until
receipt of a request therefor from Tenant and the submission by Tenant of the
following:
(i) A certificate signed by Tenant and Tenant's architect
dated not more than ten (10) days prior to such request setting forth (a) the
attached list contains all of the contractors, subcontractors and materialmen
who furnished labor, supplies and materials to the demised premises and the
aggregate amount of monies that each contractor, subcontractor and materialman
received up to the date of Tenant's request, (b) that the sum then requested is
justly due to persons who have rendered services or furnished materials for the
work therein specified, and giving a brief description of such services and
materials and the several amounts due to each of said persons in respect
thereof, and stating that no part of such expenditure contained in the current
requisition, was the basis, in any previous or then pending prior request, for
the receipt of Landlord's Contribution or has been made out of the proceeds of
Landlord's Contribution received by Tenant, (c) that except for the amount, if
any, stated pursuant to the foregoing subdivision (i)(b) in such certificate to
be due to the date of Tenant's request for services or materials, there is no
outstanding indebtedness known to the persons signing such certificate, which is
then due and payable for labor, wages, materials, supplies or services in
connection with Tenant's Work which, if unpaid, might immediately become the
basis of a vendors, mechanic's, laborer's or materialmen's statutory or similar
lien upon such work or upon the land and building or any part thereof or upon
Tenant's leasehold interest, (d) that the work described in the certificate has
been completed substantially in accordance with the Tenant's Plans, (e) that
there has not been filed with respect to the demised premises or the building or
any part thereof or any improvements thereon, any vendor's, mechanic's,
laborer's, materialmen's or other like liens arising out of Tenant's Work which
has not been bonded or discharged of record, and (f) that Tenant has complied
with all of the conditions set forth in Articles 3 and 44 and the Alteration
Rules of this lease; and
(ii) Landlord agrees to disburse five (5%) percent of the
remaining ten (10%) percent balance of the portion of Landlord's Contribution
for which Tenant has submitted payment requests upon (a) substantial completion
of Tenant's Work in accordance with Tenant's Plans and a certificate signed by
Tenant and Tenant's architect certifying thereto has been delivered to Landlord,
and (b) Landlord's receipt of original, duly executed and acknowledged releases
of liens, paid receipts or such other proof of payment as Landlord reasonably
requires for all work done and materials supplied.
(iii) Landlord agrees to disburse the remaining five (5%) per
cent balance of the portion of Landlord's Contribution for which Tenant has
submitted payment requests upon full compliance by Tenant with the provisions of
subdivisions (x) and (y) of Article 3, except that final approval from the New
York City Fire Department will not be required provided Tenant has applied for
such final approval and diligently pursues the same until obtained and Tenant's
architect has furnished a written certificate to Landlord stating that to the
best of his knowledge all of Tenant's Work has been completed in full compliance
with the requirements of the New York City Fire Department.
(B) It is expressly understood and agreed that Tenant shall
expeditiously complete, at its sole cost and expense, Tenant's Work, whether or
not Landlord's Contribution is sufficient to fund such completion and
notwithstanding the provisions of subdivisions (ii) and (iii) of Paragraph (B)
of this Article. Any costs to complete Tenant's Work in excess of Landlord's
Contribution shall be the sole responsibility and obligation of Tenant.
(C) If Landlord shall fail to disburse to Tenant any portion of
Landlord's Contribution to which Tenant is entitled when due as a result of
Tenant's full compliance with the foregoing provisions of this Article, then
Tenant may give Landlord notice of such failure and if Landlord shall continue
to fail to make such disbursement to Tenant within twenty (20) days after
Landlord's receipt of notice, then Tenant shall have the right to offset the
amount of such disbursement against the Fixed Rent and additional rent next
becoming due under this lease. Notwithstanding the foregoing, Tenant shall not
have such offset right with respect to any portion of such reimbursement as to
which Landlord shall give Tenant notice that Landlord disputes Tenant's claim
with respect thereto unless Landlord continues to fail to reimburse Tenant for
ten (10) business days after Tenant has obtained and docketed a final judgment
therefor.
53. Landlord's Work
(A) Landlord agrees to commence diligently to perform the work required to
be performed by Landlord pursuant to Exhibit B annexed hereto (hereinafter
called "Landlord's Work") at Landlord's cost and expense except as otherwise
provided in Exhibit B, in building standard manner, which shall be good and
workmanlike and expeditiously performed in compliance with Law. If (i)
Landlord's performance, or failure to perform, the balance of Landlord's Work
after the Commencement Date, or (ii) the existence of a violation in the
Building after the Commencement Date, (a) that was not caused by Tenant, its
agents, contractors or employees, or (b) that is not permitted by this lease, is
the sole cause of a demonstrable delay in the substantial completion of Tenant's
Work with respect to the demised premises, then Tenant shall be entitled to a
day- for-day extension of the applicable rent abatement period set forth in
Article 35(G).
(B) The provisions of this Article 53 are expressly made subject to
Article 26(A) hereof but the Commencement Date shall not be deemed to have
occurred until Landlord has in fact complied with the provisions of Article
30(B)(ii).
(C) Landlord hereby confirms that Landlord intends to upgrade the
public lobby on the ground floor and the elevator cabs in the Building but not
during the time periods set forth for Landlord's Work.
54. Building Directory
(A) So long as this lease shall be in full force and effect, Tenant
shall be permitted up to twelve (12) listings on the directory in the lobby of
the building. Additional and changes in listings shall be at Tenant's cost but
not to exceed Landlord's out-of-pocket costs.
(B) The listing of any party's name other than Tenant's shall neither grant
such party any right or interest in this lease and/or the demised premises nor
constitute Landlord's consent to any assignment or sublease to or occupancy by
such party.
55. Signage
Tenant, at Tenant's sole cost and expense, shall have the right, during
the Term, to furnish and install signage on the wall of the elevator lobby on
the floor containing the demised premises and on the entrance door to the
demised premises, subject to the following terms and conditions. Said signs
shall be dignified in appearance and non-illuminated and shall be subject to
Landlord's prior written approval as to size, type, color and style. Prior to
the installation and display of such sign, Tenant shall submit to Landlord for
Landlord's approval, details of the size, type, color and style of such proposed
signs. Tenant, at Tenant's expense, shall at all times comply with all present
and future Laws, rules and regulations of Landlord and any and all governmental
and public authorities applicable to such signs. Landlord's approval under this
Article shall not be unreasonably withheld or delayed. Tenant shall pay the
entire cost of such signage and the entire cost of the installation, cleaning,
maintenance, repair and replacement thereof and the entire cost of all necessary
permits therefor. Upon the expiration or other termination of the Term, Tenant,
at Tenant's expense, shall promptly remove such signage and repair all damage
and injury caused by such removal.
(SIGNATURES ON FOLLOWING PAGE)
IN WITNESS WHEREOF, Landlord and Tenant have respectively
signed and sealed this lease as of the day and year first above written.
Witness for Landlord: 498 SEVENTH, LLC
/s/Maria E. Sierra By:Peter S. Duncan
By:/s/ Peter S. Duncan
Witness for Tenant: FORSTMANN & CO., INC.
/s/Robert H. Regan By:/s/Rodney J. Peckham
President
Federal Identification No.58-1651326
STATE OF NEW YORK )
) SS.:
COUNTY OF NEW YORK )
On the 15th day of September, 1998, before me personally came
Rodney J. Peckham, to me known, who, being by me duly sworn, did depose and
say that he resides at No. 560 West 43rd Street #44E NYC 10036 that he
is the Exec. Vice President of Forstmann & Co., Inc., the corporation described
in and which executed the foregoing instrument; and that he signed his name
thereto by authority of the board of directors of said corporation.
/s/Miriam W. Hermann
-----------------------------
RULES AND REGULATIONS ATTACHED TO
AND MADE A PART OF THIS LEASE
IN ACCORDANCE WITH ARTICLE 32.
1. The sidewalks, entrances, driveways, passages, courts, elevators,
vestibules, stairways, corridors or halls shall not be obstructed or encumbered
by any tenant or used for any purpose other than for ingress or egress from the
demised premises and for delivery of merchandise and equipment in a prompt and
efficient manner using elevators and passageways designated for such delivery by
Landlord. There shall not be used in any space, or in the public hall of the
Building, either by any tenant or by jobbers or others in the delivery or
receipt of merchandise, any hand trucks, except those equipped with rubber tires
and sideguards.
2. The water and wash closets and plumbing fixtures shall not be used
for any purposes other than those for which they were designed or constructed
and no sweepings, rubbish, rags, acids or other substances shall be deposited
therein, and the expense of any breakage, stoppage, or damage resulting from the
violation of this rule shall be borne by the tenant who, or whose clerks,
agents, employees or visitors, shall have caused it.
3. No carpet, rug or other article shall be hung or shaken out of any
window of the Building, and no tenant shall sweep or throw or permit to be swept
or thrown from the demised premises any dirt or other substances into any of the
corridors, halls, or elevators, or out of the doors or windows or stairways of
the Building. No tenant shall use, keep or permit to be used or kept any foul or
noxious gas or substance in the demised premises, or permit or suffer the
demised premises to be occupied or used in a manner offensive or objectionable
to Landlord or other occupants of the Building by reason of noise, odors and/or
vibrations, or interfere in any way with other tenants or those having business
therein, nor shall any animals be kept in or about the Building. Smoking or
carrying lighted cigars or cigarettes in the public areas of the Building is
prohibited.
4. No awnings or other projections shall be attached to the outside
walls of the Building without the prior written consent of Landlord.
5. No sign, advertisement, notice or other lettering shall be
exhibited, inscribed, painted or affixed by any tenant on any part of the
outside of the demised premises or the Building or on the inside of the demised
premises if the same is visible from the outside of the premises without the
prior written consent of Landlord, except that the name of such tenant may
appear on the entrance door of the premises. In the event of the violation of
the foregoing by any tenant, Landlord may remove the same without any liability,
and may charge the expense incurred by such removal to Tenant or tenants
violating this rule. Interior signs on doors shall be inscribed, painted or
affixed for each Tenant by Landlord at the expense of such Tenant, and shall be
of a size, color and style acceptable to Landlord.
6. No tenant shall in any way deface any part of the demised premises
or the Building. No boring, cutting or stringing of wires shall be permitted,
except as provided in Article 3. No tenant shall lay linoleum, or other similar
floor covering, so that the same shall come in direct contact with the floor of
the demised premises, and, if linoleum or other similar floor covering is
desired to be used, an interlining of builder's deadening felt shall be first
affixed to the floor, by a paste or other material, soluble in water, the use of
cement or other similar adhesive material being expressly prohibited.
7. No additional locks or bolts of any kind shall be placed upon any of
the doors or windows by any tenant, nor shall any changes be made in existing
locks or mechanism thereof unless Landlord is provided with a key thereto except
that Tenant shall be permitted to install its own security system in the demised
premises subject to all the terms and conditions of this lease including without
limitation Articles 3 and 44. Each tenant must, upon the termination of its
tenancy, restore to Landlord all keys of stores, offices and toilet rooms,
either furnished to, or otherwise procured by, such tenant, and in the event of
the loss of any keys so furnished, such tenant shall pay to Landlord the cost
thereof.
8. Freight, furniture, business equipment, merchandise and bulky matter
of any description shall be delivered to and removed from the premises only on
the freight elevators and through the service entrances and corridors, and only
during hours and in a manner reasonably approved by Landlord. Landlord reserves
the right to inspect all freight to be brought into the Building and to exclude
from the Building all freight which violates any of these Rules and Regulations
or the lease.
9. Canvassing, soliciting and peddling in the Building is prohibited.
10. Landlord reserves the right to exclude from the Building between
the hours of 6 p.m. and 8 a.m. and at all hours on Sundays and legal holidays
all persons who do not present a pass to the Building signed by Landlord.
Landlord will furnish passes to persons for whom any Tenant requests same in
writing. Each tenant shall be responsible for all persons for whom it requests
such pass and shall be liable to Landlord for all acts of such person.
11. Landlord shall have the right to prohibit any advertising by any
tenant containing the name or address of the Building which in Landlord's
opinion tends to impair the reputation of the Building or its desirability as a
Building for offices, and, upon written notice from Landlord, Tenant shall
refrain from or discontinue such advertising.
12. Tenant shall not bring or permit to be brought or kept in or on the
demised premises, any inflammable, combustible or explosive fluid, material,
chemical or substance (except for lawful quantities of normal office supplies),
or cause or permit any odors of cooking or other processes, or any unusual or
other objectionable odors to permeate in or emanate from the demised premises.
13. If the Building contains central air conditioning and ventilation,
Tenant agrees to keep all windows closed at all times and to abide by all rules
and regulations issued by Landlord with respect to such services. If Tenant
requires air conditioning or ventilation after the usual hours, Tenant shall
give notice in writing to the Building superintendent prior to 3:00 p.m. in the
case of services required on week days, and prior to 3:00 p.m. on the day prior
in the case of after hours service required on weekends or on holidays.
14. Tenant shall not move any safe, heavy machinery, heavy equipment,
bulky matter, or fixtures into or out of the Building without Landlord's prior
written consent. If such safe, machinery, equipment, bulky matter or fixtures
requires special handling, all work in connection therewith shall comply with
the Administrative Code of the City of New York and all other laws and
regulations applicable thereto and shall be done during such hours as Landlord
may reasonably designate.
EXHIBIT B
1. Demolish existing installation (including removal of all
obsolete pipes and conduits) and leave premises in broom clean condition.
2. Furnish Tenant an ACP-5 covering the demised premises.
3. Construct demising walls for the demised premises in
accordance with New York City code requirements.
4. Identify and tag all existing building system conduits,
pipes, risers or vertical conduits servicing the demised premises.
5. Cut back sprinkler system to the main valve in the demised
premises.
6. Remove all obsolete existing low voltage cabling or
telephone wires within the demised premises.
7. Remove sprinkler ladder if permitted by New York City code.
Remove abandoned piping across common corridor.
8. Remove existing knife switch in the demised premises.
Install fire stopping and fire proofing at all locations in the demised premises
required by code - fireproof all metal decking in the demised premises, if
required by code. Patch all holes in slab in the demised premises which are
beyond repair by standard flash patching.
9. Refurbish existing bathrooms on the floor containing the
demised premises including replacement of cracked, damaged and missing floor,
wall and ceiling tiles, cracked, damaged and missing mirrors, damaged partitions
and ceilings and damaged, broken and missing fixtures and hardware, and
repainting of the entire bathroom, including electrostatic painting of all stall
partitions and doors. Landlord shall perform the foregoing as well as making
common area egress and the "Class E" system in common areas of the floor
containing the demised premises so as to comply with current ADA standards and
all current applicable federal, state and city building codes.
10. Provide a sufficient number of connection points to the
Building's life safety systems, either on the 17th floor or on adjacent floors,
as required by code for Tenant to connect Tenant's required life safety devices.
Landlord shall be responsible for the cost of re-programming the "Class E"
system to accommodate Tenant's connections.
11. Repair or replace if needed freight elevator doors within
the demised premises. Sheetrock over the freight elevator not servicing the
demised premises and electronically lock out service of said elevator to the
demised premises.
12. Provide one (1) building standard radiator for each bay
window in the demised premises with new building standard automatic valves and
traps. Initially clean exterior of all windows in the demised premises.
13. Create two (2) air conditioning rooms in the demised
premises, including fire/smoke dampers, if required, and containing new building
standard water cooled air conditioning package units of up to 45 tons in the
aggregate ("base building air conditioning"). Tenant to be responsible for all
air conditioning ductwork and distribution.
14. Replace doors and hardware for two (2) fire stairs within
the demised premises.
Landlord agrees to use its best efforts to substantially
complete items 9 through 14 of this Exhibit B within sixty (60) days after the
Commencement Date.
Landlord and Tenant agree to cooperate with each other in
coordinating the balance of Landlord's Work after the Commencement Date and
Tenant's Work.
Notwithstanding anything to the contrary contained in this
lease including but not limited to Articles 23 and 53 hereof and Exhibit B, it
is understood and agreed that Landlord will at Landlord's expense (unless caused
by the fault of Tenant, its contractors, subcontractors or agents) obtain a
temporary certificate of occupancy and ultimately a permanent certificate of
occupancy covering the demised premises permitting the use set forth in Article
2A hereof, provided, however, it is understood, acknowledged and agreed that
Landlord will not be able to obtain (nor shall Landlord have any liability as a
result thereof) the temporary certificate of occupancy unless and until Tenant
completes Tenant's Work in accordance with all the terms and conditions of this
lease and obtains sign-offs from all governmental authorities having
jurisdiction thereof and furnishes the same to Landlord. At such time as
Landlord receives notice from Tenant that Tenant has so completed Tenant's Work
and delivers such sign-offs to Landlord, Landlord shall promptly apply for the
temporary certificate of occupancy covering the demised premises and diligently
pursue the same. At such time as Landlord is legally entitled to apply for a
permanent certificate of occupancy, Landlord will promptly apply for the same
and diligently pursue obtaining the issuance thereof. Tenant covenants and
agrees to cooperate with Landlord in connection with all of the foregoing. In
the event that a violation occurs resulting in a fine solely as a result of
Tenant's occupancy of the demised premises without Landlord's having obtained
the temporary certificate of occupancy when required pursuant to the foregoing
provisions and not as a result of the acts or omissions of Tenant or the manner
of use as opposed to mere occupancy for offices by Tenant, Landlord shall be
responsible for the payment of such fine.
EXHIBIT F
Dear :
Regarding the proposed alteration indicated by your provided
plan for Filing with the Building department, Landlord approves same only for
the purpose of required approval under the lease and for Filing purposes. Please
be advised that the following provisions apply to this and future approvals of
final construction plans when provided.
1. All costs and expenses in connection with or arising out of
the performance of the work shall be borne by Tenant. At no time shall Tenant do
or permit, anything to be done whereby our property may be subject to any
mechanics' or other liens or encumbrances arising out of the work; and our
consent herein shall not be deemed to constitute any consent or permission to do
anything which may create or be the basis of any lien or charge against the
estate of the Landlord in the demised premises or the real estate of which they
are a part.
2. All materials as well as methods and processes used in the
performance of the work shall conform to the standards of the building, and it
is assured that your contractor is entirely familiar with such requirements or
that he will familiarize himself therewith.
3. Tenant will perform this work in a safe and lawful manner
complying with applicable laws and all requirements and regulations of municipal
and other governmental or duly constituted bodies exercising authority,
including but not limited to required compliance with the applicable Americans
with Disabilities Act of 1990.
4. Tenant will hereby indemnify and agree to defend and hold
us harmless from and against any and all suits, claims, violations, actions,
loss, cost arising from or relating to or in connection with any personal injury
or property damage caused in the performance of this work by you, and your
employees, agents, servants of contractors engaged by you; and you will repair
or replace, or at our election reimburse us for the cost of repairs, or
replacing any portion of the building or item of equipment, or any of our real
or personal property so damaged, lost or destroyed in the performance of this
work.
5. Workmen's Compensation, Comprehensive Liability, Bodily
Injury and Property Damage Insurance in at least the amount of $10,000,000.00,
Combined Single Limit (CSL) with companies and on forms satisfactory to us,
shall be provided and at all times maintained by Tenant and your contractors
engaged in the per formance of the work, and before proceeding with the work,
certificates of such insurance shall be submitted to us and, if requested, the
original policies thereof.
6. We shall have no responsibility for, or in connection with,
the work and you will remedy at your expense, and be responsible for any and all
defects in all such work that may appear during or after the completion thereof
whether the same shall affect premises in particular or any part of the building
in general.
7. Landlord or its agents shall not be responsible for any
disturbances or deficiency created in the air conditioning or other mechanical,
electrical or structural facilities within the building as a result of the
alteration unless due to a pre-existing defect or system inadequacy. If such
disturbances or deficiencies result, it shall be the tenant's entire
responsibility to correct the resulting conditions, and to restore the services
to the complete satisfaction of the Landlord, its Architect and Engineers.
8. (a) Tenant's contractors shall comply with the rules of
the building and the manner of handling materials, equipment and debris to avoid
conflict and interference with building operation.
(b) The delivery of materials and equipment must be
arranged to avoid any inconvenience and annoyance to other Tenants.
Cleaning must be controlled to prevent dirt and dust from
infiltrating into adjacent Tenant or mechanical areas.
9. We expressly reserve the right to revoke this consent upon
three (3) days notice to you in the event of the breach of any of the terms or
conditions hereof that is not cured with such three-day period.
10. Any cost incurred by Landlord pursuant to this agreement
shall be payable by tenant as additional rent as and when billed.
11. Submit all permits prior to starting work, approved plans,
electrical approvals, and final inspections for our records.
12. Submit final approval by Building Department, Fire
Department and Architect's Write-offs for the work.
13. In the event of any inconsistency between this letter and
the lease, the lease shall prevail.
Please sign and return one (1) copy to our office prior to
commencement of work.
Very truly yours,
498 SEVENTH, LLC
By:_________________________
ACCEPTED & AGREED TO:
By:__________________________
Date:________________________
EXHIBIT G
[Name and Address
of Landlord]
Re: Irrevocable Clean Letter of Credit
Gentlemen:
By order of our client, _____________________________, we hereby open
our clean irrevocable Letter of Credit No. _______ in your favor for an amount
not to exceed in the aggregate $______US Dollars effective immediately.
Funds under this credit are available to you against your sight draft
drawn on us mentioning thereon our Credit No. __.
This Letter of Credit shall expire one year from the date hereof;
provided, however, that it is a condition of this Letter of Credit that it shall
be deemed automatically extended, from time to time, without amendment, for one
year from the expiry date hereof and from each and every future expiry date,
unless at least sixty (60) days prior to any expiry date we shall notify you by
registered mail that we elect not to consider this Letter of Credit renewed for
any such additional period.
This Letter of Credit is transferable and may be transferred one or
more times. However, no transfer shall be effective unless advice of such
transfer is received by us in the form attached signed by you.
We hereby agree with you that all drafts drawn or negotiated in
compliance with the terms of this Letter of Credit will be duly and promptly
honored upon presentment and delivery of your draft to our office at
___________________ if negotiated on or prior to the expiry date as the same may
from time to time be extended.
Except as otherwise specified herein, this Letter of Credit is subject
to the Uniform Customs and Practice for Documentary Credits (1993 Revision),
International Chamber of Commerce Publication No.
500.
Very truly yours,
(Name of Bank)
By: ____________________
EXHIBIT G-1
Re: Credit Issued by
- ------------------- ----------------------
Gentlemen:
For value received, the undersigned beneficiary irrevocably transfers
to:
- ------------------------------------------------------------
(Name of Second Beneficiary)
- ------------------------------------------------------------
(Address)
all rights of the undersigned beneficiary to draw under the
above Letter of Credit in its entirety.
By this transfer, all rights of the undersigned beneficiary
in such letter of Credit are transferred to the second beneficiary and the
second beneficiary shall have the sole rights as beneficiary thereof, including
sole rights relating to any amendments whether increases or extensions or other
amendments and whether now existing or hereafter made. All amendments are to be
advised direct to the second beneficiary without necessity of any consent of or
notice of the undersigned beneficiary.
The advice of such Letter of Credit is returned herewith, and we ask
you to endorse the assignment on the reverse thereof and forward it directly to
the second beneficiary with your customary notice of transfer.
Enclosed is remittance of $100.00 in payment of your transfer
commission and in addition thereto we agree to pay you on demand any expenses
that may be incurred by you in connection with this transfer.
Yours very truly,
SIGNATURE AUTHENTICATED
(Bank) Signature of Beneficiary
(Authorized Signature)
EXHIBIT H
Seventeenth (17th) Floor Rights
1. CHARLES ALAN, INC. has options to extend the term of its lease
covering Suite 1709, each option to be exercised upon not less
than 180 days notice, and each for a period of two (2) years,
the first commencing February 1, 2001 through January 31,
2003, and the second commencing February 1, 2003 through
January 31, 2005.
2. CLAIRTEX CORP. has the right to lease Suite 1700 for a period
of approximately ten (10) years commencing February 1, 2000
or such earlier date as the space may become vacant or
available. -ii-
<PAGE>
Exhibit 10.10(b)
FIRST AMENDMENT OF LEASE
AGREEMENT made as of this 30th day of December, 1998, between
498 SEVENTH, LLC, a New York limited liability company, having an office c/o
George Comfort & Sons, Inc. at No. 200 Madison Avenue, Borough of Manhattan,
City, County and State of New York 10016 (hereinafter referred to as
"Landlord"), and FORSTMANN & CO., INC., a corporation duly organized and
existing under the laws of the State of Georgia, qualified to do business in the
State of New York and having a place of business at No. 1155 Avenue of the
Americas, Borough of Manhattan, City, County and State of New York 10036
(hereinafter referred to as "Tenant").
W I T N E S S E T H:
WHEREAS, Landlord and Tenant heretofore entered into a certain
written lease dated as of September 15, 1998, wherein and whereby Landlord
leased to Tenant, and Tenant hired from Landlord, those certain premises known
as a portion of the seventeenth (17th) floor, as more particularly described and
as shown hatched on the plan annexed to said lease in the building known as No.
498 Seventh Avenue, in the Borough of Manhattan, City, County and State of New
York, for a term of ten (10) years and four (4) months to commence on the
Commencement Date (as defined therein) and to end on the Expiration Date (as
defined therein) (or until such term shall sooner cease and expire as provided
in said lease), at the rental and additional rental and upon the covenants,
conditions, provisions, and agreements con tained in such lease, (which lease is
hereinafter referred to as the "Lease"); and
WHEREAS, Landlord and Tenant desire to modify the Lease only in
the respects hereinafter stated;
NOW, THEREFORE, in consideration of the premises and the
mutual covenants hereinafter contained, the parties hereto by these presents do
covenant and agree as follows:
o All terms contained in this Agreement shall, for the purposes hereof, have the
same meanings ascribed to them in the Lease unless otherwise defined herein. As
used herein, the term "Lease" shall mean the Lease as amended by this Agreement
and as the same may be hereafter amended.
1. The Commencement Date and the Expiration Date of the Lease
shall conclusively and for all purposes be deemed to be November 5, 1998 and
March 31, 2009, respectively.
2. It is acknowledged that Landlord has substantially
completed all of Landlord's Work originally provided in the Lease to be done
prior to the Commencement Date and Tenant has commenced Tenant's Work in the
demised premises. With respect to Landlord's Work provided in the Lease to be
done subsequent to the Commencement Date, the terms of the Lease shall prevail.
3. Article 12(B)(ii) of the Lease shall be modified by adding
the words "and kilowatts of demand" after the word "hours" and before the word
"recorded" therein.
4. If, within thirty (30) days after the Commencement Date (as
defined in Article 30(B)(ii) of the Lease), Landlord shall have failed to pay
the real estate brokerage commission due and payable to the Broker pursuant to
separate agreement between Landlord and the Broker, then Tenant may at its
option give Landlord notice of such failure and if Landlord shall continue to
fail to make such payment within ten (10) days after Landlord's receipt of such
notice, then Tenant shall have the right to pay such due and unpaid commission
on a pari passu basis to each firm constituting the Broker and offset the amount
of its payment against the Fixed Rent next becoming due under the Lease to the
extent and amount that Tenant shall have in fact expended and paid.
Notwithstanding the foregoing, Tenant shall not have such right of payment to
any portion of such commission as to which Landlord shall give Tenant notice
that Landlord disputes the Broker's claim with respect thereto.
5. Except as modified by this agreement, the Lease and all the
terms, covenants, conditions, provisions, and agreements thereof are hereby in
all respects ratified, confirmed, and approved.
6. This agreement contains the entire understanding between
the parties with respect to the matter contained herein. No representations,
warranties, covenants or agreements have been made concerning or affecting the
subject matter of this agreement, except as are contained herein.
7. This agreement may not be changed orally, but only by an
agreement in writing signed by the party against whom enforcement of any waiver,
change, modification or discharge is sought.
8. This agreement shall be binding upon, and inure to the
benefit of the parties hereto, their respective legal representatives,
successors and, except as otherwise provided in the Lease as modified by this
agreement, their respective assigns.
9. The submission of this agreement to Tenant shall not be
construed as an offer, nor shall Tenant have any rights with respect hereto,
unless and until Landlord and Tenant shall execute a copy of this agreement and
Landlord delivers a fully executed counterpart to Tenant.
IN WITNESS WHEREOF, the parties hereto have respectively
executed this agreement as of the day and year first above written.
498 SEVENTH, LLC
By: C/L GROUP, LLC, its manager
By: COMFORT 498, INC., its manager
By:/s/Peter S. Duncan
President
FORSTMANN & CO., INC.
By:/s/ Rodney J. Peckham
Executive Vice President
STATE OF NEW YORK )
) SS.:
COUNTY OF NEW YORK )
On the 30th day of December, 1998, before me personally came Rodney J. Peckham,
to me known, who, being by me duly sworn, did depose and say that he resides at
560 West 43rd Street, Apartment #44E, New York, New York 10036, that he is the
Executive Vice President of Forstmann & Co., Inc., the corporation described in
and which executed the foregoing instrument; and that he signed his name thereto
by authority of the board of directors of said corporation.
/s/Miriam W. Hermann
--------------------------------
Notary Public
<PAGE>
Exhibit 10.11
EMPLOYMENT AGREEMENT
AGREEMENT, dated as of January 26, 1998, between FORSTMANN &
COMPANY, INC., a Georgia corporation (the "Company"), and BRIAN A. MOORSTEIN
("Executive").
W I T N E S S E T H:
WHEREAS, the Company wishes to avail itself of the advice and
services of Executive in connection with its business, and Executive wishes to
be employed by the Company;
NOW, THEREFORE, in consideration of the premises and of the
mutual agreements set forth herein, the parties agree as follows:
1. Services.
1.1 Employment and Term. Subject to the terms and conditions
of this Agreement, the Company agrees to employ Executive, and Executive agrees
to serve the Company, as its President and in such additional executive
capacities as the Board of Directors of the Company may reasonably request. The
term of this Agreement (the "Term") shall commence on the date of this Agreement
and shall continue through January 26, 2000. On such date and each following
January 26, the Term shall automatically be extended for one additional year,
unless the Company notifies Executive not later than one year prior to January
26, 2000 or to any anniversary date thereof of its election not to so extend the
Term.
1.2 Duties. Executive shall perform such duties and shall have
such responsibilities as normally pertain to the offices which he holds.
Executive shall report directly to the Board of Directors of the Company.
Executive shall perform his duties to the best of his ability and shall devote
substantially all of his business time, efforts and attention to such duties,
subject to the understanding that he may have various investment activities
which may, from time to time, require his attention, but which shall not
interfere with the performance of his duties to the Company.
1.3 Service for Subsidiaries. At the request of the Company's
Board of Directors, Executive shall also serve as an officer or director of any
subsidiary which the Company may form. Executive shall receive no compensation
for such service in addition to that provided in Section 2.
2. Compensation.
2.1 Salary. During the term of this Agreement, the Company
shall pay to Executive an annual salary of not less than $265,000 in equal
semi-monthly installments.
2.2 Management Incentive Plan. During the Term, Executive
shall participate in the Company's Management Incentive Plan as a "Group I"
participant for as long as the Company maintains such plan. Nothing in this
Section 2.2 shall require the Company to continue such plan for any particular
period or shall limit the Company's right to modify such plan in any respect.
2.3 Stock Options. Executive shall continue to participate in
the Company's Executive Stock Option Plan (the "Option Plan"). In addition to
the stock options previously granted to Executive, he shall be granted as of the
date hereof options to purchase 12,000 shares of the Company's Common Stock
under the Option Plan at an exercise price of $12.88 per share. On the third
anniversary date of this Agreement and on each anniversary date thereafter,
provided that Executive is still employed by the Company, he shall automatically
be granted an option to purchase an additional 2,500 shares of the Company's
Common Stock under the Option Plan. Each option shall become exercisable as to
one-third of the shares subject to such option on the date of grant and on each
of the first two anniversary dates of the date of grant. Options shall be
exercisable for a term of 10 years or until earlier terminated, as provided in
the Option Plan.
2.4 Benefit Plans. Executive shall be entitled to participate
in all employee fringe benefit plans and policies that the Company may make
available to, or have in effect for, its senior executives from time to time,
including, without limitation, health, hospitalization and welfare benefits,
pension, profit-sharing and similar plans, incentive compensation plans, stock
option plans, and savings, investment, retirement and supplemental benefit
plans, in each case subject to the eligibility and other provisions of any such
plan or policy. Nothing in this Section 2.4 shall require the Company to
institute or make available to Executive any particular benefit plan or policy.
2.5 Expense Reimbursement. Executive shall be entitled to
reimbursement for all reasonable and necessary travel, entertainment and other
expenses which are incurred by him in the performance of his duties. The Company
shall pay or reimburse Executive such expenses on presentation, within a
reasonable time after such expenses are incurred, of an itemized account of such
expenses, together with such vouchers or receipts for individual expense items
as the Company may from time to time require under its normal policies and
procedures.
2.6 Vacation. Executive shall be entitled to paid vacation
leave during each year in accordance with such policies as the Company may have
in effect from time to time.
2.7 Parking. During the Term, the Company shall pay, or
reimburse Executive for, the reasonable cost of parking one automobile in a
parking garage reasonably convenient to the Company's offices.
3. Termination.
3.1 Termination for Cause. In the event of Executive's (i)
continuing gross neglect (after written warning) or willful misconduct in the
performance of his duties, (ii) material breach of Sections 4 or 5, (iii)
conviction for a felony or (iv) drunkenness or illegal use of drugs which
interferes with the performance of his duties under this Agreement and which
continues after written warning or (v) commission of acts constituting fraud,
gross dishonesty or harassment against the Company or any of its employees, this
Agreement and Executive's employment may be termi nated by the Company without
prior notice. In the event of such termination, the Company shall pay Executive
any salary and expense reimbursement owed to him for periods through the date of
termi nation and shall have no other liability to him hereunder other than as
required under applicable law.
3.2 Termination on Account of Death or Disability. If
Executive dies, this Agreement shall terminate. If Executive, due to physical or
mental disability or incapacity, is unable to substantially perform his duties
hereunder for a period of 90 consecutive days or more, or for an aggregate of
six months in any 18-month period, the Company shall have the right to terminate
Executive's employment hereunder on 45 days' prior written notice. If Executive
is able to and re commences rendering services and performing his duties
hereunder within such 45-day notice period, such notice shall be vitiated. In
the event of Executive's death or disability, Executive or his personal
representatives shall be entitled to receive all earned but unpaid compensation
through the date of termination of his employment. If this Agreement is
terminated on account of Executive's death or disability, the Company shall pay
Executive or his personal representatives an amount equal to one year's salary
at its then current rate not later than the 45th day following such termination,
less any amounts paid or payable to Executive under any policies of insurance
obtained by the Company.
3.3 Termination Without Cause in Certain Circumstances. If (i)
the Company elects not to extend the Term on any anniversary date of this
Agreement as contemplated in the last sentence of Section 1.1 (which election
shall be deemed for purposes of this Section 3.3 to be a termination of
Executive's employment without cause effective as of such anniversary date) or
(ii) a Change in Control (as defined below) occurs and, within two years
following such Change in Control, the Company terminates Executive's employment
other than for cause pursuant to Section 3.1 or on account of Executive's death
or disability pursuant to Section 3.2 (for this purpose, a material reduction in
Executive's responsibilities, title or authority or a change in his reporting
responsibilities so that he no longer reports directly to the Company's Board of
Directors shall be deemed to be a termination without cause), the Company shall
pay Executive a termination award equal to 200% of Executive's then current
salary pursuant to Section 2.1., plus an amount equal to the average of the
annual incentive bonuses paid to Executive over the three completed years
preceding the date of termination. Any such termination award shall be payable
(A) if clause (i) of this Section 3.3 applies, in two equal installments equal
to 50% of the total termination award each, with the first installment to be
payable not later than three days following the date of termination of
Executive's employment and the second installment to be payable not later than
180 days following the due date of the first installment or (B) if clause (ii)
of this Section 3.3 applies, in one lump sum payment not later than three days
following the date of termination of Executive's employment. Such payment or
payments shall be in lieu of any other severance or other payment or arrangement
in favor of Executive which is in effect on the date of this Agreement, any
right to which Executive waives as of the date hereof.
For purposes of this Agreement, a "Change in Control" means
the occurrence of any of the following events:
(a) a majority of the members of the Board at any time cease
for any reason other than due to death or disability to be persons who were
members of the Board 24 months prior to such time (the "Incumbent Directors");
provided that any director whose election, or nomination for election by the
Company's stockholders, was approved by a vote of at least a majority of the
members of the Board then still in office who are Incumbent Directors shall be
treated as an Incumbent Director; or
(b) any "person," including a "group" (as such terms are used
in Sections 13(d) and 14(d) (2) of the Exchange Act, but excluding the Company,
its affiliates (that is, any subsidiary or parent corporation of the Company, as
such terms are used in Section 424 of the Internal Revenue Code of 1986, as
amended), any employee benefit plan of the Company or any affiliate, employees
of the Company or any affiliate or any group of which any of the foregoing is a
member) is or becomes the "beneficial owner" (as defined in Rule 13(d) (3) under
the Exchange Act), directly or indirectly, including without limitation, by
means of a tender or exchange offer, of securities of the Company representing
40% or more of the combined voting power of the Company's then outstanding
securities; or
(c) the stockholders of the Company shall approve a definitive
agreement (i) for the merger or other business combination of the Company with
or into another corporation immediately following which merger or combination
(A) the stock of the surviving entity is not readily tradeable on an established
securities market, (B) a majority of the directors of the surviving entity are
persons who (I) were not directors of the Company immediately prior to the
merger and (II) are not nominees or representatives of the Company or (C) any
"person," including a "group" (as such terms are used in Sections 13(d) and
14(d) (2) of the Exchange Act, but excluding the Company, its Affiliates, any
employee benefit plan of the Company or any Affiliate, employees of the Company
or any Affiliate or any group of which any of the foregoing is a member) is or
becomes the "beneficial owner" (as defined in Rule 13(d) (3) under the Exchange
Act), directly or indirectly, of 40% or more of the securities of the surviving
entity or (ii) for the direct or indirect sale or other disposition of all or
substantially all of the assets of the Company; or
(d) any other event or transaction that is declared by
resolution of the Board to constitute a Change in Control for purposes of this
Agreement.
Notwithstanding the foregoing, a "Change in Control" shall not be deemed to
occur in the event the Company files for bankruptcy, liquidation or
reorganization under the United States Bankruptcy Code.
4. Non-Competition. During the Term, Executive shall have a
duty to work only in the best interests of the Company and not to appropriate
any of the Company's business opportunities for his personal gain or the gain of
another party, or attempt to do so. Further, during the Term and provided that
the Company is not then in material breach of its obligations hereunder, for six
months after the end of the Term, Executive shall not, in any geographical area
in which the Company conducts business (or for such lesser area or such lesser
period as may be determined by a court of competent jurisdiction to be a
reasonable limitation on the competitive activity of Executive), directly or
indirectly:
(a) engage, for or on behalf of himself or on behalf of any
person or entity other than the Company, in the specific business then actively
conducted by the Company;
(b) solicit or attempt to solicit business for services then
offered by the Company from any parties who are clients or customers of the
Company during the six months prior to termination of Executive's employment or
to whom the Company makes proposals for services during such six months;
(c) solicit or attempt to solicit for any business endeavor
any employee of the Company;
(d) interfere with the Company or the conduct of its business
or otherwise divert or attempt to divert from the Company any business
whatsoever; or
(e) render any services as a joint venturer, partner,
consultant or otherwise to, or have any interest as a stockholder, partner,
lender or otherwise in, any person or entity which is engaged in activities
which, if performed by Executive, would violate this Section 4.
The foregoing shall not prevent Executive from purchasing or owning up to 5% of
the voting secur ities of any corporation, the securities of which are
publicly-traded. References to the Company in this Section 4 shall also be
deemed to refer to its divisions and subsidiaries.
5. Confidentiality.
(a) Executive understands and acknowledges that, as a result
of his employment with the Company, he shall necessarily become informed of, and
shall have access to, confidential information of the Company, including,
without limitation, the contents of this Agreement, trade secrets, marketing
plans and information, pricing information, identity of customers and
prospective customers, and that such information, even though it may have been
or may be developed or otherwise acquired by Executive, is the exclusive
property of the Company to be held by Executive in a fiduciary capacity and
solely for the Company's benefit. Executive shall not at any time, either during
or subsequent to his employment hereunder, reveal, report, publish, transfer or
otherwise disclose to any person, Company or other entity, or use, any of the
Company's confidential information which Executive, in the exercise of
reasonable diligence, knows to be confidential, without the written consent of
the members of the Company (other than Executive), except for use on behalf of
the Company in connection with its business, and except for such information
that legally and legitimately is or becomes of general public knowledge from
authorized sources other than Executive or which Executive is required by law to
disclose (but only to the extent required to be so disclosed).
(b) On the termination of his employment with the Company for
any reason, Executive shall promptly deliver to the Company all manuals,
letters, notes, notebooks, reports and copies, summaries or abstracts thereof
and all other materials, including, without limitation, those of a secret or
confidential nature, relating to the Company's business or affairs that are in
Executive's possession or control.
6. Remedies and Survival. Because the Company would not have
an adequate remedy at law to protect its business and its interest in its trade
secrets, proprietary or confidential information and similar commercial assets
from any breach of the provisions of Sections 4 or 5, the Company shall be
entitled, in the event of such a breach or threatened breach thereof by
Executive, to injunctive relief, in addition to such other remedies and relief
that would be available to the Company. In the event of such a breach, in
addition to any other remedies, the Company shall be entitled to receive from
Executive payment of, or reimbursement for, its reasonable attorneys' fees and
disbursements incurred in successfully enforcing any such provision. The
provisions of Sections 4 and 5 and of this Section 6 shall survive any
termination of this Agreement.
7. Entire Agreement; Amendments; No Waivers. This Agreement
sets forth the entire understanding of the parties with respect to its subject
matter and merges and supersedes all prior and contemporaneous understandings of
the parties with respect to its subject matter. No provision of this Agreement
may be waived or modified, in whole or in part, except by a writing signed by
each of the parties. Failure of any party to enforce any provision of this
Agreement shall not be construed as a waiver of its rights under such or any
other provision. No waiver of any provi sion of this Agreement in any instance
shall be deemed to be a waiver of the same or any other provision in any other
instance.
8. Communications. All notices, consents and other
communications given under this Agreement shall be in writing and shall be
deemed to have been duly given (a) when delivered by hand or by Fedex or a
similar overnight courier to, (b) five days after being deposited in any United
States post office enclosed in a postage prepaid registered or certified
envelope addressed to, or (c) when successfully transmitted by facsimile (with a
confirming copy of such communication to be sent as provided in (a) or (b)
above) to, the party for whom intended, at the address or facsimile number for
such party set forth below, or to such other address or facsimile number as may
be furnished by such party by notice in the manner provided herein; provided,
however, that any notice of change of address or facsimile number shall be
effective only upon receipt.
If to the Company: If to Executive:
Forstmann & Company, Inc. Mr. Brian A. Moorstein
1155 Avenue of the Americas 164 Hudson Avenue
New York, New York 10036-2711 Tenafly, New Jersey 07670
Attention: Mr. Rodney J. Peckham Fax No. (201) 816-8186
Fax No. (212) 642-6942
9. Successors and Assigns. This Agreement shall be binding on,
enforceable against and inure to the benefit of, the parties and their
respective successors and permitted assigns, and nothing herein is intended to
confer any right, remedy or benefit upon any other person. No party may assign
its rights or delegate its obligations under this personal Agreement without the
express written consent of the other party.
10. Governing Law. This Agreement shall in all respects be
governed by and construed in accordance with the laws of the State of New York
applicable to agreements made and fully to be performed in such state, without
giving effect to conflicts of law principles.
11. Severability and Savings Clause. If any provision of this
Agreement is held to be invalid or unenforceable by any court or tribunal of
competent jurisdiction, the remainder of this Agreement shall not be affected
thereby, and such provision shall be carried out as nearly as possible according
to its original terms and intent to eliminate such invalidity or
unenforceability. In this regard, the parties agree that the provisions of
Section 4, including, without limitation, the scope of the territorial and time
restrictions, are reasonable and necessary to protect and preserve the Company's
legitimate interests. If the provisions of Section 4 are held by a court of
competent jurisdiction to be in any respect unreasonable, then such court may
reduce the territory or time to which it pertains or otherwise modify such
provisions to the extent necessary to render such provisions reasonable and
enforceable.
12. Counterparts. This Agreement may be executed in two
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
13. Construction. Headings used in this Agreement are for
convenience only and shall not be used in the interpretation of this Agreement.
References to Sections are to the sections of this Agreement. As used herein,
the singular includes the plural and the masculine, feminine and neuter gender
each includes the others where the context so indicates.
IN WITNESS WHEREOF, the parties have duly executed this
Agreement as of the date first set forth above.
FORSTMANN & COMPANY, INC.
By /s/ Rod J. Peckham
-----------------------------------
Rodney J. Peckham
Executive Vice President
/s/ Brian A. Moorstein
------------------------------------
BRIAN A. MOORSTEIN
<PAGE>
Exhibit 10.11
EMPLOYMENT AGREEMENT
AGREEMENT, dated as of January 26, 1998, between FORSTMANN &
COMPANY, INC., a Georgia corporation (the "Company"), and RODNEY J. PECKHAM
("Executive").
W I T N E S S E T H:
WHEREAS, the Company wishes to avail itself of the advice and
services of Executive in connection with its business, and Executive wishes to
be employed by the Company;
NOW, THEREFORE, in consideration of the premises and of the
mutual agreements set forth herein, the parties agree as follows:
1. Services.
1.1 Employment and Term. Subject to the terms and conditions
of this Agreement, the Company agrees to employ Executive, and Executive agrees
to serve the Company, as its Executive Vice President Finance, Administration
and Strategic Planning, Secretary and Treasurer and in such additional executive
capacities as the Board of Directors of the Company may reasonably request. The
term of this Agreement (the "Term") shall commence on the date of this Agreement
and shall continue through January 26, 2000. On such date and each following
January 26, the Term shall automatically be extended for one additional year,
unless the Company notifies Executive not later than one year prior to January
26, 2000 or to any anniversary date thereof of its election not to so extend the
Term.
1.2 Duties. Executive shall perform such duties and shall have
such responsibilities as normally pertain to the offices which he holds.
Executive shall report directly to the Board of Directors of the Company.
Executive shall perform his duties to the best of his ability and shall devote
substantially all of his business time, efforts and attention to such duties,
subject to the understanding that he may have various investment activities
which may, from time to time, require his attention, but which shall not
interfere with the performance of his duties to the Company.
1.3 Service for Subsidiaries. At the request of the Company's
Board of Directors, Executive shall also serve as an officer or director of any
subsidiary which the Company may form. Executive shall receive no compensation
for such service in addition to that provided in Section 2.
2. Compensation.
2.1 Salary. During the term of this Agreement, the Company
shall pay to Executive an annual salary of not less than $265,000 in equal
semi-monthly installments.
2.2 Management Incentive Plan. During the Term, Executive
shall participate in the Company's Management Incentive Plan as a "Group I"
participant for as long as the Company maintains such plan. Nothing in this
Section 2.2 shall require the Company to continue such plan for any particular
period or shall limit the Company's right to modify such plan in any respect.
2.3 Stock Options. Executive shall continue to participate in
the Company's Executive Stock Option Plan (the "Option Plan"). In addition to
the stock options previously granted to Executive, he shall be granted as of the
date hereof options to purchase 12,000 shares of the Company's Common Stock
under the Option Plan at an exercise price of $12.88 per share. On the third
anniversary date of this Agreement and on each anniversary date thereafter,
provided that Executive is still employed by the Company, he shall automatically
be granted an option to purchase an additional 2,500 shares of the Company's
Common Stock under the Option Plan. Each option shall become exercisable as to
one-third of the shares subject to such option on the date of grant and on each
of the first two anniversary dates of the date of grant. Options shall be
exercisable for a term of 10 years or until earlier terminated, as provided in
the Option Plan.
2.4 Benefit Plans. Executive shall be entitled to participate
in all employee fringe benefit plans and policies that the Company may make
available to, or have in effect for, its senior executives from time to time,
including, without limitation, health, hospitalization and welfare benefits,
pension, profit-sharing and similar plans, incentive compensation plans, stock
option plans, and savings, investment, retirement and supplemental benefit
plans, in each case subject to the eligibility and other provisions of any such
plan or policy. Nothing in this Section 2.4 shall require the Company to
institute or make available to Executive any particular benefit plan or policy.
2.5 Expense Reimbursement. Executive shall be entitled to
reimbursement for all reasonable and necessary travel, entertainment and other
expenses which are incurred by him in the performance of his duties. The Company
shall pay or reimburse Executive such expenses on presentation, within a
reasonable time after such expenses are incurred, of an itemized account of such
expenses, together with such vouchers or receipts for individual expense items
as the Company may from time to time require under its normal policies and
procedures.
2.6 Vacation. Executive shall be entitled to paid vacation
leave during each year in accordance with such policies as the Company may have
in effect from time to time.
2.7 Parking. During the Term, the Company shall pay, or
reimburse Executive for, the reasonable cost of parking one automobile in a
parking garage reasonably convenient to the Company's offices.
3. Termination.
3.1 Termination for Cause. In the event of Executive's (i)
continuing gross neglect (after written warning) or willful misconduct in the
performance of his duties, (ii) material breach of Sections 4 or 5, (iii)
conviction for a felony or (iv) drunkenness or illegal use of drugs which
interferes with the performance of his duties under this Agreement and which
continues after written warning or (v) commission of acts constituting fraud,
gross dishonesty or harassment against the Company or any of its employees, this
Agreement and Executive's employment may be termi nated by the Company without
prior notice. In the event of such termination, the Company shall pay Executive
any salary and expense reimbursement owed to him for periods through the date of
termi nation and shall have no other liability to him hereunder other than as
required under applicable law.
3.2 Termination on Account of Death or Disability. If
Executive dies, this Agreement shall terminate. If Executive, due to physical or
mental disability or incapacity, is unable to substantially perform his duties
hereunder for a period of 90 consecutive days or more, or for an aggregate of
six months in any 18-month period, the Company shall have the right to terminate
Executive's employment hereunder on 45 days' prior written notice. If Executive
is able to and re commences rendering services and performing his duties
hereunder within such 45-day notice period, such notice shall be vitiated. In
the event of Executive's death or disability, Executive or his personal
representatives shall be entitled to receive all earned but unpaid compensation
through the date of termination of his employment. If this Agreement is
terminated on account of Executive's death or disability, the Company shall pay
Executive or his personal representatives an amount equal to one year's salary
at its then current rate not later than the 45th day following such termination,
less any amounts paid or payable to Executive under any policies of insurance
obtained by the Company.
3.3 Termination Without Cause in Certain Circumstances. If (i)
the Company elects not to extend the Term on any anniversary date of this
Agreement as contemplated in the last sentence of Section 1.1 (which election
shall be deemed for purposes of this Section 3.3 to be a termination of
Executive's employment without cause effective as of such anniversary date) or
(ii) a Change in Control (as defined below) occurs and, within two years
following such Change in Control, the Company terminates Executive's employment
other than for cause pursuant to Section 3.1 or on account of Executive's death
or disability pursuant to Section 3.2 (for this purpose, a material reduction in
Executive's responsibilities, title or authority or a change in his reporting
responsibilities so that he no longer reports directly to the Company's Board of
Directors shall be deemed to be a termination without cause), the Company shall
pay Executive a termination award equal to 200% of Executive's then current
salary pursuant to Section 2.1., plus an amount equal to the average of the
annual incentive bonuses paid to Executive over the three completed years
preceding the date of termination. Any such termination award shall be payable
(A) if clause (i) of this Section 3.3 applies, in two equal installments equal
to 50% of the total termination award each, with the first installment to be
payable not later than three days following the date of termination of
Executive's employment and the second installment to be payable not later than
180 days following the due date of the first installment or (B) if clause (ii)
of this Section 3.3 applies, in one lump sum payment not later than three days
following the date of termination of Executive's employment. Such payment or
payments shall be in lieu of any other severance or other payment or arrangement
in favor of Executive which is in effect on the date of this Agreement, any
right to which Executive waives as of the date hereof.
For purposes of this Agreement, a "Change in Control" means
the occurrence of any of the following events:
(a) a majority of the members of the Board at any time cease
for any reason other than due to death or disability to be persons who were
members of the Board 24 months prior to such time (the "Incumbent Directors");
provided that any director whose election, or nomination for election by the
Company's stockholders, was approved by a vote of at least a majority of the
members of the Board then still in office who are Incumbent Directors shall be
treated as an Incumbent Director; or
(b) any "person," including a "group" (as such terms are used
in Sections 13(d) and 14(d) (2) of the Exchange Act, but excluding the Company,
its affiliates (that is, any subsidiary or parent corporation of the Company, as
such terms are used in Section 424 of the Internal Revenue Code of 1986, as
amended), any employee benefit plan of the Company or any affiliate, employees
of the Company or any affiliate or any group of which any of the foregoing is a
member) is or becomes the "beneficial owner" (as defined in Rule 13(d) (3) under
the Exchange Act), directly or indirectly, including without limitation, by
means of a tender or exchange offer, of securities of the Company representing
40% or more of the combined voting power of the Company's then outstanding
securities; or
(c) the stockholders of the Company shall approve a definitive
agreement (i) for the merger or other business combination of the Company with
or into another corporation immediately following which merger or combination
(A) the stock of the surviving entity is not readily tradeable on an established
securities market, (B) a majority of the directors of the surviving entity are
persons who (I) were not directors of the Company immediately prior to the
merger and (II) are not nominees or representatives of the Company or (C) any
"person," including a "group" (as such terms are used in Sections 13(d) and
14(d) (2) of the Exchange Act, but excluding the Company, its Affiliates, any
employee benefit plan of the Company or any Affiliate, employees of the Company
or any Affiliate or any group of which any of the foregoing is a member) is or
becomes the "beneficial owner" (as defined in Rule 13(d) (3) under the Exchange
Act), directly or indirectly, of 40% or more of the securities of the surviving
entity or (ii) for the direct or indirect sale or other disposition of all or
substantially all of the assets of the Company; or
(d) any other event or transaction that is declared by
resolution of the Board to constitute a Change in Control for purposes of this
Agreement.
Notwithstanding the foregoing, a "Change in Control" shall not be deemed to
occur in the event the Company files for bankruptcy, liquidation or
reorganization under the United States Bankruptcy Code.
4. Non-Competition. During the Term, Executive shall have a
duty to work only in the best interests of the Company and not to appropriate
any of the Company's business opportunities for his personal gain or the gain of
another party, or attempt to do so. Further, during the Term and provided that
the Company is not then in material breach of its obligations hereunder, for six
months after the end of the Term, Executive shall not, in any geographical area
in which the Company conducts business (or for such lesser area or such lesser
period as may be determined by a court of competent jurisdiction to be a
reasonable limitation on the competitive activity of Executive), directly or
indirectly:
(a) engage, for or on behalf of himself or on behalf of any
person or entity other than the Company, in the specific business then actively
conducted by the Company;
(b) solicit or attempt to solicit business for services then
offered by the Company from any parties who are clients or customers of the
Company during the six months prior to termination of Executive's employment or
to whom the Company makes proposals for services during such six months;
(c) solicit or attempt to solicit for any business endeavor
any employee of the Company;
(d) interfere with the Company or the conduct of its business
or otherwise divert or attempt to divert from the Company any business
whatsoever; or
(e) render any services as a joint venturer, partner,
consultant or otherwise to, or have any interest as a stockholder, partner,
lender or otherwise in, any person or entity which is engaged in activities
which, if performed by Executive, would violate this Section 4.
The foregoing shall not prevent Executive from purchasing or owning up to 5% of
the voting secur ities of any corporation, the securities of which are
publicly-traded. References to the Company in this Section 4 shall also be
deemed to refer to its divisions and subsidiaries.
5. Confidentiality.
(a) Executive understands and acknowledges that, as a result
of his employment with the Company, he shall necessarily become informed of, and
shall have access to, confidential information of the Company, including,
without limitation, the contents of this Agreement, trade secrets, marketing
plans and information, pricing information, identity of customers and
prospective customers, and that such information, even though it may have been
or may be developed or otherwise acquired by Executive, is the exclusive
property of the Company to be held by Executive in a fiduciary capacity and
solely for the Company's benefit. Executive shall not at any time, either during
or subsequent to his employment hereunder, reveal, report, publish, transfer or
otherwise disclose to any person, Company or other entity, or use, any of the
Company's confidential information which Executive, in the exercise of
reasonable diligence, knows to be confidential, without the written consent of
the members of the Company (other than Executive), except for use on behalf of
the Company in connection with its business, and except for such information
that legally and legitimately is or becomes of general public knowledge from
authorized sources other than Executive or which Executive is required by law to
disclose (but only to the extent required to be so disclosed).
(b) On the termination of his employment with the Company for
any reason, Executive shall promptly deliver to the Company all manuals,
letters, notes, notebooks, reports and copies, summaries or abstracts thereof
and all other materials, including, without limitation, those of a secret or
confidential nature, relating to the Company's business or affairs that are in
Executive's possession or control.
6. Remedies and Survival. Because the Company would not have
an adequate remedy at law to protect its business and its interest in its trade
secrets, proprietary or confidential information and similar commercial assets
from any breach of the provisions of Sections 4 or 5, the Company shall be
entitled, in the event of such a breach or threatened breach thereof by
Executive, to injunctive relief, in addition to such other remedies and relief
that would be available to the Company. In the event of such a breach, in
addition to any other remedies, the Company shall be entitled to receive from
Executive payment of, or reimbursement for, its reasonable attorneys' fees and
disbursements incurred in successfully enforcing any such provision. The
provisions of Sections 4 and 5 and of this Section 6 shall survive any
termination of this Agreement.
7. Entire Agreement; Amendments; No Waivers. This Agreement
sets forth the entire understanding of the parties with respect to its subject
matter and merges and supersedes all prior and contemporaneous understandings of
the parties with respect to its subject matter. No provision of this Agreement
may be waived or modified, in whole or in part, except by a writing signed by
each of the parties. Failure of any party to enforce any provision of this
Agreement shall not be construed as a waiver of its rights under such or any
other provision. No waiver of any provi sion of this Agreement in any instance
shall be deemed to be a waiver of the same or any other provision in any other
instance.
8. Communications. All notices, consents and other
communications given under this Agreement shall be in writing and shall be
deemed to have been duly given (a) when delivered by hand or by Fedex or a
similar overnight courier to, (b) five days after being deposited in any United
States post office enclosed in a postage prepaid registered or certified
envelope addressed to, or (c) when successfully transmitted by facsimile (with a
confirming copy of such communication to be sent as provided in (a) or (b)
above) to, the party for whom intended, at the address or facsimile number for
such party set forth below, or to such other address or facsimile number as may
be furnished by such party by notice in the manner provided herein; provided,
however, that any notice of change of address or facsimile number shall be
effective only upon receipt.
If to the Company: If to Executive:
Forstmann & Company, Inc. Mr. Rodney J. Peckham
1155 Avenue of the Americas 560 West 43rd Street
New York, New York 10036-2711 Apartment 44E
Attention: Mr. Brian A. Moorstein New York, New York 10036
Fax No. (212) 642-6942 Fax No. (212)
9. Successors and Assigns. This Agreement shall be binding on,
enforceable against and inure to the benefit of, the parties and their
respective successors and permitted assigns, and nothing herein is intended to
confer any right, remedy or benefit upon any other person. No party may assign
its rights or delegate its obligations under this personal Agreement without the
express written consent of the other party.
10. Governing Law. This Agreement shall in all respects be
governed by and construed in accordance with the laws of the State of New York
applicable to agreements made and fully to be performed in such state, without
giving effect to conflicts of law principles.
11. Severability and Savings Clause. If any provision of this
Agreement is held to be invalid or unenforceable by any court or tribunal of
competent jurisdiction, the remainder of this Agreement shall not be affected
thereby, and such provision shall be carried out as nearly as possible according
to its original terms and intent to eliminate such invalidity or
unenforceability. In this regard, the parties agree that the provisions of
Section 4, including, without limitation, the scope of the territorial and time
restrictions, are reasonable and necessary to protect and preserve the Company's
legitimate interests. If the provisions of Section 4 are held by a court of
competent jurisdiction to be in any respect unreasonable, then such court may
reduce the territory or time to which it pertains or otherwise modify such
provisions to the extent necessary to render such provisions reasonable and
enforceable.
12. Counterparts. This Agreement may be executed in two
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
13. Construction. Headings used in this Agreement are for
convenience only and shall not be used in the interpretation of this Agreement.
References to Sections are to the sections of this Agreement. As used herein,
the singular includes the plural and the masculine, feminine and neuter gender
each includes the others where the context so indicates.
IN WITNESS WHEREOF, the parties have duly executed this
Agreement as of the date first set forth above.
FORSTMANN & COMPANY, INC.
By /s/Brian A. Moorstein
-----------------------------------
Brian A. Moorstein
President
/s/ Rodney J. Peckham
------------------------------------
RODNEY J. PECKHAM
<PAGE>
Exhibit 10.13
APPROVAL OF 1997 DIRECTORS
COMPENSATION PLAN
In October 1997, the Board of Directors of the Company adopted
the 1997 Directors Compensation Plan (the "Directors Plan"), which is being
submitted and recommended to the shareholders for approval. Approval of the
Directors Plan requires the affirmative vote of a majority of all votes cast at
the Annual Meeting. The following description of the principal features of the
Directors Plan is qualified in its entirety by reference to the full text of the
Directors Plan, which is set forth in Exhibit A.
Purposes. The purposes of the Directors Plan are to enable the
Company to attract, retain and motivate the best qualified directors and to
enhance a long-term mutuality of interest between the directors and the
shareholders by providing the directors with stock ownership and granting them
options to purchase shares of the Common Stock.
Term. The Directors Plan became effective on December 19, 1997
and will terminate on December 31, 2007, unless earlier terminated by the
shareholders of the Company.
Participants. Directors of the Company who are not also
officers or employees of the Company or its subsidiaries are eligible to
participate in the Directors Plan (each a "Participant"). Currently, only the
two nominees for director are eligible to participate in the Directors Plan.
Directors Fees. Each Participant will receive for services as
a director a payment of $3,000 for each fiscal quarter during each fiscal year
of the Company from 1998 through 2007, subject to a prorated adjustment if the
Participant was not a director at the time of each meeting of the Board of
Directors held during such fiscal quarter. Each Participant will also receive a
$1,000 fee for each meeting of the Board of Directors he or she attends in each
fiscal year from 1998 through 2007 in excess of six meetings during such fiscal
year. Each Participant who also serves as Chairperson of the Board of Directors
or of any committee thereof will also receive an additional fee of $375 for each
fiscal quarter of such fiscal years.
Shares Subject to the Directors Plan. A total of 450,000
shares of the Common Stock will be available, and have been reserved, for
issuance under the Directors Plan pursuant to stock options granted or to be
granted, and share awards made or to be made, under the Directors Plan. The
Directors Plan provides for the automatic grant of a fixed number of stock
options and the automatic making of share awards having a fixed fair market
value to each Participant. If any stock option or share award made under the
Directors Plan is canceled or forfeited, the shares subject to the stock option
or share award will again be available for issuance under the Directors Plan.
Stock Options. The Directors Plan authorizes the Company to
grant non-qualified stock options, but not incentive stock options (within the
meaning of Section 422 of the Code). On the date that an individual becomes a
Participant, he or she will automatically be granted an option to purchase
12,000 shares of the Common Stock (an "Initial Option"). On the third
anniversary of such initial grant and on each anniversary date thereafter,
provided that a Participant is still a director, he or she will automatically be
granted an option to purchase an additional 2,500 shares. Each option will
become exercisable as to one-third of the shares subject to such option on the
date of grant and on each of the first two anniversary dates of the date of
grant. Options will be exercisable for a term of 10 years or until earlier
terminated, as described below.
The exercise price of an option granted under the Directors
Plan will be the Fair Market Value of the Common Stock on the date of grant,
except that the exercise price of any Initial Option will in no event be less
than $12.88 per share. The exercise price of an option, together with any
required taxes, must be paid in full at the time of exercise in cash, by the
delivery of shares of the Common Stock (subject to certain conditions) or a
combination of cash and shares.
For these purposes (and for purposes of the share awards
discussed below), "Fair Market Value" is defined as the average daily Market
Price of the Common Stock for the 20-day period immediately preceding the date
as of which Fair Market Value is being determined. "Market Price" is defined as
the closing price of the Common Stock on the principal securities exchange on
which it is traded. If the Common Stock is not traded on a securities exchange,
but is reported by the National Association of Securities Dealers, Inc.
Automated Quotation System and market information is published on a regular
basis in The New York Times or The Wall Street Journal, then the Market Price
will be deemed to be the average of the published high and low sales price or
the published daily bid and asked prices of the Common Stock, as so published,
for the date as of which Market Price is being determined. If market information
is not so published on a regular basis, then Market Price will be deemed to be
the average of the high bid and low asked prices of the Common Stock in the
over-the-counter market for the date as of which the Market Price is being
determined, as reported by the National Association of Securities Dealers
Automated Quotation System, or, if not so reported, by a generally accepted
reporting service. If the Common Stock is not then publicly traded, the Market
Price will be the fair value thereof as determined in good faith by the Board of
Directors.
Acceleration of Vesting. If a Participant dies or becomes
permanently disabled, any stock option granted to such Participant will become
100% vested and may be exercised by the Participant or his or her designated
beneficiary at any time prior to the expiration of the term of the stock option
or within one year following the Participant's death or permanent disability,
whichever period is shorter. If a Participant ceases to be a director for any
reason other than death or permanent disability, any stock option granted to
such Participant which is then 100% vested may be exercised at any time prior to
the expiration of the term of the stock option or the 90th day following the
Participant's termination of employment, whichever period is shorter. All stock
options which are not vested as of the date a Participant ceases to be a
director for any reason other than death or permanent disability will be
forfeited.
In addition, in the event of a "change in control" any stock
option then held by a Participant will become 100% vested and may be exercised
by the Participant or his or her designated beneficiary at any time prior to the
expiration of the stock option or within 90 days after the change in control,
whichever period is shorter. For purposes of the Directors Plan, a change in
control will be deemed to have occurred if (i) any "person" or "group" (within
the meaning of Section 13(d) or 14(d)(2) of the Securities Exchange Act of 1934
and the rules thereunder), other than affiliates of the Company, becomes the
beneficial owner of securities of the Company representing 40% or more of the
combined voting power of the then outstanding securities of the Company, (ii) a
majority of the Board of Directors at any time ceases for any reason other than
death or disability to be composed of persons who were directors 24 months prior
to such time ("Incumbent Directors") or whose election to the Board of Directors
had been approved by Incumbent Directors or (iii) the shareholders approve a
definitive agreement for (A) the sale of all or substantially all of the assets
of the Company or (B) the merger or other business combination of the Company,
pursuant to which (1) the stock of the surviving company is not readily
tradeable in an established securities market, (2) a majority of the directors
of the surviving entity are persons who were not directors of the Company
immediately prior to the merger and are not nominees of the Company or (C) a
"person" or "group" (as defined above), other than the Company or an affiliate
of the Company becomes the beneficial owner of securities of the surviving
entity representing 40% or more of the combined voting power of the then
outstanding securities of the surviving entity.
Share Awards. Each Participant will receive for services as a
director, for each fiscal quarter during each fiscal year of the Company from
1998 through 2007, an award of that number of shares of the Common Stock
(rounded to the nearest whole number) as equals $3,000 divided by the Fair
Market Value of a share of the Common Stock as of the last business day of such
fiscal quarter, subject to a prorated adjustment if the Participant was not a
director at the time of each meeting of the Board of Directors held during such
fiscal quarter.
Pursuant to the Directors Plan, 239 shares of the Common Stock
were awarded to Mr. Kjorlien, and 159 shares were awarded to Mr. Gregory in
respect of their services as directors during the fiscal quarter of the Company
ended November 2, 1997, based on a Fair Market Value of $12.56 per share. Mr.
Kjorlien was a director during all of such fiscal quarter, while Mr. Gregory was
appointed to the Board on September 15, 1997. Further, 217 shares of the Common
Stock were awarded to each of the directors for the fiscal quarter of the
Company ended February 2, 1998 based on a Fair Market Value of $ 13.83 per
share, and 222 shares of the Company Stock were awarded to each director for the
fiscal quarter ended May 3, 1998 based on a Fair Market Value of $13.50.
Pursuant to the Directors Plan, a Participant may elect, on or
before December 31 of any calendar year ending on or before December 31, 2006,
to defer receipt of all or any part of any share award payable in respect of the
calendar year following the year in which such election is made, and to have
such amounts credited to a stock account under the Directors Plan. In addition,
any person who becomes a Participant during any calendar year ending on or
before December 31, 2007 may elect, not later than the 30th day after he or she
becomes a Participant, to defer payment of all or any part of his or her share
award payable with regard to the portion of such calendar year following such
election. A deferral election will continue in effect unless and until a
Participant revokes or modifies such election by written notice to the Company.
Any such revocation or modification will become effective as of the end of the
calendar year in which such notice is given and only with respect to any share
award in subsequent calendar years. Further, a Participant who has revoked an
election may file a new election to defer share awards in the calendar year
following the year in which such new election is filed.
Any share award which is deferred by a Participant will be
deemed to be invested in a number of notional shares of the Common Stock
("Units") equal to the number of shares the Participant would have received
under the Plan had he or she not elected to defer the share award. Whenever a
dividend other than a dividend payable in the form of shares of the Common Stock
is declared with respect to the shares, the number of Units in the Participant's
stock account under the Director's Plan will be increased by the number of Units
determined by dividing (i) the product of (A) the number of Units in the
Participant's stock account on the related dividend record date, multiplied by
(B) the amount of any cash dividend declared by the Company on a share of the
Common Stock (or, in the case of any dividend distributable in property other
than Shares, the per share value of such dividend, as determined by the Company
for purposes of income tax reporting) by (ii) the Fair Market Value on the
related dividend payment date. In the case of any dividend declared on the
shares which is payable in shares, the Participant's stock account will be
increased by the number of Units equal to the product of (i) the number of Units
credited to the Participant's stock account on the related dividend record date,
multiplied by (ii) the number of shares (including any fraction thereof)
distributable as a dividend on a share. In the event of any change in the number
or kind of outstanding shares by reason of any recapitalization, reorganization,
merger, consolidation, stock split or any similar change affecting the shares,
other than a stock dividend as provided above, the Board of Directors will make
an appropriate adjustment in the number of Units credited to the Participant's
stock account. Fractional Units will be credited, but will be rounded to the
nearest hundredth percentile, with amounts equal to or greater than .005 rounded
up and amounts less than .005 rounded down.
A Participant may elect to receive distribution of the value
of his or her stock account under the Director's Plan on termination of his or
her service as a director or earlier, in cash , in shares or in a combination of
cash and shares. Distributions will begin immediately following the date a
Participant ceases to be a director or on the first business day of any calendar
year following the calendar year in which the Participant ceases to be a
director and will be in one lump-sum payment or in such number of annual install
ments (not to exceed ten) as a Participant may designate. If a Participant
elects to receive distributions prior to his or her ceasing to be a director,
such election must be made on or before June 30 of the year prior to the year in
which the distribution is to occur.
Transferability. In general, stock options and share awards
granted under the Directors Plan are not assignable or transferable by a
Participant, except under the limited circumstances contemplated by the
Directors Plan.
Administration. The Directors Plan provides that it will be
administered by the Board of Directors. Under the Directors Plan, the Board of
Directors has the sole authority, among other things, to grant awards, determine
terms, conditions and limitations applicable to awards, establish rules,
procedures, regulations and guidelines relating to the Directors Plan generally;
and to construe and interpret the Directors Plan. The Board of Directors may
not, however, have any discretion as to the selection of Participants or the
number of stock options or share awards that may be granted under the Directors
Plan. Further, the Directors Plan may not be amended in a manner that would
alter or impair any rights of any Participant or any obligations of the Company
under any stock option or share award theretofore granted in any manner adverse
to such Participant without the consent of such Participant.
The Directors Plan provides that, if the Board of Directors
determines that any stock dividend, extraordinary cash dividend,
recapitalization, reorganization, merger, consolidation, split-up, spin-off,
combination, exchange of shares, warrants or rights offering to purchase Common
Stock at a price substantially below fair market value or other similar event
affects the Common Stock such that an adjustment is required to preserve, or to
prevent enlargement of, the benefits or potential benefits made available under
the Directors Plan, the Board of Directors may make equitable adjustments in any
or all of (i) the number and kind of shares which thereafter may be awarded or
optioned and sold under the Directors Plan, (ii) the number and kinds of shares
subject to outstanding stock options and share awards and (iii) the grant,
exercise or conversion price with respect to any of the foregoing. Additionally,
the Board may make provisions for a cash payment to a Participant or a person
who has an outstanding stock option or share award.
Federal Income Tax Consequences. Under current federal income
tax laws and regulations and judicial interpretations thereof, which are subject
to change at any time, the grant of a stock option under the Directors Plan will
create no tax consequences for the participant or the Company. On exercise of a
non-qualified stock option, a Participant must recognize ordinary income in an
amount equal to the difference between the exercise price and the fair market
value of the stock on the exercise date. At such time, the Company will receive
a deduction for the same amount (assuming the applicable requirements of Section
162(m) of the Code have been met).
With respect to share awards, a Participant must recognize
ordinary income in an amount equal to the cash or the fair market value of the
shares of the Common Stock received, when received. The Company will receive a
deduction for the same amount, provided that, at the time the income is
recognized, a Participant either is not a covered employee or does not have
total compensation in excess of $1,000,000 for the year of recognition (other
than compensation that otherwise meets the requirements of Section 162(m) of the
Code). The tax treatment on disposition of shares acquired under the Directors
Plan will depend on how long the shares have been held.
------------------------
The Board of Directors believes that it is in the best
interests of the Company and its shareholders that the Directors Plan be
approved. The Board of Directors believes that the future success of the Company
will in large part depend on its ability to attract, retain and motivate
directors through, among other things, such incentive compensation programs.
Accordingly, the Board of Directors has adopted, and recommends that the
shareholders approve, the Directors Plan.
<PAGE>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
The only subsidiary of the registrant is Forstmann Apparel, Inc., a New York
corporation.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains financial information extracted from Forstmann & Company,
Inc.'s consolidated financial statements for the fifty-two weeks ended November
1, 1998 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<CIK> 0000798246
<NAME> Forstmann & Company, Inc.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Nov-01-1998
<PERIOD-START> Nov-03-1997
<PERIOD-END> Nov-01-1998
<CASH> 143
<SECURITIES> 0
<RECEIVABLES> 32,743
<ALLOWANCES> 1,309
<INVENTORY> 38,818
<CURRENT-ASSETS> 71,003
<PP&E> 30,480
<DEPRECIATION> 8,245
<TOTAL-ASSETS> 95,243
<CURRENT-LIABILITIES> 20,008
<BONDS> 43,565
0
0
<COMMON> 44
<OTHER-SE> 31,626
<TOTAL-LIABILITY-AND-EQUITY> 95,243
<SALES> 149,597
<TOTAL-REVENUES> 149,597
<CGS> 141,760
<TOTAL-COSTS> 141,760
<OTHER-EXPENSES> 15,890
<LOSS-PROVISION> 851
<INTEREST-EXPENSE> 6,489
<INCOME-PRETAX> (18,888)
<INCOME-TAX> 0
<INCOME-CONTINUING> (18,888)
<DISCONTINUED> 99
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,987)
<EPS-PRIMARY> 0
<EPS-DILUTED> (4.33)
</TABLE>
