<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One) --------------------------
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED FEBRUARY 27, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________.
COMMISSION FILE NO. 0-19972
BRAUN'S FASHIONS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 06 - 1195422
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
2400 XENIUM LANE NORTH, PLYMOUTH, MINNESOTA 55441
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (612) 551-5000
-------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
12% Senior Notes due 2005
-------------------------
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/
Indicate by check mark whether the registrant (1) has filed all reports
required 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 whether the registrant has filed all documents and
reports required to be filed by Section 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 May 14, 1999, 4,353,894 shares of common stock were outstanding and
the aggregate value of the common stock held by non-affiliates of the Registrant
on that date was approximately $45,701,790 based upon the last reported sale
price of the common stock at that date by The Nasdaq Stock Market.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held July 28, 1999 (the "Proxy Statement") are incorporated
by reference into Part III.
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<PAGE>
BRAUN'S FASHIONS CORPORATION
1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
PART I
<S> <C> <C>
Item 1. Business..................................................................................1
Item 2. Properties................................................................................4
Item 3. Legal Proceedings.........................................................................5
Item 4. Submission of Matters to a Vote of Security Holders.......................................5
Item 4a. Executive Officers of the Registrant......................................................6
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.................7
Item 6. Selected Consolidated Financial Data......................................................8
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.....................................................................9
Item 7a. Quantitative and Qualitative Disclosures About Market Risk...............................14
Item 8. Consolidated Financial Statements........................................................15
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.....33
PART III
Item 10. Directors and Executive Officers of the Registrant.......................................33
Item 11. Executive Compensation...................................................................33
Item 12. Security Ownership of Certain Beneficial Owners and Management...........................33
Item 13. Certain Relationships and Related Transactions...........................................34
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..........................34
Signatures...............................................................................36
</TABLE>
<PAGE>
PART I
ITEM 1.
BUSINESS
GENERAL
Braun's Fashions Corporation ("BFC"), is a Minneapolis-based regional
retailer of women's specialty apparel which operates through its wholly owned
subsidiary, Braun's Fashions, Inc. ("BFI") (collectively referred to as
"Braun's" or the "Company"). As of May 14, 1999, the Company operated a chain of
199 stores in 22 states, primarily in the Midwest. Most stores are mall based
and average approximately 3,400 square feet.
BUSINESS STRATEGY
The Company's business strategy is to provide its target customer with
high quality, moderately-priced, coordinated ensembles that are interchangeable
between work and leisure activities; to differentiate itself from its
competitors through its focused merchandising approach, including an emphasis on
private label merchandise manufactured exclusively for the Company under its
proprietary brand name, Christopher & Banks; to utilize management information
systems to effectively manage its merchandise inventories; and to expand its
store network and maintain updated, attractive store facilities.
The key elements of the Company's strategy are as follows:
- Focus on a target customer and meet her needs
- Deliver a well defined merchandising approach
- Use information systems to drive decision making and maintain
disciplined inventory management
- Expand store base in existing and new markets
FOCUS ON A TARGET CUSTOMER AND MEET HER NEEDS. Braun's target customer is
a 35 to 55 year old working woman with an annual family income of $35,000 to
$75,000. Management believes this target customer leads a busy life, shops in
regional malls and purchases mainstream popular fashion which is suitable for
both work and leisure activities.
The Company utilizes point-of-sale inventory tracking to analyze the
buying patterns of its customers. Braun's also uses a product testing program to
identify consumer demand for clothing styles, patterns and colors. This test and
reorder philosophy gives the Company the ability to offer proven best sellers
throughout a selling season. The Company's objective is to be recognized by its
target customer as offering quality fashion at moderate prices. Braun's
differentiates itself from other fashion retailers through offering clothing
that is characterized by a novelty flair with distinctive patterns, textures and
colors.
DELIVER A WELL DEFINED MERCHANDISING APPROACH. In fiscal 1999, Braun's
lines of merchandise included four principal categories: sportswear, sweaters,
dresses and accessories. The following table sets forth the approximate
percentage of net sales attributable to each merchandise group for the past
three fiscal years:
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
----------------------------
MERCHANDISE GROUP 1999 1998 1997
----------------- ------ ------ ------
<S> <C> <C> <C>
Sportswear 53.6% 57.7% 59.5%
Sweaters 29.3 26.5 21.5
Dresses 12.1 10.1 10.9
Accessories 5.0 5.7 5.3
Coats and jackets -- -- 2.8
------ ------ ------
Total 100.0% 100.0% 100.0%
------ ------ ------
------ ------ ------
</TABLE>
The Company has developed a variety of strategies and programs to
distinguish itself from its competitors and build customer loyalty. Major
elements of its merchandising strategy include:
1
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STRONG VISUAL MERCHANDISE PRESENTATION. The Company's stores rely heavily
on attracting mall traffic through stimulating visual presentation. Braun's
uses carefully designed front-of-store displays to draw customers into the
store. The visual program emphasizes attractive windows and an open
store-entrance area with bright lighting. To keep its fashions fresh,
Braun's introduces a new "color story" every 10 to 12 weeks. Each month a
new floorset is completed and new fashion is displayed in the front of the
stores, with older or less-actively selling merchandise moved back for
promotion and liquidation in the current season.
DIRECT IMPORT PROGRAM. During fiscal 1999, the Company directly imported
approximately 53% of its total merchandise purchases. The Company
anticipates that direct imports, as a percent of total purchases, will be
approximately the same in fiscal 2000. Management believes that direct
imports allow the Company to obtain high quality merchandise at a lower
cost. This in turn provides the Company with the ability to sell garments,
comparable in quality and design to those sold in department stores, at a
lower price.
PRIVATE LABEL CLOTHING -- CHRISTOPHER & BANKS. The use of private label
clothing produced exclusively for Braun's creates a unique store identity
and establishes a competitive "point of difference". The Company's design
staff, guided by its merchants, continually develops new designs for the
Company's private label merchandise. For its private label clothing, the
Company uses its proprietary brand name, Christopher & Banks. The Company
estimates that sales of Braun's private label clothing comprised
approximately 87% of its sales in fiscal 1999 compared to 80% in fiscal
1998. The Company anticipates that private label clothing will account for
approximately 90% percent of its sales in fiscal 2000.
In February 1999, the Company announced that all of its new stores will
adopt the name Christopher & Banks, thereby identifying the store name with
the Company's brand name merchandise. Based on the operating results at the
new stores the Company will also consider changing the name of other
existing Braun's stores to Christopher & Banks.
KEY VENDOR RELATIONSHIPS. The Company's ongoing relationships with key
vendors has enabled it to expand its private label offerings in order to
project a merchandising point of difference and to execute a timely product
testing and reorder program designed to gauge consumer demand and maximize
sales.
QUALITY ASSURANCE. The Company uses a variety of quality control measures
including color, fabric and construction analysis and sizing verification,
to ensure that all merchandise meets the Company's quality standards.
LOYALTY BUILDING PROGRAMS. Braun's has frequent shopper and preferred
customer programs, which the Company believes encourage repeat sales and
customer loyalty. Under the frequent shopper program, customers, after
reaching certain cumulative purchase levels, are awarded a coupon
redeemable toward future purchases. The customer automatically becomes a
preferred customer after receiving the first frequent shopper award coupon.
The preferred customer program offers additional customer benefits
including invitations to private sales, informational phone calls and
notices on upcoming sales. As of February 27, 1999, there were
approximately 225,000 active frequent customers and 55,000 active preferred
customers.
PRIVATE LABEL CREDIT CARD. The Company offers its customers a private label
credit card. In fiscal 1999, sales on the Company's card accounted for
approximately 8% of the Company's total sales. The Company's card is
offered through a third party finance company with no recourse or credit
risk to the Company.
USE INFORMATION SYSTEMS TO DRIVE DECISION MAKING AND MAINTAIN DISCIPLINED
INVENTORY MANAGEMENT. In February 1999, the Company completed the implementation
of its new merchandise and financial management information systems. These
systems are updated with daily information from the Company's point-of-sale
registers. Management believes these new systems will provide it with the
ability to enhance its merchandise planning, sales tracking and trend analysis.
Management anticipates the Company's new merchandise information systems
will also provide improved distribution center processing and enhanced planning
and allocation features allowing the Company to more efficiently manage its
merchandise assortments at its stores. The Company also utilizes a
cost-effective program to efficiently deliver merchandise on a daily basis from
the Company's distribution center to all stores. As a result of these programs,
inventories can be maintained at an efficient level throughout the year, which
ensures a consistent flow of fresh merchandise to the stores. Inventory turnover
increased from 3.7 turns in fiscal 1998 to 3.9 turns in fiscal 1999.
2
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EXPAND STORE BASE IN EXISTING AND NEW MARKETS. The Company plans to
pursue a strategy of controlled expansion with approximately 15% annual growth
in net store count. The Company plans to expand its store base by 30 stores in
fiscal 2000. All new stores will be opened under the name Christopher & Banks,
thereby identifying the store name with the Company's proprietary brand name.
New stores will be opened in regional malls in states that already have a market
presence or in adjoining states. Additionally, based on the operating results of
the new stores, the Company may change the name of other existing Braun's stores
to Christopher & Banks.
PROPERTIES
The Company has developed an updated store design which has been used for
new stores and remodeled stores since the beginning of fiscal 1998. The Company
plans to continue to use this design for its new stores and remodels as leases
expire. This store prototype highlights visual merchandise presentation and
improves the customer's shopping experience through enhanced decor, bright
lighting and an open store layout. The Company typically effects a major or a
minor remodeling of a store following renewal of the store's lease. However,
during the interim, improvements such as carpet replacement, painting and other
improvements are made as needed. The Company completed five major store
remodelings in each of fiscal 1999, 1998 and 1997. The Company plans to complete
nine major store remodelings in fiscal 2000.
STORE OPERATIONS
The Company operates its stores in a manner that encourages operational
management participation in planning, execution and evaluation of the Company's
business and operational policies at all functional levels. Each store has a
manager who is responsible for day-to-day operations of the store. Store
managers complete a management training program and are eligible for Company
incentive awards based upon store sales volume.
PURCHASING/SOURCES OF SUPPLY
Direct imports accounted for approximately 53% of total purchases in
fiscal 1999. The Company purchased its merchandise from approximately 200
vendors in fiscal 1999. In fiscal 1999, the Company's ten largest vendors
represented approximately 45% of the Company's purchases. Further, purchases
from the Company's largest overseas supplier accounted for 20% of total
purchases in fiscal 1999, compared to 18% in fiscal 1998. The Company's main
suppliers are established, quality apparel manufacturers who have worked with
the Company over many years and are familiar with the Company's merchandising
approach. The Company believes it has good working relationships with its
vendors. A disruption in supply from vendors could have a negative impact on the
Company's business. The Company intends to directly import approximately the
same percentage of purchases in fiscal 2000 as in fiscal 1999.
ADVERTISING AND PROMOTION
The Company believes that most of its locations depend on mall traffic.
To attract customers into its stores, the Company emphasizes attractive
front-of-store displays and an open, clean in-store visual presentation. The
merchandise presentation is further enhanced by the use of photographic visual
merchandise signage. Additionally, the Company uses direct mail in connection
with the frequent shopper and preferred customer programs and maintains an
internet website at www.braunsfashions.com and www.christopherandbanks.com.
SEASONALITY
The Company's sales show seasonal variation as sales in the third and
fourth quarters, which include the fall and holiday seasons, generally have been
higher than sales in the first and second quarters. Sales generated during the
fall and holiday seasons have a significant impact on the Company's annual
results of operations.
COMPETITION
The women's retail apparel business is highly competitive. The Company
believes that the principal bases upon which it competes are merchandise
selection, fashion, quality, store location, store environment and service. The
Company competes with a broad range of national and regional retail chains that
sell similar merchandise, including department stores and specialty stores. Many
of these competitors are larger and have greater financial resources than the
Company. The Company believes that its focused merchandise selection, strong
visual presentation, product quality, loyalty building programs and customer
service enable the Company to compete effectively.
3
<PAGE>
EMPLOYEES
At May 14, 1999, the Company had approximately 450 full-time and 1,300
part-time employees. The number of part-time employees increases during peak
selling periods. None of the Company's employees are represented by a labor
union or is subject to a collective bargaining agreement. The Company has never
experienced a work stoppage and considers its relationship with its employees to
be satisfactory.
TRADEMARKS AND SERVICE MARKS
The Company is the owner of the federally registered trademark and
service mark "BRAUNS" with respect to articles of apparel and
"CHRISTOPHER & BANKS", which is its predominant private label. The Company also
has common law rights in other trademarks and service marks which it considers
to be of lesser importance. The Company believes its primary marks are important
to its business and are recognized in the women's retail apparel industry.
Accordingly, the Company intends to maintain its marks and the related
registrations. The Company is not aware of any pending claims of infringement or
other challenges to the Company's right to use its marks in the United States.
ITEM 2.
PROPERTIES
STORE LOCATIONS
The Company's stores are located primarily in regional shopping malls in
mid-sized cities and suburban areas, which offer high-traffic by potential
walk-in customers. The typical store is in a visible and accessible location in
an enclosed regional mall that has numerous specialty stores and two or more
general merchandise chains or department stores as anchor tenants. Fewer than
10% of the Company's stores are located in strip shopping centers. The Company
attempts to locate its stores strategically within the mall or shopping center
to attract walk-in customers through stimulating visual displays. The average
store size is approximately 3,400 square feet, of which the Company estimates an
average of approximately 85% is selling space.
At May 14, 1999, the Company operated 199 stores in the following states:
<TABLE>
<CAPTION>
Number Number
State of Stores State of Stores
----- --------- ----- ---------
<S> <C> <C> <C>
Minnesota..................... 39 Montana........................ 6
Iowa.......................... 24 South Dakota................... 6
Wisconsin..................... 23 Colorado....................... 5
Michigan...................... 17 Idaho.......................... 5
Illinois...................... 10 Indiana........................ 4
Kansas........................ 8 New York....................... 4
Nebraska...................... 7 Pennsylvania................... 4
North Dakota.................. 7 Arkansas....................... 3
Ohio.......................... 7 Oklahoma....................... 3
Utah.......................... 7 Washington..................... 2
Missouri...................... 6 Wyoming........................ 2
</TABLE>
STORE LEASES
All of the Company's stores are leased. Management believes that the
current commercial real estate market, combined with the Company's relationship
with nationally-recognized developers and established operating history makes
the Company an attractive tenant when negotiating terms with shopping center
developers or owners.
4
<PAGE>
Lease terms typically are for 10 years and may contain a renewal option.
Leases generally provide for a fixed minimum rental and a percentage rent if
sales are above a specified level. This percentage override is typically 5%. The
following table, which covers all of the stores operated by the Company at May
14, 1999, indicates the number of leases expiring during the fiscal year
indicated and the number of such leases with renewal options.
<TABLE>
<CAPTION>
Number of Number with
Fiscal Year Leases Expiring Renewal Options
----------- --------------- ---------------
<S> <C> <C>
2000....................................... 26 3
2001....................................... 12 2
2002....................................... 18 4
2003....................................... 24 2
2004....................................... 31 5
2005 - 2009................................ 80 4
2010 - 2014................................ 8 --
</TABLE>
The Company currently plans to negotiate new leases in most of the
locations which do not have renewal options.
HEADQUARTERS FACILITY
The Company occupies a 210,000 square foot headquarters and merchandise
distribution center facility located in Plymouth, Minnesota. Of this facility,
the Company uses approximately 95,000 square feet for its own office and
distribution facility and subleases the balance to third parties. The Company
leases this facility under an agreement which expires on June 14, 2005. Under
the agreement, the Company is required to pay minimum rent of approximately
$688,000 per year through June 14, 1999, and $746,000 per year from June 15,
1999, until the end of the lease term. The Company is also required to reimburse
the landlord for property taxes and pay for utilities and other operating costs
of the facility.
The Company subleases 80,000 square feet of warehouse space in its
distribution center to a third party under an agreement which commenced October
1, 1997. Under the agreement, the Company received minimum rent of $14,667 per
month from October 1, 1997 through August 31, 1998; and will receive $21,667 per
month from September 1, 1998 through August 31, 1999 and $24,667 per month from
September 1, 1999 through August 31, 2000. The subtenant may extend the lease
for two option periods. Rent for the first three year option period would be
$26,480 per month. Rent for the second option period of one year and nine months
would be $29,790 per month. The subtenant is also required to reimburse the
Company for property taxes, utilities and other operating costs of the subleased
portion of the facility.
Under a second sublease, effective September 1, 1997 and expiring on May
31, 2005, the Company subleased 33,000 square feet of warehouse and office space
to a third party. Under the agreement the Company will receive annual minimum
rent of $132,000. The subtenant is also required to reimburse the Company for
property taxes, utilities and other operating costs of the subleased portion of
the facility.
The Company believes its headquarters and merchandise distribution center
facility to be adequate to accomodate the expansion plans of the Company for the
foreseeable future.
ITEM 3.
LEGAL PROCEEDINGS
There are no material legal proceedings pending against the Company.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of fiscal 1999.
5
<PAGE>
ITEM 4a.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the
executive officers of the Company as of May 14, 1999.
<TABLE>
<CAPTION>
NAME AGE POSITIONS AND OFFICES
- -------------------- ------- ----------------------------------------------------------
<S> <C> <C>
William J. Prange 45 President and Chief Executive Officer
Joseph E. Pennington 53 Executive Vice President and Chief Operating Officer
Ralph C. Neal 52 Executive Vice President/Store Operations
Kathryn R. Gangstee 49 Senior Vice President and General Merchandising Manager
Andrew K. Moller 40 Senior Vice President and Chief Financial Officer
Nancy C. Scott 50 Vice President of Real Estate and Construction
Kim M. Westerham 41 Vice President of Merchandise Planning and Distribution
Lanette S. Menear 47 Vice President and Divisional Merchandising Manager
</TABLE>
WILLIAM J. PRANGE has served as President and Chief Executive Officer
since March 1998. From July 1997 through February 1998, Mr. Prange was President
and Chief Merchandising Officer. From April 1995 through June 1997, he was
Senior Vice President and General Merchandising Manager. From April 1994
through March 1995, Mr. Prange was Vice President and General Merchandising
Manager. From 1989 to 1994, he was President and General Merchandise Manager of
id Stores. From 1987 to 1989, he was Vice President and General Merchandise
Manager of id stores. From 1985 to 1987, Mr. Prange was Vice President and
General Merchandise Manager of Prange Department Stores.
JOSEPH E. PENNINGTON has served as Executive Vice President and Chief
Operating Officer since March 1998. Mr. Pennington was Senior Vice President of
Merchandise Planning and Distribution from July 1997 through February 1998. From
February 1997 through June 1997, Mr. Pennington was Vice President of
Merchandise Planning and Distribution and Management Information Systems. From
April 1996 through January 1997, Mr. Pennington was self-employed, providing
consulting services to retail companies including Braun's. Mr. Pennington was
President and Chief Executive Officer of American Specialty Stores (dba the id)
from June 1994 through March 1996. From October 1993 through May 1994, Mr.
Pennington was Senior Vice President of Merchandise and Operations for the id,
and from January 1990 through October 1993, Mr. Pennington was Vice President of
Operations. From 1976 through 1989, Mr. Pennington held various positions with
Foxmoor Stores, including Vice President of Planning from 1984 through 1989.
RALPH C. NEAL has served as Executive Vice President/Store Operations
since March 1998. Mr. Neal was Senior Vice President of Store Operations from
July 1997 through February 1998. From September 1996 through June 1997, Mr. Neal
was Vice President of Store Operations. From 1989 to 1996, Mr. Neal was Vice
President of Store Operations for the id stores. From 1986 to 1989, Mr. Neal was
a Senior Vice President of Brooks Fashions. From 1982 to 1986, Mr. Neal was Vice
President of Operations for the id stores. Prior to 1982 Mr. Neal served in
various managerial capacities for other women's apparel retailers.
KATHRYN R. GANGSTEE has served as Senior Vice President and General
Merchandise Manager since March 1998. From September 1997 through February 1998,
Ms. Gangstee was Vice President and Divisional Merchandise Manager. Ms. Gangstee
was a Divisional Merchandise Manager from March 1986 through August 1997. From
January 1984 through February 1986, Ms. Gangstee held other positions with the
Company.
ANDREW K. MOLLER has served as Senior Vice President and Chief Financial
Officer since March 1999. From March 1998 through February 1999, Mr. Moller was
Vice President Finance and Chief Financial Officer. Mr. Moller was Controller
from January 1995 through February 1998. From September 1992 through December
1994, Mr. Moller was Assistant Controller. Prior to joining the Company, Mr.
Moller held managerial accounting positions with Ladbroke Racing Canterbury,
Inc., a subsidiary of Ladbroke Group and with B Dalton Bookstores. Mr. Moller
also has previous experience with Arthur Andersen LLP and is a Certified Public
Accountant.
6
<PAGE>
NANCY C. SCOTT has served as Vice President of Real Estate and
Construction since March 1998. From May 1997 through February 1998, Ms. Scott
was a Regional Director of Leasing for Pacific Sunwear of California. Ms. Scott
was employed by Frederick's of Hollywood Stores, Inc. from March 1987 through
April 1997. She held the position of Vice President Real Estate/Leasing from
February 1989 to April 1997. From 1979 through 1986, Ms. Scott held leasing
positions with other companies.
KIM M. WESTERHAM has served as Vice President of Merchandise Planning and
Distribution since March 1999. Ms. Westerham was Director of Merchandise
Planning and Distribution from September 1993 through February 1999. From March
1984 through August 1993 Ms. Westerham was a Buyer with the Company.
LANNETTE S. MENEAR has served as Vice President and Divisional
Merchandising Manager since March 1999. Ms. Menear was a Divisional
Merchandising Manager from April 1998 to February 1999 and a Buyer and Product
Development Manager with the Company from August 1991 to March 1998. Prior to
joining the Company Ms. Menear held various management positions with A.J.
Brandon, a women's apparel manufacturer, Donaldson's Department Stores and
Dayton-Hudson Department Stores.
Messrs. Prange, Pennington and Neal were all previously affiliated with
American Specialty Stores (dba the id) which filed a voluntary petition for
Chapter 11 Bankruptcy Court protection in September 1994. American Specialty
Stores plan of reorganization was confirmed by the Bankruptcy Court in September
1995.
PART II
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock has traded on The Nasdaq Stock Market under
the symbol "BFCI" since March 31, 1992. Prior to that date there was no public
market for the Company's common stock.
The quarterly high and low stock sales price information for the
Company's common stock for fiscal 1999 and fiscal 1998 are presented in Note 10
of the Consolidated Financial Statements and are included herein.
The number of holders of record of the Company's common stock as of May
14, 1999 was 77. Based upon information received from the record holders, the
Company believes there are more than 1,200 beneficial owners. The last reported
sales price of the Company's common stock on May 14, 1999 was $11.75.
The Company has never paid dividends on its common stock. The Company
presently intends to retain all future earnings, if any, for the operation of
its business and does not expect to pay cash dividends on its common stock in
the foreseeable future. Currently, dividends are restricted by the terms of the
Company's revolving credit facility. (See Item 7 of this Form 10-K.) Any future
determination as to the payment of dividends on common stock will depend upon
future earnings, results of operations, capital requirements, compliance with
financial covenants, the financial condition of the Company and any other
factors the Board of Directors may consider.
In fiscal 1999 and fiscal 1998, the Company did not sell any equity
securities in a transaction that was exempt from the registration provisions of
the Securities Act of 1933, as amended. During fiscal 1997, in connection with
the Company's Chapter 11 proceedings and in accordance with its Second Amended
Plan of Reorganization (the "Plan"), the Company issued an aggregate of 617,516
shares of common stock in the Company and $10,300,200 principal face amount of
Senior Notes to holders of certain claims. By issuing these securities the
Company discharged $13,201,075 of claims pursuant to the Plan. In connection
with the distribution of securities, the Company relied upon the exemption
provided under Section 3(a) (7) of the Securities Act of 1933 as amended.
During fiscal 1999, the Company purchased 368,000 shares of the Company's
common stock at a total cost, including commissions, of $3,000,000. The common
stock purchased will be held in treasury and reduced the number of shares of the
Company's outstanding common stock by approximately 8%.
7
<PAGE>
ITEM 6.
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data has been derived from the audited
consolidated financial statements of the Company and should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and related
notes appearing elsewhere herein.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS AND SELECTED OPERATING DATA)
FEB. 27, FEB. 28, MARCH 1, MARCH 2, FEB. 25,
1999 1998 1997(1) 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales................................. $110,142 $ 99,536 $ 95,946 $ 97,296 $ 93,961
Cost of sales(2).......................... 71,488 65,111 65,445 70,386 68,108
--------- --------- --------- --------- ---------
Gross profit.............................. 38,654 34,425 30,501 26,910 25,853
Selling, general and
administrative expenses................ 25,621 23,390 22,854 24,897 22,565
Depreciation and amortization............. 2,679 2,534 2,649 3,154 2,690
Reorganization expense(3)................. -- -- 7,830 -- --
Nonrecurring expense(4)................... -- 775 -- -- --
--------- --------- --------- --------- ---------
Operating income (loss)................... 10,354 7,726 (2,832) (1,141) 598
Interest, net............................. 282 691 684 1,388 993
--------- --------- --------- --------- ---------
Income (loss) before income taxes......... 10,072 7,035 (3,516) (2,529) (395)
Income tax provision (benefit)(5)......... 3,880 2,750 (2,895) 929 (150)
--------- --------- --------- --------- ---------
Income (loss) before extraordinary gain... 6,192 4,285 (621) (3,458) (245)
Extraordinary gain(6)..................... 35 116 -- -- --
--------- --------- --------- --------- ---------
Net income (loss)......................... $ 6,227 $ 4,401 $ (621) $ (3,458) $ (245)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Basic earnings per common share:
Income (loss) before
extraordinary gain.................... $ 1.36 $ 0.96 $ (0.15) $ (0.91) $ (0.06)
Extraordinary gain(6)..................... 0.01 0.02 -- -- --
--------- --------- --------- --------- ---------
Net income (loss)......................... $ 1.37 $ 0.98 $ (0.15) $ (0.91) $ (0.06)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average number of shares
outstanding .......................... 4,541 4,482 4,029 3,792 3,785
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted earnings per common share:
Income (loss) before
extraordinary gain.................... $ 1.30 $ 0.89 $ (0.15) $ (0.91) $ (0.06)
Extraordinary gain(6)..................... 0.01 0.02 -- -- --
--------- --------- --------- --------- ---------
Net income (loss)......................... $ 1.31 $ 0.91 $ (0.15) $ (0.91) $ (0.06)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average common and common
equivalent shares outstanding......... 4,774 4,812 4,029 3,792 3,785
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
(1) From July 2, 1996 until December 3, 1996, the Company operated its business
as a debtor-in-possession under Chapter 11 of the United States Bankruptcy
Code. The Company emerged from bankruptcy upon the confirmation of its
Second Amended Plan of Reorganization.
(2) Cost of sales includes cost of merchandise and buying expenses and store
and distribution center occupancy costs, but excludes all depreciation and
amortization.
(3) In fiscal 1997, the Company recorded $7,830,000 of reorganization expense
as a result of the Company's July 2, 1996 Chapter 11 bankruptcy filing.
(4) In fiscal 1998, the Company recorded a one time pre-tax charge of $775,000,
or $0.13 per diluted share, related to the implementation of its management
succession plan. The majority of this expense was non-cash, related to
accelerated vesting of previously issued options.
(5) In fiscal 1996, the Company recorded a valuation allowance of $1.8 million,
or $0.47 per share, equal to the full amount of its deferred tax assets,
due to the uncertainty of realizing the value of these assets in future
years. In fiscal 1997, the Company reversed the valuation allowance as
improved operating performance made the future realization of these assets
more likely than not.
(6) In fiscal 1999 and 1998, the Company recorded extraordinary gains of
$35,000 and $116,000 on the purchase at a discount from par of $4,676,000
and $1,033,000 principal face amount of its 12% Senior Notes due 2005,
respectively.
8
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------------------------------------
FEB. 27, FEB. 28, MARCH 1, MARCH 2, FEB. 25,
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA
Same store sales increase (decrease)(1)... 3% 10% 10% (3)% (9)%
Stores at end of period................... 195 179 170 221 224
Net sales per gross square foot(1)........ $ 172 $ 166 $ 148 $ 129 $ 128
BALANCE SHEET DATA (AT END OF PERIOD IN THOUSANDS)
Working capital(2)....................... $ 16,424 $ 19,172 $ 14,746 $ 248 $ 10,900
Total assets.............................. 40,060 40,590 34,637 32,304 36,179
Long-term debt(2)......................... 5,074 9,616 10,374 952 11,170
Stockholders' equity...................... 24,730 20,959 15,573 13,662 17,118
</TABLE>
(1) Fiscal 1997 excludes stores closed as part of the Company's Chapter 11
reorganization.
(2) In fiscal 1996, $10.4 million of long-term debt potentially subject to
acceleration was reclassified to current liabilities.
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company was incorporated in Delaware in 1986 to acquire BFI, which
had operated as a family-owned business since 1956. As of May 14, 1999, the
Company operated a chain of 199 stores in 22 states, primarily in the Midwest.
In fiscal 1999, the Company opened 24 new stores and closed eight stores when
their leases expired. In fiscal 2000, the Company intends to expand its store
base by 30 stores.
REORGANIZATION
As a result of an extremely competitive retail environment and in
response to the deteriorating liquidity position brought on by losses at
approximately 50 of its store locations and to facilitate restructuring of its
obligations, the Company filed for protection from its creditors under Chapter
11 of the United States Bankruptcy Code on July 2, 1996. Under the protection of
Chapter 11, the Company managed its affairs and operated its business as a
debtor-in-possession while developing a plan of reorganization. The Company
filed its Second Amended Plan of Reorganization on October 22, 1996 (the
"Plan"), along with its Disclosure Statement. The Plan was approved by 99.6% of
the voting shareholders and by a majority of each class of the creditors that
voted. On November 22, 1996, the Bankruptcy Court confirmed the Plan, which
became effective on December 3, 1996.
During the reorganization the Company rejected 50 unprofitable store
leases, which in fiscal 1996 generated operating losses of $2.3 million and
re-negotiated more favorable lease terms for an additional 46 stores. The
Company disposed of its old inventory during liquidation sales and strengthened
its inventory control thereby increasing inventory turnover from 3.2 turns in
fiscal 1997 to 3.7 turns in fiscal 1998 and to 3.9 turns in fiscal 1999. Also,
the Company reconfigured its distribution center and subsequently subleased an
additional 33,000 square feet of space to a subtenant. Following the Chapter 11
filing, the Company significantly strengthened its management team through
hiring highly qualified individuals in the key areas of store operations,
merchandise planning and distribution and real estate.
MANAGEMENT SUCCESSION
In February 1998, the Company completed the implementation of its
management succession plan. As a result of the plan, William J. Prange who has
led the Company's merchandising operations since 1994, became President and
Chief Executive Officer. He replaced Nicholas H. Cook, who will continue as
Chairman of the Company's Board of Directors through August 31, 1999. The new
management team also included the promotions of Joseph E. Pennington to
Executive Vice President and Chief Operating Officer, Ralph C. Neal to Executive
Vice President/Store Operations, Kathryn R. Gangstee to Senior Vice President
and General Merchandising Manager and Andrew K. Moller to Vice President Finance
and Chief Financial Officer.
9
<PAGE>
The Company also hired Nancy C. Scott as Vice President Real Estate and
Construction. Herbert D. Froemming, the Company's former Vice Chairman, elected
to take early retirement. In connection with its management succession plan, in
fiscal 1998 the Company recorded a one-time pre-tax charge of $775,000 or $0.13
per diluted share. The majority of this expense was non-cash, related to the
accelerated vesting of previously issued options.
RESULTS OF OPERATIONS
The following table sets forth operating statement data expressed as a
percentage of net sales for the last three fiscal years and should be read in
conjunction with "Selected Consolidated Financial Data."
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------
FEBRUARY 27, FEBRUARY 28, MARCH 1,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net sales........................................... 100.0% 100.0% 100.0%
Cost of sales....................................... 64.9 65.4 68.2
------------ ------------ ------------
Gross profit........................................ 35.1 34.6 31.8
Selling, general and administrative expenses........ 23.3 23.5 23.8
Depreciation and amortization....................... 2.4 2.6 2.8
Reorganization expense(1)........................... -- -- 8.2
Nonrecurring expense(2)............................. -- 0.8 --
------------ ------------ ------------
Operating income (loss)............................. 9.4 7.7 (3.0)
Interest, net....................................... 0.3 0.7 0.7
------------ ------------ ------------
Income (loss) before income taxes................... 9.1 7.0 (3.7)
Income tax provision (benefit)(3)................... 3.5 2.7 (3.1)
------------ ------------ ------------
Net income (loss) before extraordinary gain......... 5.6 4.3 (0.6)
Extraordinary gain(4)............................... 0.1 0.1 --
------------ ------------ ------------
Net income (loss)................................... 5.7% 4.4% (0.6)%
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
(1) In fiscal 1997, the Company recorded $7,830,000 of reorganization expense
as a result of the Company's July 2, 1996 Chapter 11 bankruptcy filing.
(2) In fiscal 1998, the Company recorded a one time pre-tax charge of $775,000,
or $0.13 per diluted share, related to the implementation of its management
succession plan. The majority of this expense was non-cash, related to
accelerated vesting of previously issued options.
(3) In fiscal 1997, the Company reversed a $1.8 million valuation allowance
against its deferred tax assets and recorded an additional $255,000 of
deferred tax assets as improved operating performance made the future
realization of these assets more likely than not.
(4) In fiscal 1999 and 1998, the Company recorded extraordinary gains of
$35,000 and $116,000 on the purchase at a discount from par of $4,676,000
and $1,033,000 principal face amount of its 12% Senior Notes due 2005,
respectively.
FISCAL 1999 COMPARED TO FISCAL 1998
NET SALES. Net sales for the fiscal year ended February 27, 1999, were
$110.1 million, an increase of 11% from sales of $99.5 million in fiscal 1998.
The increase in net sales was attributable to a 3% increase in same-store sales
combined with an increase in the number of stores operated by the Company. The
Company operated 195 stores at February 27, 1999 compared to 179 at February 28,
1998.
GROSS PROFIT. Gross profit (which is net sales less cost of merchandise
and buying and occupancy expenses) was $38.7 million or 35.1% of net sales in
fiscal 1999, compared to $34.4 million or 34.6% of net sales in fiscal 1998. The
percentage increase in gross profit was primarily due to more favorable
merchandise pricing obtained from overseas vendors offset by a slight increase
in occupancy costs as a percent of net sales.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $25.6 million or 23.3% of net sales in fiscal 1999
compared to $23.4 million or 23.5% of net sales in fiscal 1998. Selling, general
and administrative expenses as a percent of net sales decreased modestly due to
leveraging associated with increased sales.
NONRECURRING EXPENSE. No nonrecurring expense was recorded in fiscal
1999. In fiscal 1998, the Company incurred a one-time pre-tax expense of
$775,451, or $0.13 per diluted share, related to the implementation of its
management succession plan. This expense was primarily non-cash, reflecting the
accelerated vesting of previously issued stock options.
OPERATING INCOME. As a result of the foregoing, operating income was
$10.4 million or 9.4% of net sales in fiscal 1999, compared to operating income
of $7.7 million or 7.7% of net sales in fiscal 1998.
10
<PAGE>
INTEREST, NET. Net interest expense decreased to $282,508 in fiscal 1999
from $690,589 in fiscal 1998. This decrease was primarily due to a higher cash
balance maintained during the year and a reduction in the Company's long-term
debt. In fiscal 1999 the Company repurchased and retired approximately $4.7
million original principal face amount of its 12% Senior Notes due 2005.
INCOME TAXES. Income tax expense in fiscal 1999 was $3.9 million with an
effective tax rate of 38.5% compared to $2.7 million with an effective tax rate
of 39.1% in fiscal 1998.
EXTRAORDINARY GAIN. In fiscal 1999, the Company purchased approximately
$4.7 million principal face amount of its 12% Senior Notes due 2005 at a
discount from par. These purchases resulted in an extraordinary gain of $35,396
net of tax. In fiscal 1998, the Company purchased a total of approximately $1.0
million principal face amount of its 12% Senior Notes due 2005 at a discount
from par. These purchases resulted in a gain of $115,872 net of tax.
NET INCOME. Net income for fiscal 1999 was $6.2 million or 5.7% of net
sales compared to net income of $4.4 million or 4.4% of net sales in fiscal
1998.
FISCAL 1998 COMPARED TO FISCAL 1997
NET SALES. Net sales for the fiscal year ended February 28, 1998, were
$99.5 million, an increase of 4% from sales of $95.9 million in fiscal 1997,
which included sales from 50 stores closed during the reorganization. Same store
sales increased 10%.
GROSS PROFIT. Gross profit (which is net sales less cost of merchandise
and buying and occupancy expenses) was $34.4 million or 34.6% of net sales in
fiscal 1998, compared to $30.5 million or 31.8% of net sales in fiscal 1997. The
percentage increase in gross profit was primarily due to closing 50 unprofitable
stores whose gross margins were unusually low, particularly during the second
quarter fiscal 1997 liquidation sales, and lower occupancy costs as a percent of
net sales in the continuing stores.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $23.4 million or 23.5% of net sales in fiscal 1998
compared to $22.9 million or 23.8% of net sales in fiscal 1997. Selling, general
and administrative expenses as a percent of net sales decreased due to
leveraging associated with increased sales.
REORGANIZATION EXPENSE. No reorganization expense was incurred in fiscal
1998. In fiscal 1997, the Company recorded approximately $7.8 million of
reorganization expense. This reorganization expense included $2.6 million of
professional fees and services; a $2.5 million loss on disposal of fixed assets;
$1.0 million of lease rejection claims and $1.7 million in other bankruptcy
related expenses.
NONRECURRING EXPENSE. In fiscal 1998, the Company incurred a one-time
pre-tax expense of $775,451 or $0.13 per diluted share related to the
implementation of its management succession plan. This expense was primarily
non-cash, reflecting the accelerated vesting of previously issued stock options.
OPERATING INCOME. As a result of the foregoing, operating income was $7.7
million or 7.7% of net sales in fiscal 1998 compared to an operating loss of
$2.8 million or 3.0% of net sales in fiscal 1997.
INTEREST, NET. Net interest expense in fiscal 1998 increased to $690,589
from $684,330 in fiscal 1997. In fiscal 1997, the Company was not required to
accrue interest on its prepetition debt after the July 2, 1996 bankruptcy
filing. If the Company had been required to pay interest on its prepetition
debt, contractual interest in fiscal 1997 would have totaled $1.2 million. The
decrease in net interest expense is due to the Company's improved cash flow in
fiscal 1998 which resulted in no advances on the line of credit and increased
income from short-term investments.
INCOME TAXES. Provision for income taxes was $2.7 million in fiscal 1998
with an effective tax rate of 39.1%. The Company had an income tax benefit of
$2.9 million in fiscal 1997. In fiscal 1997, the Company reversed a $1.8 million
valuation allowance against its deferred tax assets and recorded an additional
$255,000 of deferred tax assets as improved operating performance made the
future realization of these assets more likely then not. The remainder of the
tax benefit resulted from recording an income tax refund receivable of $851,000
related to the Company's net operating loss carryback.
EXTRAORDINARY GAIN. In fiscal 1998, the Company purchased a total of
$1,033,000 principal face amount of its 12% Senior Notes due 2005 at a discount
from par. These purchases resulted in a gain of $115,872 net of tax.
NET INCOME (LOSS). Net income for fiscal 1998 was $4.4 million or 4.4% of
net sales as compared to a net loss of $621,000 or 0.6% of net sales in fiscal
1997.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal on-going cash requirements are to finance the
construction of new stores and the remodeling of certain existing stores, to
purchase merchandise inventories and to fund other working capital requirements.
Merchandise purchases vary on a seasonal basis, peaking in the fall. As a
result, the Company's cash requirements historically reach their peak in October
and November. Conversely, cash balances reach their peak in January, after the
holiday season is completed.
Net cash generated by operating activities totaled $8.8 million in fiscal
1999. Cash was used to finance $4.8 million of capital expenditures to open 24
new stores, to substantially complete five major store remodelings and to
install new computer software packages. The Company used cash to repurchase
approximately $4.7 million principal face amount of its 12% Senior Notes. In
addition, cash was also used to repurchase 368,000 shares of the Company's
common stock at a total cost including commissions of $3.0 million. Primarily,
as a result of the foregoing, cash decreased by $3.3 million in fiscal 1999. In
fiscal 2000, the Company expects to spend approximately $8 million on capital
expenditures to expand its store base by 30 stores, to complete nine major
remodels and for other miscellaneous purchases for its headquarters facility.
Management expects its cash on hand combined with cash flow from operations to
be sufficient to meet its capital expenditure and working capital requirements
and its other needs for liquidity during the upcoming year.
In March 1999, the Company entered into an Amended and Restated Revolving
Credit and Security agreement with Norwest Bank Minnesota, National Association
(the "Norwest Revolver"). The Norwest Revolver will expire on June 30, 2002 and
replaced the Company's previous credit agreement with Norwest Bank. The Norwest
Revolver provides the Company with revolving credit loans and letters of credit
up to $12 million, subject to a borrowing base formula tied to inventory levels.
Loans under the Norwest Revolver bear interest at Norwest's base rate
plus 1/4%. Interest is payable monthly in arrears. The Norwest Revolver carries
a facility fee of 1/4% on the unused portion of the Norwest Revolver as defined
in the Norwest Revolver. This facility is secured by substantially all of the
Company's assets. The borrowing base at May 14, 1999, was $7.1 million. As of
May 14, 1999, the Company had no borrowings and outstanding letters of credit in
the amount of $5.1 million under the Norwest Revolver. Accordingly, the
availability of revolving credit loans under the Norwest Revolver was $2.0
million at that date.
The Norwest Revolver contains certain restrictive covenants including
restrictions on incurring additional indebtedness, limitations on certain types
of investments and prohibitions on paying dividends, as well as requiring the
maintenance of certain financial ratios. As of February 27, 1999, the most
recent measurement date, the Company was in compliance with all covenants of the
Norwest Revolver.
In January 1997, the Company issued $10,300,200 of debt in the form of
12% Senior Notes (the "Senior Notes") due January 2005. The Senior Notes were
issued, pursuant to an Indenture dated as of December 2, 1996, to (i) the
holders of the 9% Senior Notes due January 2001 where each holder received, for
each $1,000 principal face amount, (a) 48 shares of common stock in the Company
and (b) Senior Notes in original principal face amount of $800 and (ii) the
Company's prepetition banks who received a total of (a) 138,284 shares of common
stock in the Company and (b) $2,313,000 in original principal face amount of the
Senior Notes.
The principal amount of the Senior Notes bears interest at the rate of
12% per annum. Interest at the rate of 9% per annum on the outstanding principal
amount is due monthly. Interest at the rate of 3% per annum on the outstanding
principal amount accrues monthly and upon accrual is treated as principal for
all purposes, including without limitation, the calculation of all interest
payments due thereafter, and is payable in full on January 1, 2005.
The Senior Notes are general unsecured senior obligations of the Company.
The Indenture for the Senior Notes ("the Indenture") contains certain covenants
which, among other things, limit the ability of the Company to incur liens and
additional indebtedness. As of February 27, 1999, the most recent measurement
date, the Company was in compliance with all covenants of the Indenture. In
November 1998, the Company received consent from the holders of a majority, by
principal face amount, of its Senior Notes. This consent eliminated a
restrictive covenant under the Indenture which, among other things, prohibited
the Company from repurchasing its equity securities and paying dividends.
In fiscal 1999 and fiscal 1998, the Company repurchased $4,676,000 and
$1,033,000, respectively, of principal face amount of its Senior Notes at a
discount from par. These purchases satisfied all of the annual mandatory
redemption requirements through January 1, 2004 leaving no additional mandatory
payments due until maturity on January 1, 2005. The Company recorded an
extraordinary gain, net of tax, of $35,396 in fiscal 1999 and $115,872 in fiscal
1998 as a result of these purchases.
The Company is unaware of any environmental liability that would have a
material adverse effect on the financial position or the results of operations
of the Company.
12
<PAGE>
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS No. 130"), effective in fiscal 1999, establishes
standards of disclosure and financial statement display for reporting total
comprehensive income and the individual components thereof. The adoption of SFAS
No. 130 had no impact on the Company's financial position or results of
operations for the year ended February 27, 1999.
Statement of Financial Accounting Standards No. 131, "Disclosures
About Segments of an Enterprise and Related Information" ("SFAS No. 131"),
effective in fiscal 1999, established new standards for determining
reportable segments and for disclosing information regarding each such
segment. Management does not believe that the Company has reportable segments
and as such will not be required to disclose segment information.
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"), effective for
fiscal years beginning after June 15, 1999, establishes standards for the
recognition and measurement of derivatives and hedging activities. The Company
does not currently engage in these types of risk management or investment
activities. Therefore, SFAS No. 133 is not anticipated to have any impact on the
Company's financial position or results of operations.
QUARTERLY RESULTS AND SEASONALITY
The Company's sales show seasonal variation as sales in the third and
fourth quarters, which include the fall and holiday seasons, generally have been
higher than sales in the first and second quarters. Sales generated during the
fall and holiday seasons have a significant impact on the Company's annual
results of operations. Quarterly results may fluctuate significantly depending
on a number of factors including store openings, adverse weather conditions,
shifts in the timing of certain holidays and promotional events and customer
response to the Company's seasonal merchandise mix.
The Company's unaudited quarterly operating results for each quarter of
fiscal 1999 and 1998 are presented in Note 10 of the Consolidated Financial
Statements.
INFLATION
The Company does not believe that inflation has had a material effect on
the results of operations during the past three fiscal years.
YEAR 2000 MATTERS
The year 2000 issue results from computer programs being written using
two digits rather than four to define the applicable year. Certain of the
Company's computer information systems and their associated software
("IT Systems") and other equipment using microchips or embedded technology
("Non-IT Systems") may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in system failures or miscalculations causing
disruptions of operations including, but not limited to, a temporary inability
to process transactions or to engage in similar business activities.
READINESS FOR YEAR 2000. The Company has been in the process of
addressing the year 2000 issue with regard to its IT and Non-IT Systems since
the beginning of calendar 1998. In connection with a general upgrade of its
IT Systems, the Company completed the installation of new merchandise and
financial system software packages in February 1999. The Company began using
these systems in March 1999. In addition to being year 2000 compliant,
management believes the new merchandise systems allow for improved merchandise
planning, sales tracking and trend analysis. Further, the Company also expects
these systems will allow for improved distribution center processing and more
flexible allocation of merchandise to the Company's stores.
During fiscal 1999, the Company employed a consultant to upgrade the
Company's point-of-sale systems to be year 2000 compliant. The final stages of
this project, including testing, are estimated to be complete by August 1999.
The Company has also evaluated its Non-IT Systems and determined that all Non-IT
Systems that are critical to the Company's operations have been addressed
regarding year 2000 compliance.
COSTS TO ADDRESS YEAR 2000 ISSUES. Management estimates that new year
2000 compliant software packages and related hardware improvements, which the
Company previously planned to install irrespective of any year 2000
considerations, cost approximately $1.0 million, of which approximately $50,000
was expensed and the remainder was capitalized. In addition, the Company intends
to spend approximately $300,000 in future hardware costs related to the new
software packages. Other internal costs associated with the year 2000 issue,
which are not separately tracked by the Company, consist primarily of payroll
and related expenses for the Company's Management Information Systems
department. All costs related to year 2000 compliance issues have been, or will
be funded through cash flows from operations.
13
<PAGE>
RISKS OF YEAR 2000 ISSUES. The Company expects to implement all changes
necessary to address the year 2000 issue by December 1999. The Company presently
believes that, with the conversions to new software and modifications to
existing IT and Non-IT Systems, the year 2000 issue will not pose significant
operational problems for the Company's IT and Non-IT Systems and thus will not
have a materially adverse effect on the Company's operations. However, the year
2000 issue is pervasive and complex and can potentially affect any computer
process. Accordingly, no assurance can be given that the year 2000 compliance
can be achieved without additional unanticipated expenditures and uncertainties
that might affect future financial results.
Additionally, in its normal course of operations the Company relies upon
vendors, government agencies, utility companies, telecommunications companies,
shipping companies, suppliers and other third party service providers over which
it can assert little control. The Company's ability to conduct its business is
dependent upon the ability of these third parties to avoid year 2000 related
disruptions. The Company has contacted and will continue to contact its key
suppliers and other third party service providers to inquire as to their year
2000 readiness. If these parties do not adequately address their year 2000
issues the Company's business may be affected, which could result in a
materially adverse effect on the results of operations and financial condition
of the Company.
CONTINGENCY PLANS. In addition to the above plans, the Company's
contingency plans involve addressing operational issues that may arise due to
the failure of the Company's or third parties' IT and Non-IT Systems. The
Company is currently assessing such issues and estimates these plans will be
completed by December 1999.
FORWARD LOOKING INFORMATION
Information contained in this Form 10-K contains "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, which can be identified by the use of forward-looking terminology such
as "may", "will", "expect", "intend", "plan", "anticipate", "estimate" or
"continue" or the negative thereof or other variations thereon or comparable
terminology. There are certain important factors that could cause results to
differ materially from those anticipated by some of these forward-looking
statements. Investors are cautioned that all forward-looking statements involve
risks and uncertainty. The factors, among others, that could cause actual
results to differ materially include: consumers' spending and debt levels; the
Company's ability to execute its business plan; the Company's ability to open
new stores on favorable terms and the timing of such store openings; the
acceptance of the Company's merchandising strategies by its target customers;
the ability of the Company to anticipate marketing trends and consumer needs;
continuity of a relationship with or purchases from major vendors, particularly
those from whom the Company imports merchandise; competitive pressures on sales
and pricing; increases in other costs which cannot be recovered through improved
pricing of merchandise; and the adverse effect of weather conditions from time
to time on consumers' ability or desire to purchase new clothing. The Company
currently purchases most of its import merchandise using letters of credit
denominated in U.S. dollars, primarily from suppliers in countries, whose
currency is pegged to the U.S. dollar. Therefore, the Company does not expect
foreign currency fluctuations to materially affect its business. However, to the
extent the Company begins purchasing larger amounts of merchandise from other
countries, currency fluctuations could affect the Company's business.
ITEM 7a.
QUANTITATIVE AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISK
Not applicable.
14
<PAGE>
ITEM 8.
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Index to Financial Statements...................................................................... 15
Financial Statements:
Report of Independent Accountants................................................................ 16
Consolidated Balance Sheet at February 27, 1999 and February 28, 1998............................ 17
Consolidated Statement of Operations for the three years ended February 27, 1999................. 18
Consolidated Statement of Stockholders' Equity for the three years ended February 27, 1999....... 19
Consolidated Statement of Cash Flows for the three years ended February 27, 1999................. 20
Notes to Consolidated Financial Statements....................................................... 21
</TABLE>
15
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Braun's Fashions Corporation
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Braun's Fashions Corporation and its subsidiary at February 27, 1999
and February 28, 1998, and the results of their operations and their cash flows
for each of the three years in the period ended February 27, 1999 in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
April 2, 1999
16
<PAGE>
BRAUN'S FASHIONS CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS FEBRUARY 27, FEBRUARY 28,
1999 1998
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................. $ 12,587,719 $ 15,848,439
Accounts receivable................................................... 1,397,502 847,746
Merchandise inventory................................................. 10,799,046 10,735,681
Prepaid expenses...................................................... 547,947 414,341
Current deferred tax asset............................................ 275,493 322,570
------------ ------------
Total current assets................................................ 25,607,707 28,168,777
Equipment and improvements:
Leasehold improvements................................................ 11,600,657 11,817,695
Furniture and fixtures................................................ 9,312,599 8,296,459
Other equipment....................................................... 4,445,331 3,337,479
Construction in progress.............................................. 864,714 312,585
------------ ------------
26,223,301 23,764,218
Less accumulated depreciation and amortization........................ 13,268,337 12,821,164
------------ ------------
Net equipment and improvements...................................... 12,954,964 10,943,054
Other assets:
Long-term deferred tax asset.......................................... 1,468,101 1,414,789
Other................................................................. 28,844 63,424
------------ ------------
Total other assets.................................................. 1,496,945 1,478,213
------------ ------------
Total assets........................................................ $ 40,059,616 $ 40,590,044
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................................... $ 2,893,317 $ 3,666,921
Accrued salaries, wages and related expenses.......................... 2,236,876 2,014,996
Other accrued liabilities............................................. 3,234,935 2,446,536
Current maturities of long-term debt.................................. 271,592 681,424
Income taxes payable.................................................. 546,936 186,982
------------ ------------
Total current liabilities........................................... 9,183,656 8,996,859
Long-term obligations:
Long-term debt........................................................ 5,073,604 9,616,311
Accrued rent obligation............................................... 1,072,590 1,017,556
------------ ------------
Total long-term obligations......................................... 6,146,194 10,633,867
Stockholders' equity:
Preferred stock - $0.01 par value, 1,000,000 shares authorized,
none outstanding.................................................... -- --
Common stock - $0.01 par value, 9,000,000 shares authorized,
4,349,761 and 4,523,393 shares issued and outstanding in 1999
and 1998, respectively.............................................. 47,178 45,234
Additional paid-in capital............................................ 29,304,648 28,588,350
Accumulated deficit................................................... (1,447,099) (7,674,266)
------------ ------------
27,904,727 20,959,318
Common stock held in treasury, at cost (368,000 shares)............... (2,999,961) --
Common stock subscriptions receivable................................. (175,000) --
------------ ------------
Total stockholders' equity.......................................... 24,729,766 20,959,318
------------ ------------
Total liabilities and stockholders' equity.......................... $ 40,059,616 $ 40,590,044
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
BRAUN'S FASHIONS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------------------
FEBRUARY 27, FEBRUARY 28, MARCH 1,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net sales..................................................... $110,142,393 $ 99,535,773 $ 95,946,046
Cost of sales:
Merchandise, buying and occupancy
(exclusive of depreciation and amortization shown below).. 71,488,228 65,110,994 65,445,103
----------- ------------ ------------
Gross profit.............................................. 38,654,165 34,424,779 30,500,943
Selling, general and administrative........................... 25,621,024 23,390,027 22,854,266
Depreciation and amortization................................. 2,678,987 2,533,282 2,648,563
Reorganization expense........................................ -- -- 7,829,924
Nonrecurring expense.......................................... -- 775,451 --
----------- ------------ ------------
Operating income (loss)................................... 10,354,154 7,726,019 (2,831,810)
Interest, net................................................. 282,508 690,589 684,330
----------- ------------ ------------
Income (loss) before income taxes............................. 10,071,646 7,035,430 (3,516,140)
Income tax provision (benefit)................................ 3,879,875 2,749,971 (2,895,146)
----------- ------------ ------------
Net income (loss) before extraordinary gain............... 6,191,771 4,285,459 (620,994)
Extraordinary gain............................................ 35,396 115,872 --
----------- ------------ ------------
Net income (loss)............................................. $ 6,227,167 $ 4,401,331 $ (620,994)
----------- ------------ ------------
----------- ------------ ------------
Basic earnings per common share:
Net income (loss) before extraordinary gain............... $ 1.36 $ 0.96 $ (0.15)
Extraordinary gain........................................ 0.01 0.02 --
----------- ------------ ------------
Net income (loss)......................................... $ 1.37 $ 0.98 $ (0.15)
----------- ------------ ------------
----------- ------------ ------------
Weighted average common shares outstanding................ 4,541,480 4,482,119 4,029,041
----------- ------------ ------------
----------- ------------ ------------
Diluted earnings per common share:
Net income (loss) before extraordinary gain............... $ 1.30 $ 0.89 $ (0.15)
Extraordinary gain........................................ 0.01 0.02 --
----------- ------------ ------------
Net income (loss)......................................... $ 1.31 $ 0.91 $ (0.15)
----------- ------------ ------------
----------- ------------ ------------
Weighted average common and common
equivalent shares outstanding........................ 4,773,836 4,812,482 4,029,041
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
BRAUN'S FASHIONS CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON COMMON
COMMON STOCK ADDITIONAL STOCK STOCK
------------------------- PAID-IN ACCUMULATED HELD IN SUBSCRIPTIONS
SHARES AMOUNT CAPITAL DEFICIT TREASURY RECEIVABLE TOTAL
----------- ---------- ----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
March 2, 1996 3,793,312 $ 37,933 $25,079,052 $(11,454,603) $ -- $ -- $13,662,382
Stock issued pursuant
to plan of reorganization 617,516 6,175 2,475,006 -- -- -- 2,481,181
Stock issued on
exercise of options 21,760 218 49,985 -- -- -- 50,203
Net loss -- -- -- (620,994) -- -- (620,994)
----------- ---------- ----------- ----------- ----------- ------------ -----------
March 1, 1997 4,432,588 44,326 27,604,043 (12,075,597) -- -- 15,572,772
Stock issued on
exercise of options 90,805 908 300,507 -- -- -- 301,415
Tax benefit on exercise
of stock options -- -- 165,349 -- -- -- 165,349
Accelerated vesting
of stock options -- -- 518,451 -- -- -- 518,451
Net income -- -- -- 4,401,331 -- -- 4,401,331
----------- ---------- ----------- ----------- ----------- ------------ -----------
February 28, 1998 4,523,393 45,234 28,588,350 (7,674,266) -- -- 20,959,318
Stock issued on
exercise of options 194,368 1,944 611,260 -- -- -- 613,204
Tax benefit on exercise
of stock options -- -- 105,038 -- -- -- 105,038
Common stock
subscriptions receivable -- -- -- -- -- (175,000) (175,000)
Acquisiton of common
stock held in treasury,
at cost (368,000) -- -- -- (2,999,961) -- (2,999,961)
Net income -- -- -- 6,227,167 -- -- 6,227,167
----------- ---------- ----------- ----------- ----------- ------------ -----------
February 27, 1999 4,349,761 $ 47,178 $29,304,648 $(1,447,099) $(2,999,961) $ (175,000) $24,729,766
----------- ---------- ----------- ----------- ----------- ------------ -----------
----------- ---------- ----------- ----------- ----------- ------------ -----------
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
BRAUN'S FASHIONS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------------------
FEBRUARY 27, FEBRUARY 28, MARCH 1,
1999 1998 1997
------------- ------------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) .......................................... $ 6,227,167 $ 4,401,331 $ (620,994)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization........................... 2,678,987 2,533,282 2,678,963
Accelerated vesting of stock options.................... -- 518,451 --
Extraordinary gain from early extinguishment of debt.... (57,090) (186,890) --
(Increase) decrease in deferred tax assets.............. (6,235) 260,744 (1,998,103)
(Gain) loss on disposal of property and equipment....... 57,134 (5,810) 2,469,940
Increase (decrease) in accrued rent obligation.......... 55,034 121,303 (185,448)
Changes in operating assets and liabilities:
(Increase) decrease in merchandise inventory,
prepaid expenses, receivables and other............ (712,147) (1,991,667) 4,456,747
Increase in accounts payable and
accrued liabilities................................ 236,675 1,242,958 2,214,825
Increase in income taxes payable/receivable........... 359,954 1,057,480 --
------------- ------------- ------------
Net cash provided by operating activities.............. 8,839,479 7,951,182 9,015,930
Cash flows from investing activities:
Purchase of equipment and improvements................. (4,811,730) (2,720,178) (1,042,622)
Proceeds from sale of furniture and fixtures........... 63,699 34,949 53,270
------------- ------------- ------------
Net cash used in investing activities.............. (4,748,031) (2,685,229) (989,352)
Cash flows from financing activities:
Principal payments on debt agreements.................. (5,120,428) (1,090,754) (250,060)
Borrowings under debt agreements....................... -- -- 2,878,952
Interest on 12% Senior Notes added to principal........ 224,979 292,760 --
Exercise of stock options and related income tax benefit 718,242 466,764 50,203
Common stock subscriptions receivable.................. (175,000) -- --
Acquisition of common stock
held in treasury, at cost........................... (2,999,961) -- --
Checks issued, not yet presented for payment........... -- -- (1,335,088)
------------- ------------- ------------
Net cash provided by (used in) financing activities.... (7,352,168) (331,230) 1,344,007
Net increase (decrease) in cash and cash equivalents.......... (3,260,720) 4,934,723 9,370,585
Cash and cash equivalents at beginning of year................ 15,848,439 10,913,716 1,543,131
------------- ------------- ------------
Cash and cash equivalents at end of year...................... $ 12,587,719 $ 15,848,439 $ 10,913,716
------------- ------------- ------------
------------- ------------- ------------
Supplemental cash flow information:
Interest paid during the year......................... $ 821,831 $ 958,627 $ 644,198
Income taxes paid (refunded) during the year.......... $ 3,442,812 $ 1,276,893 $ (903,958)
Debt for equity exchange.............................. $ -- $ -- $ 2,900,000
Write-off of deferred financing costs................. $ -- $ -- $ 418,818
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
BRAUN'S FASHIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Braun's Fashions Corporation ("BFC"), through its wholly-owned
subsidiary, Braun's Fashions, Inc. ("BFI") (collectively referred to as the
"Company"), operates retail specialty stores selling women's clothing and
related accessories, primarily in the Midwest. The Company operated 195, 179 and
170 stores at the end of fiscal 1999, 1998 and 1997, respectively.
FISCAL YEAR AND BASIS OF PRESENTATION
The Company's fiscal year ends on the Saturday nearest February 28. The
fiscal years ending February 27, 1999, February 28, 1998 and March 1, 1997
consisted of 52 weeks each. The consolidated financial statements include the
accounts of BFC and its wholly-owned subsidiary, BFI. All significant
intercompany accounts have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand and on deposit, and
investments purchased with an original maturity of three months or less.
MERCHANDISE INVENTORIES
Merchandise inventories are stated at the lower of cost or market. Cost
is determined using the first-in, first-out retail inventory method.
INVENTORY MARKDOWNS
Permanent markdowns are recorded to reflect expected adjustments to
retail prices in accordance with the retail inventory method. Markdowns are
recorded monthly on the basis of an evaluation of inventory by merchandising
management. In the Company's judgement, all markdowns necessary to record
inventory at the lower of cost or market under the retail inventory method have
been provided for all periods presented.
EQUIPMENT AND IMPROVEMENTS
Equipment and improvements are stated at cost. Equipment is depreciated
over its estimated useful life and improvements are amortized over the term of
the related leases. Repairs and maintenance which do not extend an asset's
useful life are expensed as incurred. When assets are retired or otherwise
disposed of, the cost and related accumulated depreciation or amortization are
removed from the accounts, and any resulting gain or loss is reflected in income
for that period. The Company evaluates its long-lived assets in accordance with
the provisions of SFAS No. 121, "Accounting for Impairment of Long-Lived Assets
and Long-Lived Assets to Be Disposed Of." This statement requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. As of February 27, 1999, the
Company has determined that no adjustment to the financial statements is
necessary under SFAS No. 121.
RENT EXPENSE
Many of the Company's lease agreements for retail space include
escalation clauses in minimum base rent. The Company recognizes minimum base
rent expense for the lease term in equal annual amounts over the lease term.
ADVERTISING
The Company expenses advertising costs as incurred. Advertising costs for
the fiscal years ended 1999, 1998 and 1997 were $645,000, $671,000 and $793,000,
respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash, receivables and
payables for which current carrying amounts approximate fair market value.
Additionally, interest rates on outstanding debt are at rates which approximate
market rates for debt with similar terms and maturities.
21
<PAGE>
BRAUN'S FASHIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK BASED EMPLOYEE COMPENSATION
The Company has elected to recognize compensation cost for its stock
based compensation plans in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees". Generally, no compensation
expense is recognized for stock options with exercise prices equal to the market
value of the underlying shares of stock at the date of grant. The Company has
adopted the disclosure-only provisions of Statement of Financial Accounting
Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation".
INCOME TAXES
Income taxes are provided following the provisions of Statement of
Financial Accounting Standards No. 109 ("SFAS No. 109")"Accounting for Income
Taxes. "Under the provisions of SFAS No. 109, deferred tax assets and
liabilities result from the expected future tax consequences of differences
between the carrying value and the tax basis of assets and liabilities.
NET INCOME (LOSS) PER COMMON SHARE
In fiscal 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128").
Under SFAS No. 128, basic earnings per share ("EPS") is computed based on the
weighted average number of shares of common stock outstanding during the
applicable periods while diluted EPS is computed based on the weighted average
number of shares of common and common equivalent shares (dilutive stock options)
outstanding. EPS for all periods presented have been restated to reflect the
adoption of SFAS No. 128.
The following is a reconciliation of the number of shares
(denominator) used in the basic and diluted EPS computations:
<TABLE>
<CAPTION>
EFFECT OF
BASIC DILUTIVE STOCK DILUTED
EPS OPTIONS EPS
--------- -------------- ---------
<S> <C> <C> <C>
Fiscal 1999
Shares......................................... 4,541,480 232,356 4,773,836
Per share amount before extraordinary gain..... $1.36 $(0.06) $1.30
Per share amount including extraordinary gain.. $1.37 $(0.06) $1.31
Fiscal 1998
Shares......................................... 4,482,119 330,363 4,812,482
Per share amount before extraordinary gain..... $0.96 $(0.07) $0.89
Per share amount including extraordinary gain.. $0.98 $(0.07) $0.91
Fiscal 1997
Shares......................................... 4,029,041 -- 4,029,041
Per share amount............................... $(0.15) -- $(0.15)
</TABLE>
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that may affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expenses during a reporting
period. As a result, actual results could differ because of the use of these
estimates and assumptions.
22
<PAGE>
BRAUN'S FASHIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- CHAPTER 11 REORGANIZATION
On July 2, 1996, the Company filed in the United States Bankruptcy Court
in the District of Delaware a petition for reorganization under Chapter 11 of
Title 11 of the United States Bankruptcy Code, case number 96-1030(HSB). Under
the protection of Chapter 11, the Company managed its affairs and operated its
business as a debtor-in-possession while developing a plan of reorganization.
The Company filed its Second Amended Plan of Reorganization on October 22, 1996
(the "Plan"), along with its Disclosure Statement. The Plan was approved by
99.6% of the voting shareholders and by a majority of each class of creditors
that voted. On November 22, 1996, the Bankruptcy Court confirmed the Plan, which
became effective on December 3, 1996.
As of the effective date, December 3, 1996, the Company had 3,796,512
shares of common stock issued and outstanding. Under the terms of the Plan, the
Company issued 617,516 shares of common stock on January 2, 1997 to certain
creditors in respect to their filed and allowed claims and interests. The
Company also issued approximately $10.3 million in aggregate principal amount of
12% Senior Notes (the "Senior Notes") to these classes of creditors pursuant to
the Plan. The common stock and Senior Notes were issued to these creditors in
exchange for outstanding debt of $13,201,075 previously held by these creditors.
The fair value of the common stock and Senior Notes approximated the carrying
value of the outstanding obligations, and accordingly, no gain or loss was
recorded on the exchange.
The Company incurred the following expenses during fiscal 1997 in
connection with its Chapter 11 reorganization proceedings:
<TABLE>
<S> <C>
Professional fees and services $2,610,000
Loss on disposal of property, fixtures and equipment 2,453,000
Lease rejection claims 1,042,000
Other 1,725,000
----------
Total $7,830,000
----------
----------
</TABLE>
NOTE 3 -- LONG-TERM DEBT
As part of the Plan, the Company issued $10,300,200 of debt in the form
of 12% Senior Notes (the "Senior Notes") due January 2005. The Senior Notes were
issued, pursuant to an Indenture dated December 2, 1996, to (i) the holders of
the 9% Senior Notes due January 2001 where each holder received, for each $1,000
principal face amount, (a) 48 shares of common stock in the Company and (b)
Senior Notes in original principal amount of $800 and (ii) the Company's
prepetition banks who received a total of (a) 138,284 shares of common stock in
the Company and (b) $2,313,000 in original principal face amount of the Senior
Notes.
The principal amount of the Senior Notes bears interest at the rate of
12% per annum from and after December 17, 1996. Interest at the rate of 9% per
annum on the outstanding principal amount is paid monthly. Interest at the rate
of 3% per annum on the outstanding principal amount is accrued monthly and upon
accrual is treated as principal for all purposes, including without limitation,
the calculation of all interest payments due thereafter, and is payable in full
on January 1, 2005.
The Senior Notes are general unsecured senior obligations of the Company.
The Indenture for the Senior Notes ("the Indenture") contains certain covenants
which, among other things, limit the ability of the Company to incur liens and
additional indebtedness. As of February 27, 1999, the most recent measurement
date, the Company was in compliance with all covenants of the Indenture. In
November 1998, the Company received consent from the holders of a majority, by
principal face amount, of its Senior Notes. This consent eliminated a
restrictive covenant under the Indenture which, among other things, prohibited
the Company from repurchasing its equity securities and paying dividends.
During fiscal 1999 and 1998, the Company purchased $4,676,000 and
$1,033,000 principal face amount of its Senior Notes, respectively, at a
discount from par. The purchases resulted in extraordinary gains of $35,396 and
$115,872, net of tax, in 1999 and 1998, respectively. All of the January 1, 1999
to January 1, 2004 annual mandatory redemption requirements were satisfied by
the purchases, leaving no additional mandatory payments due until maturity on
January 1, 2005.
23
<PAGE>
BRAUN'S FASHIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- LONG TERM DEBT(CONTINUED)
In March 1999, the Company entered into an Amended and Restated Revolving
Credit and Security Agreement with Norwest Bank Minnesota, National Association
(the "Norwest Revolver"). The Norwest Revolver will expire on June 30, 2002 and
replaced the Company's previous credit agreement with Norwest Bank. The Norwest
Revolver provides the Company with revolving credit loans and letters of credit
up to $12 million, subject to a borrowing base formula tied to inventory levels.
Loans under the Norwest Revolver bear interest at Norwest's base rate
plus 1/4%. Interest is payable monthly in arrears. The Norwest Revolver carries
a facility fee of 1/4% based on the unused portion of the Norwest Revolver as
defined in the agreement. This facility is secured by substantially all of the
Company's assets. The borrowing base at February 27, 1999, was $6.0 million. As
of February 27, 1999, the Company had no borrowings and outstanding letters of
credit in the amount of $3.3 million under the Norwest Revolver. Accordingly,
the availability of revolving credit loans under the Norwest Revolver was $2.7
million at that date.
The Norwest Revolver contains certain restrictive covenants, including
restrictions on incurring additional indebtedness, limitations on certain types
of investments and prohibitions on paying dividends. The Norwest Revolver also
requires the Company to maintain certain financial ratios. As of February 27,
1999, the most recent measurement date, the Company was in compliance with all
covenants of the Norwest Revolver.
Outstanding debt consists of the following:
<TABLE>
<CAPTION>
FEBRUARY 27, FEBRUARY 28,
1999 1998
------------- ------------
<S> <C> <C>
12% Senior Notes due 2005........................................... $ 4,904,194 $ 9,607,247
Obligation under capital lease...................................... 441,002 690,488
------------- ------------
5,345,196 10,297,735
Less:
Current maturities of 12% Senior Notes......................... -- 431,938
Current maturities of capital lease obligation................. 271,592 249,486
------------- ------------
Long-term debt...................................................... $ 5,073,604 $ 9,616,311
------------- ------------
------------- ------------
</TABLE>
The Company was not required to pay interest on its prepetition debt
during its Chapter 11 Bankruptcy proceedings. If the Company had been required
to pay interest on its prepetition debt, contractual interest expense net of
interest income for the year ended March 1, 1997, would have totaled
approximately $1.2 million.
24
<PAGE>
BRAUN'S FASHIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- STOCK OPTION PLANS
In 1987, the Company adopted the 1987 Stock Incentive Plan which, as
amended, provided for the granting of options to purchase up to 710,000 shares
of common stock. Option grants include qualified and non-qualified grants
vesting over zero to four years. Options are exercisable up to ten years from
the date of grant and are granted at a price not less than 100% of the fair
market value of the shares on the date of grant. In June 1996, the Company
repriced previously granted employee options to purchase up to 358,200 shares of
the Company's common stock. The initial exercise price of these options was
$7.00 per share and was reset to $2.00, $3.00, or $4.00 per share. The closing
price of the Company's common stock at the date of the repricing was $1.56 per
share. The 1987 Stock Incentive Plan terminated on September 11, 1997 and no new
options may be granted under that plan after that date.
In July 1997, the Company's shareholders approved the Company's 1997
Stock Incentive Plan to replace the 1987 incentive plan. The 1997 Stock
Incentive Plan was amended in fiscal 1999, increasing the number of shares of
common stock authorized for issuance from 300,000 to 450,000 shares. As of
February 27, 1999, 149,000 options remain available for grant. The 1997
Incentive Plan permits the granting of qualified incentive stock options meeting
the requirements of Section 422 of the Internal Revenue Code and non-qualified
stock options. Options are granted at a price not less than 100% of the fair
market value of the Company's common stock on the option grant date, vest over
three to five years and are exercisable up to 10 years from the date of grant.
The Company established the 1992 Director Stock Option Plan, effective
March 1992. This plan provides for options to purchase 40,000 shares of common
stock, all of which shares have been granted. In June 1996, the Company repriced
previously granted director options to purchase up to 40,000 shares of the
Company's common stock. The initial exercise price of these options was $6.00 or
$7.00 per share and was reset to $3.00. The closing price of the Company's
common stock at the date of the repricing was $1.56 per share. The options
vested one-third upon issuance and one-third over the next two years in annual
installments of one-third per year. Vested options are exercisable for ten years
from the date of grant.
In fiscal 1998, the Company granted to non-employee members of its Board
of Directors options to purchase an aggregate of 60,000 shares of the Company's
common stock. The exercise price of these options is $8.75, equal to the fair
market value of the common stock on the date of the grant. Accordingly, no
compensation expense was recognized on the issuance of these options. The
options vest over three years and are exercisable for ten years from the grant
date.
In July 1998, the Company's shareholders approved the Company's 1998
Director Stock Option Plan. The 1998 Director Plan provides for granting of
non-qualified stock options to purchase an aggregate of 100,000 shares of common
stock to non-employee directors. As of February 27, 1999, no options had been
granted under the 1998 Director Plan. Options are to be granted at a price not
less than 100% of the fair market value of the Company's common stock on the
option grant date and are exercisable for up to five years from the date of
grant.
During fiscal 1998, compensation expense of $518,000 was recognized
relating to the accelerated vesting of 166,000 options in connection with the
implementation of the Company's management succession plan. The compensation
expense was calculated as the difference between the exercise price and the fair
market value of the Company's common stock on the date on which the vesting of
options were accelerated.
The Company has elected to recognize compensation cost for its stock
based compensation plans in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees". Generally, no
compensation expense is recognized for stock options with exercise prices
equal to the market value of the underlying shares of stock at the date of
grant. The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for
Stock-Based Compensation." If compensation cost for these plans had been
determined based on the fair value methodology prescribed by SFAS No. 123,
the Company's net earnings and earnings per share in fiscal 1999, 1998 and
1997 would have been reduced to the pro forma amounts indicated below.
25
<PAGE>
BRAUN'S FASHIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- STOCK OPTION PLANS (CONTINUED)
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- -----------
<S> <C> <C> <C>
Net income (loss) - as reported $6,227,167 $4,401,331 $ (620,994)
Net income (loss) - pro forma $5,814,836 $4,239,092 $ (686,827)
Net income (loss) per diluted share - as reported $ 1.31 $ 0.91 $ (0.15)
Net income (loss) per diluted share - pro forma $ 1.22 $ 0.88 $ (0.17)
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model. The model was developed for use in
estimating the fair value of traded options which have no vesting registration
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
The following weighted-average assumptions were used for grants in fiscal
1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ------------ ------------
<S> <C> <C> <C>
Dividend yield 0.00% 0.00% 0.00%
Expected volatility 53.76% 56.56% 57.32%
Risk-free interest rate 5.47% 5.99% - 6.11% 5.99% - 6.50%
Expected lives 4.31 Years 4.31 Years 3 Years
</TABLE>
26
<PAGE>
BRAUN'S FASHIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- STOCKOPTION PLANS (CONTINUED)
The following summarizes stock option transactions:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------------------------------------------
FEBRUARY 27, 1999 FEBRUARY 28, 1998 MARCH 1, 1997
------------------------ ----------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
-------- ---------------- -------- ---------------- -------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of period 559,528 $4.92 519,400 $3.26 408,320 $6.52
Granted 305,000 10.69 175,000 8.75 176,000 3.83
Reissued -- -- -- -- 358,200 3.00
Exercised (194,368) 3.15 (84,139) 3.15 (21,760) 0.91
Cancelled (6,300) 7.88 (50,733) 4.13 (401,360) 6.85
-------- ------------- ------- ------------ ------- ------------
Outstanding, end of period 663,860 $8.03 559,528 $4.92 519,400 $3.26
-------- ------------- ------- ------------ ------- ------------
-------- ------------- ------- ------------ ------- ------------
Exercisable, end of period 157,067 $5.18 204,501 $3.21 23,914 $2.60
-------- ------------- ------- ------------ ------- ------------
-------- ------------- ------- ------------ ------- ------------
Available for grant, end of period 249,000 300,000 184,320
-------- ------- -------
-------- ------- -------
Weighted average fair value
of options granted $10.69 $8.75 $2.80
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
The following summarizes stock options outstanding and options exercisable at
February 27, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- -----------------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF NUMBER AVERAGE REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
----------------- ----------- ----------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$2.00 - $6.00 186,194 7.35 $3.14 101,400 $3.33
$6.01 - $8.75 176,666 8.33 8.66 55,667 8.56
$8.76 - $10.69 301,000 9.08 10.69 -- --
----------- ----------------- -------------- ----------- --------------
663,860 8.40 $8.03 157,067 $5.18
----------- ----------------- -------------- ----------- --------------
----------- ----------------- -------------- ----------- --------------
</TABLE>
NOTE 5 -- INCOME TAXES
The provision (benefit) for income taxes for the fiscal years ended
February 27, 1999, February 28, 1998 and March 1, 1997 consisted of:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ------------ -----------
<S> <C> <C> <C>
Current
Federal............................................. $3,186,110 $ 2,389,227 $ (917,043)
State............................................... 700,000 100,000 20,000
---------- ------------ -----------
Current tax expense (benefit)............................ 3,886,110 2,489,227 (897,043)
Deferred................................................. (6,235) 260,744 (1,998,103)
---------- ------------ -----------
Provision (benefit) for income tax ...................... $3,879,875 $ 2,749,971 $(2,895,146)
---------- ------------ -----------
---------- ------------ -----------
</TABLE>
27
<PAGE>
BRAUN'S FASHIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- INCOME TAXES (CONTINUED)
The Company's effective income tax rate for fiscal years ended February
27, 1999, February 28, 1998 and March 1, 1997, differs from the federal income
tax rate as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ -------
<S> <C> <C> <C>
Federal income tax at statutory rate.................... 34.0% 34.0% (34.0)%
State income tax (net of federal benefit)............... 4.6 0.9 0.4
Valuation allowance..................................... -- -- (50.9)
Accelerated vesting of stock options.................... -- 2.0 --
Other................................................... (0.1) 2.2 2.2
------ ------ -------
38.5% 39.1% (82.3)%
------ ------ -------
------ ------ -------
</TABLE>
The net deferred tax assets included in the consolidated balance sheet as
of February 27, 1999 and February 28, 1998 are as follows:
<TABLE>
<CAPTION>
FEBRUARY 27, FEBRUARY 28,
1999 1998
----------- -----------
<S> <C> <C>
Vacation accrual................................... $198,878 $180,200
Inventory and other................................ 76,615 142,370
----------- -----------
Current deferred tax assets .................... 275,493 322,570
Depreciation and amortization...................... 818,182 749,802
Accrued rent obligation............................ 364,680 345,969
Interest on Senior Notes added to principal........ 106,495 120,873
Other.............................................. 178,744 198,145
----------- -----------
Long-term deferred tax assets................... 1,468,101 1,414,789
----------- -----------
Total deferred tax assets....................... $1,743,594 $1,737,359
----------- -----------
----------- -----------
</TABLE>
Deferred income tax assets represent potential future income tax benefits.
Realization of these assets is ultimately dependent upon future taxable income.
NOTE 6 -- EMPLOYEE BENEFIT PLANS
Effective March 3, 1991, the Company established a defined contribution
plan qualified under Section 401(k) of the Internal Revenue Code for the benefit
of all employees who meet certain eligibility requirements, primarily age and
length of service. The plan allows eligible employees to invest from 1% to 16%
of their compensation. For fiscal years ended February 27, 1999, February 28,
1998 and March 1, 1997, the Company approved a discretionary matching
contribution of 25% of the first 6% of the participants' pre-tax contributions.
Such contributions were based principally on Company performance. Company
contributions made for the fiscal years ended February 27, 1999, February 28,
1998 and March 1, 1997 were $67,362, $55,954, and $56,993, respectively.
Effective March 1, 1999, the Company amended the plan to allow for fixed
quarterly Company matching contributions of 50% of the first 3% of the
participants pre-tax contributions and 25% of the next 3% of the participants
pre-tax contributions.
The Company does not offer any other post-retirement, post-employment
or pension benefits to directors or employees.
28
<PAGE>
BRAUN'S FASHIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- LEASE COMMITMENTS
The Company leases its computer equipment, office and warehouse
facility, vehicles and each of its store locations, all of which are accounted
for as operating leases. The store lease terms, including rental period, renewal
options, escalation clauses and rent as a percentage of sales, vary among the
leases. Most store leases require the Company to pay real estate taxes and
common area maintenance charges.
<TABLE>
<CAPTION>
Total rental expense for all leases was as follows: FISCAL YEAR ENDED
---------------------------------------------------
FEBRUARY 27, FEBRUARY 28, MARCH 1,
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Minimum rent.................................... $ 5,655,384 $ 4,726,654 $ 6,219,379
Contingent rent -- based on a percentage of sales 1,824,926 2,109,262 1,443,340
Maintenance, taxes and other.................... 3,267,663 2,667,097 3,367,817
------------- ------------- -------------
$ 10,747,973 $ 9,503,013 $ 11,030,536
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
In addition, the Company leases its point-of-sale (POS) registers.
This lease agreement has been capitalized at the present value of the future
minimum lease payments.
The Company leases its office and warehouse facility under an agreement
which commenced on June 15, 1994, and expires on June 14, 2005. The Company is
required to pay property taxes, insurance, utilities and other operating costs
of the facility.
The Company subleases 80,000 square feet of warehouse space in its
distribution center to a third party under an agreement which commenced October
1, 1997. Under the agreement, the Company received minimum rent of 14,667 per
month from October 1, 1997 through August 31, 1998; and will receive $21,667 per
month from September 1, 1998 to August 31, 1999 and $24,667 per month from
September 1, 1999 to August 31, 2000. The subtenant may extend the lease for two
options periods. Rent for the first three year option period would be $26,480
per month. Rent for the second option period of one year and nine months would
be $29,790 per month. The subtenant is also required to reimburse the Company
for property taxes, utilities and other operating costs of the subleased portion
of the facility.
Under a second sublease effective September 1, 1997 and expiring on May
31, 2005, the Company subleases 33,000 square feet of warehouse and office space
to a third party. Under the agreement the Company will receive annual minimum
rent of $132,000. The subtenant is also required to reimburse the Company for
property taxes, utilities and other operating costs of the subleased portion of
the facility.
Future minimum rental commitments for all leases are as follows:
<TABLE>
<CAPTION>
CAPITAL
LEASE OPERATING LEASES
----------- ---------------------------------------------------------
POS RETAIL OFFICE/
REGISTER STORE WAREHOUSE VEHICLES/
FISCAL YEAR EQUIPMENT FACILITIES FACILITIES OTHER TOTAL
----------- ------------ ------------ --------- -----------
<S> <C> <C> <C> <C> <C>
2000................................ $ 298,723 $ 5,806,451 $ 198,029 $104,149 $ 6,108,629
2001................................ 174,255 5,614,917 345,854 17,824 5,978,595
2002................................ -- 5,477,793 493,854 -- 5,971,647
2003................................ -- 4,831,430 520,971 -- 5,352,401
2004................................ -- 4,046,038 548,088 -- 4,594,126
Thereafter.......................... -- 10,710,707 726,767 -- 11,437,474
----------- ------------ ------------ --------- -----------
Total minimum lease payments.. 472,978 $36,487,336 $2,833,563 $121,973 $39,442,872
------------ ------------ --------- -----------
------------ ------------ --------- -----------
Less: Amount representing interest.. 31,976
-----------
Present value of minimum capital
lease payments................... 441,002
Less: Current maturities............ 271,592
-----------
Obligation under capital lease,
less current maturities.......... $ 169,410
-----------
-----------
</TABLE>
29
<PAGE>
BRAUN'S FASHIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- NONRECURRING EXPENSE
In February 1998, the Company completed the implementation of its
management succession plan. As a result of the plan, Nicholas H. Cook, the
Company's Chairman and Chief Executive Officer ("CEO") since 1990, relinquished
his CEO responsibilities but will continue to serve as Chairman of the Company's
Board of Directors, until August 31, 1999. Herbert D. Froemming, the Company's
former Vice Chairman, elected to take early retirement. As part of the
management succession plan, the Company incurred a one-time, pre-tax expense
of $775,000, or $0.13 per diluted share. This charge was primarily non-cash,
reflecting the accelerated vesting of previously issued stock options.
NOTE 9 -- RELATED PARTY TRANSACTIONS
The Company's previous corporate office and warehouse facility was
leased under a 28-year lease commencing June 1, 1981 from a partnership whose
partners are current stockholders and former officers of the Company. On
September 30, 1996, the Company rejected this lease and a related sublease in
the United States Bankruptcy Court. In May 1997, the Company settled the related
lease rejection claim for $89,768.
Total expenses related to transactions with related parties are as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------------
FEBRUARY 27, FEBRUARY 28, MARCH 1,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cost of sales:
Rental expense................................. $ -- $ -- $ 143,111
Selling and administrative:
Rental expense................................. -- -- 71,556
----------- ----------- -----------
$ -- $ -- $ 214,667
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
30
<PAGE>
BRAUN'S FASHIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 -- QUARTERLY FINANCIAL DATA (UNAUDITED):
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL 1999 QUARTERS
-------------------------------------------------------
1ST 2ND 3RD 4TH
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales(1). . . . . . . . . . . . . . . . . . . . . . $ 25,003 $ 22,942 $ 30,826 $ 31,371
Gross profit. . . . . . . . . . . . . . . . . . . . . . 8,673 7,554 11,453 10,974
Operating income . . . . . . . . . . . . . . . . . . . 1,855 917 4,342 3,240
Net income before extraordinary gain. . . . . . . . . . 1,078 504 2,641 1,969
Extraordinary gain(2) . . . . . . . . . . . . . . . . . -- -- 35 --
---------- ---------- ---------- ----------
Net income . . . . . . . . . . . . . . . . . . . . . . $ 1,078 $ 504 $ 2,676 $ 1,969
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Basic per share data:
Net earnings before extraordinary gain. . . . . . . . . $ 0.24 $ 0.11 $ 0.56 $ 0.45
Extraordinary gain. . . . . . . . . . . . . . . . . . . -- -- 0.01 --
---------- ---------- ---------- ----------
Net earnings. . . . . . . . . . . . . . . . . . . . . . $ 0.24 $ 0.11 $ 0.57 $ 0.45
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted per share data:
Net earnings before extraordinary gain. . . . . . . . . $ 0.22 $ 0.10 $ 0.55 $ 0.43
Extraordinary gain. . . . . . . . . . . . . . . . . . . -- -- 0.01 --
---------- ---------- ---------- ----------
Net earnings . . . . . . . . . . . . . . . . . . . . . $ 0.22 $ 0.10 $ 0.56 $ 0.43
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Market price -- high(3) . . . . . . . . . . . . . . . . $ 13.625 $ 14.375 $ 9.750 $ 9.500
-- low(3). . . . . . . . . . . . . . . . . $ 10.375 $ 8.625 $ 6.375 $ 7.250
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1998 QUARTERS
-------------------------------------------------------
1ST 2ND 3RD 4TH
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales(1). . . . . . . . . . . . . . . . . . . . . . $ 21,842 $ 20,939 $ 29,466 $ 27,289
Gross profit. . . . . . . . . . . . . . . . . . . . . . 7,659 6,761 11,028 8,977
Nonrecurring expense(4) . . . . . . . . . . . . . . . . -- -- -- 775
Operating income. . . . . . . . . . . . . . . . . . . . 1,580 684 4,120 1,342
Net income before extraordinary gain. . . . . . . . . . 855 300 2,420 710
Extraordinary gain(5) . . . . . . . . . . . . . . . . . 105 8 -- 3
---------- ---------- ---------- ----------
Net income . . . . . . . . . . . . . . . . . . . . . . $ 960 $ 308 $ 2,420 $ 713
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Basic per share data:
Net earnings before extraordinary gain. . . . . . . . . $ 0.20 $ 0.07 $ 0.54 $ 0.15
Extraordinary gain. . . . . . . . . . . . . . . . . . . 0.02 0.00 -- 0.00
---------- ---------- ---------- ----------
Net earnings. . . . . . . . . . . . . . . . . . . . . . $ 0.22 $ 0.07 $ 0.54 $ 0.15
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted per share data:
Net earnings before extraordinary gain. . . . . . . . . $ 0.18 $ 0.06 $ 0.50 $ 0.15
Extraordinary gain. . . . . . . . . . . . . . . . . . . 0.02 0.00 -- 0.00
---------- ---------- ---------- ----------
Net earnings . . . . . . . . . . . . . . . . . . . . . $ 0.20 $ 0.06 $ 0.50 $ 0.15
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Market price -- high(3) . . . . . . . . . . . . . . . . $ 10.000 $ 13.250 $ 16.125 $ 11.750
-- low(3). . . . . . . . . . . . . . . . . $ 6.375 $ 7.375 $ 7.250 $ 7.875
</TABLE>
(1) The Company's quarterly net sales show seasonal variation, as sales in the
third and fourth quarters, which include the fall and holiday seasons,
generally have been higher than sales in the first and second quarters.
(2) In fiscal 1999, the Company recorded an extraordinary gain of $35,000 on the
purchase at a discount from par of $4,676,000 principal face amount of 12%
Senior Notes due 2005.
(3) The market prices presented above represent the quarterly high and low sales
prices of the Company's common stock.
(4) In fiscal 1998, the Company recorded a one-time, pre-tax charge of $775,000,
or $0.13 per diluted share, related to the implementation of its management
succession plan. The majority of this expense was non-cash, related to
acceleration of previously issued options.
(5) In fiscal 1998, the Company recorded an extraordinary gain of $116,000 on
the purchase at a discount from par of $1,033,000 principal face amount of
12% Senior Notes due 2005.
31
<PAGE>
BRAUN'S FASHIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 -- RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS No. 130"), effective in fiscal 1999, establishes
standards of disclosure and financial statement display for reporting total
comprehensive income and the individual components thereof. The adoption of SFAS
No. 130 had no impact on the Company's financial position or results of
operations for the year ended February 27, 1999.
Statement of Financial Accounting Standards No. 131, "Disclosures About
Segments of an Enterprise and Related Information" ("SFAS No. 131"), effective
in fiscal 1999, establishes new standards for determining reportable segments
and for disclosing information regarding each such segment. Management does not
believe that the Company has reportable segments and as such will not be
required to disclose segment information.
Statement of Financial Accounting Standards No 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"), effective
for fiscal years beginning after June 15, 1999, establishes standards for the
recognition and measurement of derivatives and hedging activities. The
Company does not currently engage in these types of risk management or
investment activities. Therefore, SFAS No. 133 is not anticipated to have any
impact on the Company's financial position or results of operations.
32
<PAGE>
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
There are no matters which are required to be reported under Item 9.
PART III
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding the Company's directors required by Item 10 is
incorporated herein by reference to the section entitled, "Item 1 - Election of
Directors," in the Company's proxy statement for its 1999 Annual Meeting of
Shareholders which will be filed with the Securities and Exchange Commission
pursuant to Regulation 14A within 120 days of the Company's fiscal year ended
February 27, 1999. Information regarding the Company's executive officers
required by Item 10 is included in Part I of this Annual Report on Form 10-K as
permitted by General Instruction G(3) to Form 10-K. Information required by
this Item concerning compliance with Section 16(a) of the Securities Act of 1934
is included in the proxy statement under the section entitled "Security
Ownership of Certain Beneficial Owners and Management," and such information is
incorporated herein by reference.
ITEM 11.
EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference to
the section entitled "Compensation of Executive Officers and Directors" in the
Company's proxy statement for its 1999 Annual Meeting of Shareholders which will
be filed with the Securities and Exchange Commission pursuant to Regulation 14A
within 120 days of the Company's fiscal year ended February 27, 1999.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated herein by reference to
the section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the Company's proxy statement for its 1999 Annual Meeting of
Shareholders which will be filed with the Securities and Exchange Commission
pursuant to Regulations 14A within 120 days of the Company's fiscal year ended
February 27, 1999.
33
<PAGE>
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference to
the section entitled "Certain Relationships and Related Transactions" in the
Company's proxy statement for its 1999 Annual Meeting of Shareholders which will
be filed with the Securities and Exchange Commission pursuant to Regulation 14A
within 120 days of the Company's fiscal year ended February 27, 1999.
PART IV
ITEM 14.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) THE FOLLOWING DOCUMENTS ARE FILED AS A PART OF THIS REPORT:
<TABLE>
<CAPTION>
(1) FINANCIAL STATEMENTS: PAGE
------
<S> <C>
Report of Independent Accountants. . . . . . . . . . . . . . . . 16
Consolidated Balance Sheet . . . . . . . . . . . . . . . . . . . 17
Consolidated Statement of Operations . . . . . . . . . . . . . . 18
Consolidated Statement of Stockholders' Equity . . . . . . . . . 19
Consolidated Statement of Cash Flows . . . . . . . . . . . . . . 20
Notes to Consolidated Financial Statements . . . . . . . . . . . 21
</TABLE>
(2) FINANCIAL STATEMENT SCHEDULES:
All schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
(3) EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBITS PAGE NO.
- -------- ----------
<S> <C>
+3.1 Restated Certificate of Incorporation of the Company . . . . . . . .
+3.2 By-Laws of the Company, as amended . . . . . . . . . . . . . . . . .
+3.3 Articles of Incorporation of BFI . . . . . . . . . . . . . . . . . .
+3.4 By-laws of BFI . . . . . . . . . . . . . . . . . . . . . . . . . . .
+10.1 1987 Stock Incentive Plan. . . . . . . . . . . . . . . . . . . . . .
+10.2 Amendment No. 1 to 1987 Stock Incentive Plan . . . . . . . . . . . .
+10.3 Amendment No. 2 to 1987 Stock Incentive Plan . . . . . . . . . . . .
+10.4 1992 Director Stock Option Plan. . . . . . . . . . . . . . . . . . .
+10.5 Braun's Fashions, Inc. Retirement Savings Plan . . . . . . . . . . .
+10.9 Sublease Agreement by and between Westburne Supply, Inc., United
Westburne, Inc. and Braun's Fashions, Inc., dated February 16, 1994.
+10.10 Side Agreement between Braun's Fashions, Inc., Westburne Supply, Inc.
and United Westburne, Inc. regarding moving expenses dated February
16, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBITS PAGE NO.
- -------- ----------
<S> <C>
+10.11 Tax Sharing Agreement between Braun's Fashions Corporation and Braun's
Fashions, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . .
+10.12 Registrant's press release dated July 2, 1996 relating to the filing
of the Registrant's plan of reorganization . . . . . . . . . . . . .
+10.13 Second Amended Plan of Reorganization dated October 22, 1996 (the
"Plan of Reorganization"). . . . . . . . . . . . . . . . . . . . . .
+10.14 Motion to Approve Technical Amendment to the Plan of Reorganization
dated November 19, 1996. . . . . . . . . . . . . . . . . . . . . . .
*10.15 Amended and Restated Revolving Credit and Security Agreement dated as
of March 15, 1999 between Norwest Bank Minnesota, National Association
and Braun's Fashions , Inc. and Braun's Fashions Corporation . . . .
+10.16 Indenture dated as of December 2, 1996 by and among Braun's Fashions
Corporation, Braun's Fashions, Inc. and Schroder Bank & Trust Company.
+10.17 1997 Stock Incentive Plan. . . . . . . . . . . . . . . . . . . . . .
+10.18 Management Succession and Separation Agreement by and between Braun's
Fashions Corporation and Nicholas H. Cook dated as of February 26,
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
+10.19 Management Succession and Separation Agreement by and between Braun's
Fashions Corporation and Herbert D. Froemming dated as of February 26,
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
+10.20 Executive Employment Agreement, dated March 1, 1998, between Braun's
Fashions Corporation and William J. Prange . . . . . . . . . . . . .
+10.21 Executive Employment Agreement, dated March 1, 1998, between Braun's
Fashions Corporation and Joseph E. Pennington. . . . . . . . . . . .
+10.22 Executive Employment Agreement, dated March 1, 1998, between Braun's
Fashions Corporation and Ralph C. Neal . . . . . . . . . . . . . . .
+10.23 First Supplemental Indenture dated as of November 9, 1998. . . . . .
*10.24 Amendment No. 1 to 1997 Stock Incentive Plan . . . . . . . . . . . .
*10.25 1998 Director Stock Option Plan. . . . . . . . . . . . . . . . . . .
+22.1 Subsidiaries of Company. . . . . . . . . . . . . . . . . . . . . . .
*27 Financial Data Schedule (submitted for SEC use only) . . . . . . . .
</TABLE>
- -------------------------------------
+ Previously filed
* Filed with this report
(b) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the fourth quarter
of the fiscal year ended February 27, 1999.
35
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized on May 21, 1999.
BRAUN'S FASHIONS CORPORATION
By: /S/ WILLIAM J. PRANGE
------------------------------------
William J. Prange
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
SIGNATURE TITLE DATE
----------- ------- ------
<S> <C> <C>
/S/ NICHOLAS H. COOK Chairman of the Board and Director May 21, 1999
- -------------------------
Nicholas H. Cook
/S/ WILLIAM J. PRANGE President and Chief Executive Officer and May 21, 1999
- ------------------------- Director (Principal Executive Officer)
William J. Prange
/S/ ANDREW K. MOLLER Senior Vice President and May 21, 1999
- ------------------------- Chief Financial Officer (Principal
Andrew K. Moller Financial and Accounting Officer)
/S/ MARC C. OSTROW Director May 21, 1999
- -------------------------
Marc C. Ostrow
/S/ JAMES J. FULD, JR. Director May 21, 1999
- -------------------------
James J. Fuld, Jr.
/S/ DONALD D. BEELER Director May 21, 1999
- -------------------------
Donald D. Beeler
/S/ LARRY C. BARENBAUM Director May 21, 1999
- -------------------------
Larry C. Barenbaum
</TABLE>
36
<PAGE>
----------------------------------------------
----------------------------------------------
AMENDED AND RESTATED
REVOLVING CREDIT AND SECURITY AGREEMENT
BY AND BETWEEN
BRAUN'S FASHIONS, INC.
AND
BRAUN'S FASHIONS CORPORATION
AND
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION
Dated as of: March 15, 1999
[LOGO]
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AMENDED AND RESTATED
REVOLVING CREDIT AND SECURITY AGREEMENT
Dated as of March 15, 1999
BRAUN'S FASHIONS, INC., a Minnesota corporation ("Borrower"), BRAUN'S
FASHIONS CORPORATION, a Delaware corporation ("Guarantor") and NORWEST BANK
MINNESOTA, a national banking association ("Lender"), hereby agree as follows:
RECITALS
FIRST: the Borrower, the Guarantor and the Lender are parties to that
certain Revolving Credit and Security Agreement dated as of December 2, 1996, as
amended by that certain First Amendment to Revolving Credit and Security
Agreement dated April 8, 1998, effective as of February 25, 1998 (together, the
"Existing Credit Agreement"), whereby the Lender provides to the Borrower a
revolving credit facility in the maximum principal amount of Ten Million Dollars
($10,000,000).
SECOND: the parties hereto wish to extend the term of the Existing
Credit Agreement, increase the amount of the revolving credit commitment
thereunder and make certain other changes to the terms and conditions under
which the Lender provides to the Borrower the revolving credit commitment.
THIRD: the parties have agreed to execute and deliver this Amended
and Restated Revolving Credit and Security Agreement in order to accomplish the
foregoing objectives.
NOW, THEREFORE, for good and valuable consideration, receipt and
sufficiency of which are hereby acknowledged, the Borrower, Guarantor and Lender
agree as follows:
1. DEFINITIONS
1.1. DEFINITIONS.
For all purposes of this Agreement, except as otherwise expressly
provided or unless the context otherwise requires:
(a) the terms defined in this Article have the meanings assigned to
them in this Article, and include the plural as well as the singular; and
(b) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with GAAP.
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"Accounts" means all of the Borrower's accounts, as such term is
defined in the UCC, including without limitation the aggregate unpaid
obligations of customers and other account debtors to the Borrower arising
out of the sale or lease of goods or rendition of services by the Borrower
on an open account or deferred payment basis.
"Advance" means a Revolving Advance.
"Affiliate" or "Affiliates" means any Person controlled by,
controlling or under common control with the Borrower, including (without
limitation) any Subsidiary of the Borrower. For purposes of this
definition, "control," when used with respect to any specified Person,
means the power to direct the management and policies of such Person,
directly or indirectly, whether through the ownership of voting securities,
by contract or otherwise.
"Aggregate Outstanding" means the sum of the outstanding principal
balance of the Revolving Note and the L/C Amount.
"Agreement" means this Amended and Restated Revolving Credit and
Security Agreement, as amended, supplemented or restated from time to time.
"Banking Day" means a day other than a Saturday, Sunday or other day
on which banks are generally not open for business in Minneapolis,
Minnesota.
"Base Rate" means the rate of interest publicly announced from time to
time by Lender as its "base rate" or, if such bank ceases to announce a
rate so designated, any similar successor rate designated by the Lender.
"Borrowing Base" means, at any time the lesser of:
(a) the Maximum Line; or
(b) subject to change from time to time in the Lender's sole
discretion with prior written or telefacsimile notice to the Borrower, the
sum of:
(i) either (A) between June 1 and August 31 in any year,
and so long as there are no outstanding Advances, 80% of Eligible
Apparel Inventory, or (B) at all other times, 70% of Eligible Apparel
Inventory; and
(ii) 30% of Eligible Accessories Inventory
"Capital Expenditures" for a period means any expenditure of money for
the purchase or construction of assets, or for improvements or additions
thereto, which are capitalized on the Borrower's balance sheet.
"Cash Flow" means, for any period of determination, Net Income,
plus depreciation and amortization, plus any Interest Expense which is
accrued but not paid currently, plus repayments of Stock Purchase Loans,
minus Capital Expenditures to the extent such Capital Expenditures are
paid in cash, minus all scheduled repayment of principal on Debt
(whether or not actually paid), minus all funds expended after the date
of this Agreement for the repurchase, redemption or retirement of the
Guarantor's 12% Senior Subordinated Notes, minus all funds expended
after the date of this Agreement for the repurchase, redemption or
retirement of the Guarantor's issued and outstanding capital stock
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to the extent permitted hereunder, minus any Stock Purchase Loans made by
the Borrower or the Guarantor to the extent such loans are made in cash,
all as determined in accordance with GAAP on a consolidated basis.
"Collateral" means all of the Borrower's Equipment, General
Intangibles, Inventory, Receivables, Investment Property, and all sums on
deposit in any Collateral Account; together with (i) all substitutions and
replacements for and products of any of the foregoing; (ii) proceeds of any
and all of the foregoing; (iii) in the case of all tangible goods, all
accessions; (iv) all accessories, attachments, parts, equipment and repairs
now or hereafter attached or affixed to or used in connection with any
tangible goods; (v) all warehouse receipts, bills of lading and other
documents of title now or hereafter covering such goods; and (vi) all sums
on deposit in the Special Account.
"Collateral Account" has the meaning given in SECTION 3.3.
"Commitment" means the Lender's commitment to make Advances and to
cause the Issuer to issue Letters of Credit to or for the Borrower's
account pursuant to ARTICLE 2.
"Credit Facility" means the credit facility being made available to
the Borrower by the Lender pursuant to ARTICLE 2.
"Debt" of any Person means all items of indebtedness or liability
which in accordance with GAAP would be included in determining total
liabilities as shown on the liabilities side of a balance sheet of that
Person as at the date as of which Debt is to be determined. For purposes
of determining a Person's aggregate Debt at any time, "Debt" shall also
include the aggregate payments required to be made by such Person at any
time under any lease that is considered a capitalized lease under GAAP.
"Default" means an event that, with giving of notice or passage of
time or both, would constitute an Event of Default.
"Default Period" means any period of time beginning on the day a
Default or Event of Default occurs and ending on the date such Default or
Event of Default is cured to the Lender's satisfaction or waived in
writing.
"Default Rate" means an annual rate equal to two percent (2%) over the
Floating Rate, which rate shall change when and as the Floating Rate
changes.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Eligible Accessories Inventory" means Eligible Inventory consisting
of accessories and jewelry.
"Eligible Apparel Inventory" means Eligible Inventory consisting of
apparel.
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"Eligible Inventory" means all Inventory of the Borrower, at the lower
of cost or market value as determined in accordance with GAAP; provided,
however, that the following shall not in any event be deemed Eligible
Inventory:
(i) Inventory that is: in-transit; located at any
warehouse, job site or other premises not approved by the Lender in
writing; located outside of the states, or localities, as applicable,
in which the Lender has filed financing statements to perfect a first
priority security interest in such Inventory; covered by any
negotiable or non-negotiable warehouse receipt, bill of lading or
other document of title; on consignment from any Person; on
consignment to any Person or subject to any bailment unless such
consignee or bailee has executed an agreement with the Lender;
(ii) Supplies, packaging, parts or sample Inventory;
(iii) Work-in-process Inventory;
(iv) Inventory that is damaged, obsolete, slow moving (that
is, over four months old) or not currently saleable in the normal
course of the Borrower's operations;
(v) Inventory that the Borrower has returned, has attempted
to return, is in the process of returning or intends to return to the
vendor thereof;
(vi) Inventory that is perishable or live;
(vii) Inventory manufactured by the Borrower pursuant to a
license unless the applicable licensor has agreed in writing to permit
the Lender to exercise its rights and remedies against such Inventory;
(viii) Inventory that is subject to a security interest in
favor of any Person other than the Lender; and
(ix) Inventory otherwise deemed ineligible by the Lender in
its sole discretion.
"Environmental Laws" has the meaning specified in SECTION 5.12.
"Equipment" means all of the Borrower's equipment, as such term is
defined in the UCC, whether now owned or hereafter acquired, including but
not limited to all present and future machinery, vehicles, furniture,
fixtures, manufacturing equipment, shop equipment, office and recordkeeping
equipment, parts, tools, supplies, and including specifically (without
limitation) the goods described in any equipment schedule or list herewith
or hereafter furnished to the Lender by the Borrower.
"Event of Default" has the meaning specified in SECTION 8.1.
"Floating Rate" means an annual rate equal to the sum of the Base Rate
plus one quarter of one percent (0.25%), which annual rate shall change
when and as the Base Rate changes.
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"Existing Credit Agreement" is defined in the Recitals to this
Agreement.
"Funding Date" has the meaning given in SECTION 2.1.
"GAAP" means generally accepted accounting principles, applied on a
basis consistent with the accounting practices applied in the financial
statements previously delivered by the Borrower to the Lender.
"General Intangibles" means all of the Borrower's general intangibles,
as such term is defined in the UCC, whether now owned or hereafter
acquired, including (without limitation) all present and future patents,
patent applications, copyrights, trademarks, trade names, trade secrets,
customer or supplier lists and contracts, manuals, operating instructions,
permits, franchises, the right to use the Borrower's name, and the goodwill
of the Borrower's business.
"Guarantor" means Braun's Fashions Corporation, a Delaware
corporation.
"Hazardous Substance" has the meaning given in SECTION 5.12.
"Interest Expense" means, for a fiscal year-to-date period, the
Borrower's total gross interest expense during such period (excluding
interest income), and shall in any event include, without limitation,
(i) interest expensed (whether or not paid) on all Debt, (ii) the
amortization of debt discounts, (iii) the amortization of all fees payable
in connection with the incurrence of Debt to the extent included in
interest expense, and (iv) the portion of any capitalized lease obligation
allocable to interest expense.
"Inventory" means all of the Borrower's inventory, as such term is
defined in the UCC, whether now owned or hereafter acquired, whether
consisting of whole goods, spare parts or components, supplies or
materials, whether acquired, held or furnished for sale, for lease or under
service contracts or for manufacture or processing, and wherever located.
"Inventory Turns Ratio" means, for any period, the product obtained by
dividing the total net sales for the prior 12-month period by the average
month-end retail value of all Inventory for the same 12-month period, all
as determined in accordance with GAAP.
"Investment Property" means all of the Borrower's investment property,
as such term is defined in the UCC, whether now owned or hereafter
acquired, including but not limited to all securities, security
entitlements, securities accounts, commodity contracts, commodity accounts,
stocks, bonds, mutual fund shares, money market shares and U.S. Government
securities.
"Issuer" means the issuer of any Letter of Credit.
"L/C Amount" means the sum of (i) the aggregate face amount of any
issued and outstanding Letters of Credit and (ii) the unpaid amount of the
Obligation of Reimbursement.
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"L/C Application" means an application and agreement for letters of
credit in a form acceptable to the Issuer and the Lender.
"Letter of Credit" has the meaning specified in SECTION 2.2.
"Loan Documents" means this Agreement, the Note, the Security
Documents, the Guaranty and the Security Agreement.
"Maturity Date" means June 30, 2002.
"Maximum Line" means $12,000,000, unless said amount is reduced
pursuant to SECTION 2.10, in which event it means the amount to which said
amount is reduced.
"Net Income" means fiscal year-to-date after-tax net income.
"Note" means the Revolving Note.
"Obligations" means the Note and each and every other debt, liability
and obligation of every type and description which the Borrower may now or
at any time hereafter owe to the Lender, whether such debt, liability or
obligation now exists or is hereafter created or incurred, whether it
arises in a transaction involving the Lender alone or in a transaction
involving other creditors of the Borrower, and whether it is direct or
indirect, due or to become due, absolute or contingent, primary or
secondary, liquidated or unliquidated, or sole, joint, several or joint and
several, and including specifically, but not limited to, the Obligation of
Reimbursement and all indebtedness of the Borrower arising under this
Agreement, the Note, any L/C Application completed by the Borrower, or any
other loan or credit agreement or guaranty between the Borrower and the
Lender, whether now in effect or hereafter entered into.
"Obligation of Reimbursement" has the meaning given in
SECTION 2.3(a).
"Permitted Lien" has the meaning given in SECTION 7.1.
"Person" means any individual, corporation, partnership, joint
venture, limited liability company, association, joint-stock company,
trust, unincorporated organization or government or any agency or political
subdivision thereof.
"Plan" means an employee benefit plan or other plan maintained for the
Borrower's employees and covered by Title IV of ERISA.
"Premises" means all premises where the Borrower conducts its business
and has any rights of possession, including (without limitation) the
premises legally described in EXHIBIT C attached hereto.
"Receivables" means each and every right of the Borrower to the
payment of money, whether such right to payment now exists or hereafter
arises, whether such right to payment arises out of a sale, lease or other
disposition of goods or other property, out of a rendering of services, out
of a loan, out of the overpayment of taxes or other liabilities, or
otherwise arises under any contract or agreement, whether such right to
payment is created, generated or earned by the Borrower or by some other
person who subsequently transfers such person's
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interest to the Borrower, whether such right to payment is or is not
already earned by performance, and howsoever such right to payment may be
evidenced, together with all other rights and interests (including all
liens and security interests) which the Borrower may at any time have by
law or agreement against any account debtor or other obligor obligated to
make any such payment or against any property of such account debtor or
other obligor; all including but not limited to all present and future
accounts, contract rights, loans and obligations receivable, chattel
papers, bonds, notes and other debt instruments, tax refunds and rights to
payment in the nature of general intangibles.
"Reportable Event" shall have the meaning assigned to that term in
Title IV of ERISA.
"Revolving Advance" has the meaning given in SECTION 2.1.
"Revolving Note" means the Borrower's revolving promissory note,
payable to the order of the Lender in substantially the form of EXHIBIT A
hereto and any note or notes issued in substitution therefor, as the same
may hereafter be amended, supplemented or restated from time to time.
"Security Agreement" means the Security Agreement dated December 2,
1996 by the Guarantor in favor of the Lender.
"Security Documents" means this Agreement, the Security Agreement and
any other document delivered to the Lender from time to time to secure the
Obligations, as the same may hereafter be amended, supplemented or restated
from time to time.
"Security Interest" has the meaning given in SECTION 3.1.
"Special Account" means a specified cash collateral account maintained
by a financial institution acceptable to the Lender in connection with
Letters of Credit, as contemplated by SECTION 2.4.
"Stock Purchase Loans" means loans made by the Borrower or the
Guarantor to enable officers and directors of the Borrower or the Guarantor
to purchase shares of common stock of the Guarantor.
"Subsidiary" means any corporation of which more than 50% of the
outstanding shares of capital stock having general voting power under
ordinary circumstances to elect a majority of the board of directors of
such corporation, irrespective of whether or not at the time stock of any
other class or classes shall have or might have voting power by reason of
the happening of any contingency, is at the time directly or indirectly
owned by the Borrower, by the Borrower and one or more other Subsidiaries,
or by one or more other Subsidiaries.
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"Termination Date" means the earliest of (i) the Maturity Date,
(ii) the date the Borrower terminates the Credit Facility, or (iii) the
date the Lender demands payment of the Obligations after an Event of
Default pursuant to SECTION 8.2.
"UCC" means the Uniform Commercial Code as in effect from time to time
in the state designated in Section 9.14 as the state whose laws shall
govern this Agreement, or in any other state whose laws are held to govern
this Agreement or any portion hereof.
1.2. CROSS REFERENCES.
All references in this Agreement to Articles, Sections and
subsections, shall be to Articles, Sections and subsections of this Agreement
unless otherwise explicitly specified.
2. AMOUNT AND TERMS OF THE CREDIT FACILITY
2.1. REVOLVING ADVANCES.
The Lender agrees, on the terms and subject to the conditions herein
set forth, to make advances to the Borrower from time to time from the date all
of the conditions set forth in SECTION 4.1 are satisfied (the "Funding Date") to
the Termination Date, on the terms and subject to the conditions herein set
forth (the "Revolving Advances"). The Lender shall have no obligation to make a
Revolving Advance if, after giving effect to such requested Revolving Advance,
the sum of the outstanding and unpaid Revolving Advances under this SECTION 2.1
or otherwise would exceed the Borrowing Base less the L/C Amount. The
Borrower's obligation to pay the Revolving Advances shall be evidenced by the
Revolving Note and shall be secured by the Collateral as provided in ARTICLE 3.
Within the limits set forth in this SECTION 2.1, the Borrower may borrow, prepay
pursuant to SECTION 2.10 and reborrow. The Borrower agrees to comply with the
following procedures in requesting Revolving Advances under this SECTION 2.1:
(a) The Borrower shall make each request for a Revolving Advance to
the Lender before 12:00 noon (Minneapolis time) of the day of the requested
Revolving Advance. Requests may be made in writing or by telephone,
specifying the date of the requested Revolving Advance and the amount
thereof. Each request shall be by (i) any officer of the Borrower; or
(ii) any person designated as the Borrower's agent by any officer of the
Borrower in a writing delivered to the Lender; or (iii) any person whom the
Lender reasonably believes to be an officer of the Borrower or such a
designated agent.
(b) Upon fulfillment of the applicable conditions set forth in
ARTICLE 4, the Lender shall disburse the proceeds of the requested
Revolving Advance by crediting the same to the Borrower's demand deposit
account maintained with the Lender unless the Lender and the Borrower shall
agree in writing to another manner of disbursement. Upon the Lender's
request, the Borrower shall promptly confirm each telephonic request for an
Advance by executing and delivering an appropriate confirmation certificate
to the Lender. The Borrower shall repay all Advances even if the Lender
does not receive such confirmation and even if the person requesting an
Advance was not in fact authorized to do so. Any request for an Advance,
whether written or telephonic, shall be deemed to be a representation by
the Borrower that the conditions set forth in SECTION 4.2 have been
satisfied as of the time of the request.
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2.2. LETTERS OF CREDIT.
(a) The Lender agrees, on the terms and subject to the conditions
herein set forth, to cause an Issuer to issue, from the Funding Date to the
Termination Date, one or more irrevocable standby or documentary letters of
credit (each, a "Letter of Credit") for the Borrower's account and to
guaranty the Borrower's obligations with respect thereto. The Lender shall
have no obligation to cause an Issuer to issue, or to guaranty, any Letter
of Credit if the face amount of the Letter of Credit to be issued or
guarantied, would exceed the Borrowing Base less the sum of (A) all
outstanding and unpaid Revolving Advances and (B) the L/C Amount.
Each Letter of Credit, if any, shall be issued pursuant to a separate L/C
Application entered into by the Borrower and the Lender for the benefit of
the Issuer, completed in a manner satisfactory to the Lender and the
Issuer. The terms and conditions set forth in each such L/C Application
shall supplement the terms and conditions hereof, but if the terms of any
such L/C Application and the terms of this Agreement are inconsistent, the
terms hereof shall control.
(b) No Letter of Credit shall be issued with an expiry date later
than the Termination Date in effect as of the date of issuance.
(c) Any request for the Lender to guaranty a Letter of Credit or to
cause an Issuer to issue a Letter of Credit under this SECTION 2.2 shall be
deemed to be a representation by the Borrower that the conditions set forth
in SECTION 4.2 have been satisfied as of the date of the request.
2.3. PAYMENT OF AMOUNTS DRAWN UNDER LETTERS OF CREDIT; OBLIGATION OF
REIMBURSEMENT.
The Borrower acknowledges that the Lender, as co-applicant guarantor
on the Letters of Credit, will be liable to the Issuer for reimbursement of any
and all draws under Letters of Credit and for all other amounts required to be
paid under the applicable L/C Application. Accordingly, the Borrower agrees to
pay to the Lender any and all amounts required to be paid under the applicable
L/C Application, when and as required to be paid thereby, and the amounts
designated below, when and as designated:
(a) The Borrower hereby agrees to pay the Lender on the day a draft
is honored under any Letter of Credit a sum equal to all amounts drawn
under such Letter of Credit plus any and all reasonable charges and
expenses that the Issuer or the Lender may pay or incur relative to such
draw and the applicable L/C Application, plus interest on all such amounts,
charges and expenses as set forth below (the Borrower's obligation to pay
all such amounts is herein referred to as the "Obligation of
Reimbursement").
(b) Whenever a draft is submitted under a Letter of Credit, the
Lender shall make a Revolving Advance in the amount of the Obligation of
Reimbursement and shall apply the
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proceeds of such Revolving Advance thereto. Such Revolving Advance shall
be repayable in accordance with and be treated in all other respects as a
Revolving Advance hereunder.
(c) If a draft is submitted under a Letter of Credit when the
Borrower is unable, because a Default Period then exists or for any other
reason, to obtain a Revolving Advance to pay the Obligation of
Reimbursement, the Borrower shall pay to the Lender on demand and in
immediately available funds, the amount of the Obligation of Reimbursement
together with interest, accrued from the date of the draft until payment in
full at the Default Rate. Notwithstanding the Borrower's inability to
obtain a Revolving Advance for any reason, the Lender is irrevocably
authorized, in its sole discretion, to make a Revolving Advance in an
amount sufficient to discharge the Obligation of Reimbursement and all
accrued but unpaid interest thereon.
(d) The Borrower's obligation to pay any Revolving Advance made
under this SECTION 2.3 shall be evidenced by Revolving Note and shall bear
interest as provided in SECTION 2.6.
2.4. SPECIAL ACCOUNT.
If the Credit Facility is terminated for any reason whatsoever while
any Letter of Credit is outstanding, the Borrower shall thereupon pay the Lender
in immediately available funds for deposit in the Special Account an amount
equal to the L/C Amount. The Special Account shall be an interest bearing
account maintained for the Lender by any financial institution acceptable to the
Lender. Any interest earned on amounts deposited in the Special Account shall
be credited to the Special Account. Amounts on deposit in the Special Account
may be applied by the Lender at any time or from time to time to the Obligations
in the Lender's sole discretion, and shall not be subject to withdrawal by the
Borrower so long as the Lender maintains a security interest therein. The
Lender agrees to transfer any balance in the Special Account to the Borrower at
such time as the Lender is required to release its security interest in the
Special Account under applicable law.
2.5. OBLIGATIONS ABSOLUTE.
The Borrower's obligations arising under SECTION 2.3 shall be
absolute, unconditional and irrevocable, and shall be paid strictly in
accordance with the terms of SECTION 2.3, under all circumstances whatsoever,
including (without limitation) the following circumstances:
(a) any lack of validity or enforceability of any Letter of Credit
or any other agreement or instrument relating to any Letter of Credit
(collectively the "Related Documents");
(b) any amendment or waiver of or any consent to departure from all
or any of the Related Documents;
(c) the existence of any claim, setoff, defense or other right which
the Borrower may have at any time, against any beneficiary or any
transferee of any Letter of Credit (or any persons or entities for whom any
such beneficiary or any such transferee may be acting), or other person or
entity, whether in connection with this Agreement, the transactions
contemplated herein or in the Related Documents or any unrelated
transactions;
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(d) any statement or any other document presented under any Letter
of Credit proving to be forged, fraudulent, invalid or insufficient in any
respect or any statement therein being untrue or inaccurate in any respect
whatsoever;
(e) payment by or on behalf of the Issuer or the Lender under any
Letter of Credit against presentation of a draft or certificate which does
not strictly comply with the terms of such Letter of Credit; or
(f) any other circumstance or happening whatsoever, whether or not
similar to any of the foregoing.
2.6. INTEREST; DEFAULT INTEREST; PARTICIPATIONS; USURY.
Interest accruing on the Note shall be due and payable in arrears on
the first day of each month.
(a) REVOLVING NOTE. Except as set forth in SECTIONS 2.6(b) and
2.6(d), the outstanding principal balance of the Revolving Note shall
bear interest at the Floating Rate.
(b) DEFAULT INTEREST RATE. At any time during any Default Period,
in the Lender's sole discretion and without waiving any of its other rights
and remedies, the principal of the Advances outstanding from time to time
shall bear interest at the Default Rate, effective for any periods
designated by the Lender from time to time during that Default Period.
(c) PARTICIPATIONS. If any Person shall acquire a participation in
the Advances under this Agreement, the Borrower shall be obligated to the
Lender to pay the full amount of all interest calculated under this
Agreement, along with all other fees, charges and other amounts due under
this Agreement, regardless if such Person elects to accept interest with
respect to its participation at a lower rate than the Floating Rate, or
otherwise elects to accept less than its prorata share of such fees,
charges and other amounts due under this Agreement.
(d) USURY. In any event no rate change shall be put into effect
which would result in a rate greater than the highest rate permitted by
law.
2.7. FEES.
(a) COMMITMENT RENEWAL FEE. The Borrower hereby agrees to pay the
Lender a fully earned and non-refundable commitment renewal fee of $10,000,
due and payable upon the execution of this Agreement.
(b) FACILITY FEES. Borrower shall pay to Lender a fee (the
"Facility Fees") in an amount equal to one-quarter of one percent (0.25%)
per annum of an amount equal to the average daily difference between the
Aggregate Outstanding and Five Million Dollars ($5,000,000). To the extent
the Aggregate Outstanding exceeds Five Million Dollars ($5,000,000) but is
less than Seven Million Five Hundred Thousand Dollars ($7,500,000), the
Facility Fees shall be determined on the average daily difference between
such Aggregate
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Outstanding and Seven Million Five Hundred Thousand Dollars ($7,500,000).
To the extent the Aggregate Outstanding exceeds Seven Million Five Hundred
Thousand Dollars ($7,500,000) but is less than Ten Million Dollars
($10,000,000), the Facility Fees shall be determined on the average daily
difference between such Aggregate Outstanding and Ten Million dollars
($10,000,000). To the extent the Aggregate Outstanding exceeds Ten Million
Dollars ($10,000,000), the Facility Fees shall be determined on the average
daily difference between such Aggregate Outstanding and the Maximum Line.
Such fee shall be calculated monthly and paid in arrears commencing on the
first Banking Day of the month immediately following execution of this
Agreement and continuing on the first Banking Day of each month thereafter
until Lender's commitment to extend the Credit has been terminated pursuant
to SECTION 2.10 or SECTION 8.2(a). Borrower hereby authorizes
Lender, to make an Advance, subject to Availability in an amount equal to
the Facility Fees then due and payable and apply the same to the Facility
Fees due.
(c) STANDBY LETTER OF CREDIT FEES. The Borrower agrees to pay the
Lender a fee with respect to each standby Letter of Credit, if any,
accruing on a daily basis and computed at the annual rate of two and one
half percent (2.5%) of the aggregate amount that may then be drawn on all
issued and outstanding standby Letters of Credit assuming compliance with
all conditions for drawing thereunder (the "Aggregate Face Amount"), from
and including the date of issuance of such standby Letter of Credit until
such date as such standby Letter of Credit shall terminate by its terms or
be returned to the Lender, due and payable monthly in arrears on the first
day of each month and on the Termination Date; PROVIDED, HOWEVER that
during any Default Period, in the Lender's sole discretion and without
waiving any of its other rights and remedies, such fee shall increase to
four and one-half percent (4.5%) of the Aggregate Face Amount. The
foregoing fee shall be in addition to any and all fees, commissions and
charges of any Issuer of a Letter of Credit with respect to or in
connection with such Letter of Credit.
(d) DOCUMENTARY LETTER OF CREDIT FEES. The Borrower agrees to pay
the Lender fees with respect to each documentary Letter of Credit in
accordance with the Lender's usual and customary fees with respect to
documentary Letters of Credit.
(e) LETTER OF CREDIT ADMINISTRATIVE FEES. The Borrower agrees to
pay the Lender, on written demand, the administrative fees charged by the
Issuer in connection with the honoring of drafts under any Letter of
Credit, amendments thereto, transfers thereof and all other activity with
respect to the Letters of Credit at the then-current rates published by the
Issuer for such services rendered on behalf of customers of the Issuer
generally.
(f) COLLATERAL MONITORING FEES. So long as no Event of Default has
occurred and is continuing, Borrower shall pay to Lender a monthly
collateral monitoring fee of Two Hundred Fifty Dollars ($250) (the
"Collateral Monitoring Fees"). The monthly collateral Monitoring Fee shall
be paid in arrears commencing on the first Banking Day of the month
immediately following execution of this Agreement and continuing on the
first Banking Day of each month thereafter until all of the Obligations
have been paid in full in money and the Commitment has been terminated
pursuant to SECTIONS 2.10, 2.12 or 8.1. Borrower hereby authorizes
Lender to make an Advance, subject to Availability, in an amount equal to
the Collateral Monitoring Fees then due and payable and apply the same to
the Collateral Monitoring Fees due.
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2.8. COMPUTATION OF INTEREST AND FEES; WHEN INTEREST DUE AND PAYABLE.
Interest accruing on the outstanding principal balance of the Advances
and fees hereunder outstanding from time to time shall be computed on the basis
of actual number of days elapsed in a year of 360 days. Interest shall be
payable in arrears on the first day of each month and on the Termination Date.
2.9. CAPITAL ADEQUACY; INCREASED COSTS AND REDUCED RETURN.
If any Related Lender determines at any time that its Return has been
reduced as a result of any Rule Change, such Related Lender may require the
Borrower to pay it the amount necessary to restore its Return to what it would
have been had there been no Rule Change. For purposes of this SECTION 2.9:
(a) "Capital Adequacy Rule" means any law, rule, regulation,
guideline, directive, requirement or request regarding capital adequacy, or
the interpretation or administration thereof by any governmental or
regulatory authority, central bank or comparable agency, whether or not
having the force of law, that applies to any Related Lender. Such rules
include rules requiring financial institutions to maintain total capital in
amounts based upon percentages of outstanding loans, binding loan
commitments and letters of credit.
(b) "L/C Rule" means any law, rule, regulation, guideline,
directive, requirement or request regarding letters of credit, or the
interpretation or administration thereof by any governmental or regulatory
authority, central bank or comparable agency, whether or not having the
force of law, that applies to any Related Lender. Such rules include rules
imposing taxes, duties or other similar charges, or mandating reserves,
special deposits or similar requirements against assets of, deposits with
or for the account of, or credit extended by any Related Lender, on letters
of credit.
(c) "Return," for any period, means the return as determined by such
Related Lender on the Advances and Letters of Credit based upon its total
capital requirements and a reasonable attribution formula that takes
account of the Capital Adequacy Rules then in effect and costs of issuing
or maintaining any Letter of Credit. Return may be calculated for each
calendar quarter and for the shorter period between the end of a calendar
quarter and the date of termination in whole of this Agreement.
(d) "Rule Change" means any change in any Capital Adequacy Rule or
L/C Rule occurring after the date of this Agreement, but the term does not
include any changes in applicable requirements that at the Closing Date are
scheduled to take place under the existing Capital Adequacy Rules or L/C
Rules or any increases in the capital that any Related Lender is required
to maintain to the extent that the increases are required due to a
regulatory authority's assessment of the financial condition of such
Related Lender.
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(e) "Related Lender" includes (but is not limited to) the Lender,
the Issuer, any parent corporation of the Lender or the Issuer and any
assignee of any interest of the Lender hereunder and any participant in the
loans made hereunder.
Certificates of any Related Lender sent to the Borrower from time to time
claiming compensation under this SECTION 2.9, stating the reason therefor
and setting forth in reasonable detail the calculation of the additional amount
or amounts to be paid to the Related Lender hereunder to restore its Return
shall be conclusive absent manifest error. In determining such amounts, the
Related Lender may use any reasonable averaging and attribution methods so long
as it accurately reflects the reduction. Lender agrees to provide to the
Borrower such additional information with respect thereto upon written request
by Borrower.
2.10. VOLUNTARY PREPAYMENT; TERMINATION OF THE CREDIT FACILITY BY THE
BORROWER; CLEANDOWN PERIOD.
(a) VOLUNTARY PREPAYMENT; TERMINATION. Except as otherwise provided
herein, the Borrower may prepay the Advances and Obligation of
Reimbursement in whole at any time or from time to time in part. The
Borrower may terminate the Credit Facility at any time if it gives the
Lender at least 30 days' prior written notice and pays any termination fee
required under SECTION 2.11. Upon termination of the Credit Facility and
payment and performance of all Obligations, the Lender shall release or
terminate the Security Interest and the Security Documents to which the
Borrower is entitled by law.
(b) CLEANDOWN PERIOD. Aggregate Outstandings (excluding Letters of
Credit) shall not exceed One Million Five Hundred Thousand Dollars
($1,500,000) for a thirty (30) consecutive-day period in each fiscal year
that this Agreement is in effect, which period shall commence and end
within such fiscal year.
2.11. TERMINATION FEE; WAIVER OF TERMINATION FEE.
(a) TERMINATION FEE. If the Credit Facility is terminated for any
reason prior to January 1, 2000, the Borrower shall pay to the Lender a fee
in an amount equal to one-half of one percent (0.5%) of the Maximum Line.
(b) WAIVER OF TERMINATION FEE. The Borrower will not be required to
pay the termination fee otherwise due under this SECTION 2.11 if such
termination is made because of refinancing by an affiliate of the Lender.
2.12. MANDATORY PREPAYMENT.
Without notice or demand, if the sum of the outstanding principal
balance of the Revolving Advances plus the L/C Amount shall at any time exceed
the Borrowing Base, the Borrower shall (i) first, immediately prepay the
Revolving Advances to the extent necessary to eliminate such excess; and (ii) if
prepayment in full of the Revolving Advances is insufficient to eliminate such
excess, pay to the Lender in immediately available funds for deposit in the
Special Account an amount equal to the remaining excess. Any payment received
by the Lender under this SECTION 2.12 or under SECTION 2.10 may be applied
to the Obligations, in such order and in such amounts as the Lender, in its
discretion, may from time to time determine.
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2.13. PAYMENT.
All payments to the Lender shall be made in immediately available
funds and shall be applied to the Obligations one (1) Banking Day after receipt
by the Lender. The Lender may hold all payments not constituting immediately
available funds for three (3) additional days before applying them to the
Obligations. Notwithstanding anything in SECTION 2.1, the Borrower hereby
authorizes the Lender, in its discretion at any time or from time to time
without the Borrower's request and even if the conditions set forth in
SECTION 4.2 would not be satisfied, to make a Revolving Advance in an amount
equal to the portion of the Obligations from time to time due and payable.
2.14. PAYMENT ON NON-BANKING DAYS.
Whenever any payment to be made hereunder shall be stated to be due on
a day which is not a Banking Day, such payment may be made on the next
succeeding Banking Day, and such extension of time shall in such case be
included in the computation of interest on the Advances or the fees hereunder,
as the case may be.
2.15. USE OF PROCEEDS.
The Borrower shall use the proceeds of Advances, and each Letter of
Credit, if any, for ordinary working capital purposes and for general, lawful
corporate purposes.
2.16. LIABILITY RECORDS.
The Lender may maintain from time to time, at its discretion,
liability records as to the Obligations. All entries made on any such record
shall be presumed correct until the Borrower establishes the contrary. Upon the
Lender's demand, the Borrower will admit and certify in writing the exact
principal balance of the Obligations that the Borrower then asserts to be
outstanding. Any billing statement or accounting rendered by the Lender shall
be conclusive and fully binding on the Borrower unless the Borrower gives the
Lender specific written notice of exception within 45 days after receipt.
3. SECURITY INTEREST; COLLATERAL ACCOUNT; OCCUPANCY; SETOFF
3.1. GRANT OF SECURITY INTEREST.
The Borrower hereby reaffirms and restates its pledge, assignment and
grant to the Lender of a security interest (collectively referred to as the
"Security Interest") in the Collateral, as security for the payment and
performance of the Obligations.
3.2. NOTIFICATION OF ACCOUNT DEBTORS AND OTHER OBLIGORS.
The Lender may at any time during a Default Period notify any account
debtor or other person obligated to pay the amount due that such right to
payment has been assigned or transferred to the Lender for security and shall be
paid directly to the Lender. The Borrower will
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join in giving such notice if the Lender so requests. At any time after the
Borrower or the Lender gives such notice to an account debtor or other obligor,
after ten (10) days' written notice to the Borrower, the Lender may, but need
not, in the Lender's name or in the Borrower's name demand, sue for, collect or
receive any money or property at any time payable or receivable on account of,
or securing, any such right to payment, or grant any extension to, make any
compromise or settlement with or otherwise agree to waive, modify, amend or
change the obligations (including collateral obligations) of any such account
debtor or other obligor.
3.3. COLLATERAL ACCOUNT.
Unless otherwise consented to by the Lender, Borrower will, forthwith
upon receipt by Borrower of all checks, drafts, cash and other remittances in
payment or as proceeds of, or on account of, any of the Accounts, the
Receivables or other Collateral (except Advances made by the Lender and excess
amounts referenced in the last sentence of this SECTION 3.3) paid over to
Borrower by the Lender), deposit the same in a special Lender account (the
"Collateral Account") with the Lender or such other bank or financial
institution as the Lender shall consent, over which the Lender alone has power
of withdrawal, and will, to the extent required by the Lender, designate with
each such deposit the particular Accounts or other item of Collateral upon which
the remittance was made. Borrower acknowledges that the maintenance of the
Collateral Account is solely for the convenience of the Lender in facilitating
its own operations, and Borrower does not and shall not have any right, title or
interest in the Collateral Account or in the amounts at any time appearing to
the credit thereof. Amounts deposited in the Collateral Account shall not bear
interest. All deposits into the Collateral Account shall be applied to the
outstanding principal balance, if any, of the Revolving Loan after being held
one (1) Banking Day, or at such later time as such amounts are actually and
finally collected as determined by the Lender. Said proceeds shall be deposited
in precisely the form received except for Borrower's endorsement where necessary
to permit collection of items, which endorsement Borrower agrees to make.
Pending such deposit, Borrower agrees not to commingle any such checks, drafts,
cash and other remittances with any of its funds or property, but will hold them
separate and apart therefrom and upon an express trust for the Lender until
deposit thereof is made in the Collateral Account. Upon payment in full in cash
of all outstanding Obligations, the Lender will pay over to Borrower, daily, any
excess amounts received by the Lender as payment or proceeds of Collateral,
whether received by the Lender as a deposit in the Collateral Account or
received by the Lender as a direct payment on any of the sums due hereunder.
3.4. ASSIGNMENT OF INSURANCE.
As additional security for the payment and performance of the
Obligations, the Borrower hereby assigns to the Lender any and all monies
(including, without limitation, proceeds of insurance and refunds of unearned
premiums) due or to become due under, and all other rights of the Borrower with
respect to, any and all policies of insurance now or at any time hereafter
covering the Collateral or any evidence thereof or any business records or
valuable papers pertaining thereto, and the Borrower hereby directs the issuer
of any such policy to pay all such monies directly to the Lender. At any time,
whether or not a Default Period then exists, the Lender may (but need not), in
the Lender's name or in the Borrower's name, execute and deliver proof of claim,
receive all such monies, endorse checks and other instruments representing
payment of such monies, and adjust, litigate, compromise or release any claim
against the issuer of any such policy.
3.5. OCCUPANCY.
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(a) The Borrower hereby irrevocably grants to the Lender the right
to take possession of the Premises at any time during a Default Period
after prior written notice to the Borrower.
(b) The Lender may use the Premises only to hold, process,
manufacture, sell, use, store, liquidate, realize upon or otherwise dispose
of goods that are Collateral and for other purposes that the Lender may in
good faith deem to be related or incidental purposes.
(c) The Lender's right to hold the Premises shall cease and
terminate upon the earliest of (i) the cure to the satisfaction of the
Lender of all Events of Default, (ii) payment in full and discharge of all
Obligations and termination of the Commitment or (iii) final sale or
disposition of all goods constituting Collateral and delivery of all such
goods to purchasers.
(d) The Lender shall not be obligated to pay or account for any rent
or other compensation for the possession, occupancy or use of any of the
Premises; provided, however, that if the Lender does pay or account for any
rent or other compensation for the possession, occupancy or use of any of
the Premises, the Borrower shall reimburse the Lender promptly for the full
amount thereof. In addition, the Borrower will pay, or reimburse the
Lender for, all taxes, fees, duties, imposts, charges and expenses at any
time incurred by or imposed upon the Lender by reason of the execution,
delivery, existence, recordation, performance or enforcement of this
Agreement or the provisions of this SECTION 3.5.
3.6. LICENSE.
The Borrower hereby grants to the Lender a non-exclusive, worldwide
and royalty-free license to use or otherwise exploit all trademarks, franchises,
trade names, copyrights and patents of the Borrower for the purpose of selling,
leasing or otherwise disposing of any or all Collateral during any Default
Period.
3.7. FINANCING STATEMENT.
A carbon, photographic or other reproduction of this Agreement or of
any financing statements signed by the Borrower is sufficient as a financing
statement and may be filed as a financing statement in any state to perfect the
security interests granted hereby. For this purpose, the following information
is set forth:
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Name and address of Debtor:
Braun's Fashions, Inc.
2400 Xenium Lane North
Plymouth, Minnesota 55441
Federal Tax Identification No. 41-0851237
Name and address of Secured Party:
Norwest Bank Minnesota, National Association
Norwest Center
Sixth Street and Marquette Avenue
Minneapolis, Minnesota 55479-0152
Federal Tax Identification No. 41-1592157
3.8. SETOFF.
The Borrower agrees that the Lender may at any time or from time to
time, at its sole discretion and without demand and without prior notice to
anyone, setoff any liability owed to the Borrower by the Lender, whether or not
due, against any Obligation, whether or not due. In addition, each other Person
holding a participating interest in any Obligations shall have the right to
appropriate or setoff any deposit or other liability then owed by such Person to
the Borrower, whether or not due, and apply the same to the payment of said
participating interest, as fully as if such Person had lent directly to the
Borrower the amount of such participating interest. Lender agrees to give
prompt notice to Borrower after exercising its rights under this SECTION 3.8.
4. CONDITIONS OF LENDING
4.1. CONDITIONS PRECEDENT TO THE INITIAL REVOLVING ADVANCE AND THE
INITIAL LETTER OF CREDIT.
The Lender's obligation to continue to make Revolving Advances or to
cause to be issued any additional Letters of Credit hereunder shall be subject
to the condition precedent that the Lender shall have received all of the
following, each in form and substance satisfactory to the Lender:
(a) This Agreement, properly executed by the Borrower.
(b) The Note, properly executed by the Borrower.
(c) A complete and accurate list of all stores operated by the
Borrower, with the following information for each such location: store
number, address, and telephone number, name of landlord and, if applicable,
property manager, together with each such landlord's and property manager's
address.
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(d) True and correct copies of any and all agreements pursuant to
which the Borrower's property is in the possession of any Person other than
the Borrower, together with, in the case of any goods held by such Person
for resale, (i) a consignee's acknowledgment and waiver of liens, (ii) UCC
financing statements sufficient to protect the Borrower's and the Lender's
interests in such goods, and (iii) UCC searches showing that no other
secured party has filed a financing statement against such Person and
covering property similar to the Borrower's other than the Borrower, or if
there exists any such secured party, evidence that each such secured party
has received notice from the Borrower and the Lender sufficient to protect
the Borrower's and the Lender's interests in the Borrower's goods from any
claim by such secured party.
(e) True and correct copies of any and all agreements pursuant to
which the Borrower's property is in the possession of any Person other than
the Borrower, together with, (i) an acknowledgment and waiver of liens from
each subcontractor who has possession of the Borrower's goods from time to
time, (ii) UCC financing statements sufficient to protect the Borrower's
and the Lender's interests in such goods, and (iii) UCC searches showing
that no other secured party has filed a financing statement covering such
Person's property other than the Borrower, or if there exists any such
secured party, evidence that each such secured party has received notice
from the Borrower and the Lender sufficient to protect the Borrower's and
the Lender's interests in the Borrower's goods from any claim by such
secured party.
(f) Current searches of appropriate filing offices showing that
(i) no state or federal tax liens have been filed and remain in effect
against the Borrower, (ii) no financing statements or assignments of
patents, trademarks or copyrights have been filed and remain in effect
against the Borrower except those financing statements and assignments of
patents, trademarks or copyrights relating to Permitted Liens or to liens
held by Persons who have agreed in writing that upon receipt of proceeds of
the Advances, they will deliver UCC releases and/or terminations and
releases of such assignments of patents, trademarks or copyrights
satisfactory to the Lender, and (iii) the Lender has duly filed all
financing statements necessary to perfect the Security Interest, to the
extent the Security Interest is capable of being perfected by filing.
(g) A certificate of the Borrower's and Guarantor's Secretary or
Assistant Secretary certifying as to (i) the resolutions of the Borrower's
and Guarantor's directors and, if required, shareholders, authorizing the
execution, delivery and performance of the Loan Documents, (ii) the
Borrower's and Guarantor's articles or certificate of incorporation and
bylaws, and (iii) the signatures of the Borrower's and Guarantor's officers
or agents authorized to execute and deliver the Loan Documents and other
instruments, agreements and certificates, including Advance requests, on
the Borrower's and Guarantor's behalf.
(h) A current certificate issued by the Secretary of State of
Minnesota, certifying that the Borrower is in compliance with all
applicable organizational requirements of the State of Minnesota.
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(i) A current certificate issued by the Secretary of State of
Delaware, certifying that the Guarantor is in compliance with all
applicable organizational requirements of the State of Delaware.
(j) Evidence that the Borrower is duly licensed or qualified to
transact business in all jurisdictions where the character of the property
owned or leased or the nature of the business transacted by it makes such
licensing or qualification necessary.
(k) A certificate of an officer of the Borrower confirming the
representations and warranties set forth in ARTICLE 5.
(l) An opinion of counsel to the Borrower and Guarantor, addressed
to the Lender.
(m) Certificates of the insurance required hereunder, with all
hazard insurance containing a lender's loss payable endorsement in the
Lender's favor and with all liability insurance naming the Lender as an
additional insured.
(n) A reaffirmation of Guaranty, properly executed by the Guarantor,
pursuant to which the Guarantor unconditionally reaffirms its obligations
under the Guaranty.
(o) Payment of the fees and commissions due through the date of
execution of this Agreement under SECTION 2.7 and expenses incurred by the
Lender through such date and required to be paid by the Borrower under
SECTION 9.7, including all legal expenses incurred through the date of this
Agreement.
(p) Such other documents as the Lender in its sole discretion may
require.
4.2. CONDITIONS PRECEDENT TO ALL ADVANCES AND LETTERS OF CREDIT.
The Lender's obligation to make each Advance or to cause the Issuer to
issue any Letter of Credit shall be subject to the further conditions precedent
that on such date:
(a) the representations and warranties contained in ARTICLE 5 are
correct on and as of the date of such Advance or issuance of Letter of
Credit as though made on and as of such date, except to the extent that
such representations and warranties relate solely to an earlier date; and
(b) no event has occurred and is continuing, or would result from
such Advance or the issuance of such Letter of Credit, as the case may be,
which constitutes a Default or an Event of Default.
5. REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Lender as follows:
5.1. CORPORATE EXISTENCE AND POWER; NAME; CHIEF EXECUTIVE OFFICE;
INVENTORY AND EQUIPMENT LOCATIONS; TAX IDENTIFICATION NUMBER.
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The Borrower is a corporation, duly organized, validly existing and in
good standing under the laws of the State of Minnesota and is duly licensed or
qualified to transact business in all jurisdictions where the character of the
property owned or leased or the nature of the business transacted by it makes
such licensing or qualification necessary. The Borrower has all requisite power
and authority, corporate or otherwise, to conduct its business, to own its
properties and to execute and deliver, and to perform all of its obligations
under, the Loan Documents. The Borrower conducts business solely under the
names set forth in SCHEDULE 5.1 hereto. The Borrower's chief executive office
and principal place of business is located at the address set forth in
SCHEDULE 5.1 hereto, and all of the Borrower's records relating to its business
or the Collateral are kept at that location. All Inventory and Equipment is
located at that location or at one of the other locations set forth in
SCHEDULE 5.1 hereto. The Borrower's tax identification number is correctly set
forth in SECTION 3.7 hereto.
5.2. AUTHORIZATION OF BORROWING; NO CONFLICT AS TO LAW OR AGREEMENTS.
The execution, delivery and performance by the Borrower of the Loan
Documents and the borrowings from time to time hereunder have been duly
authorized by all necessary corporate action and do not and will not (i) require
any consent or approval of the Borrower's stockholders; (ii) require any
authorization, consent or approval by any governmental department, commission,
board, bureau, agency or instrumentality, domestic or foreign, or any third
party, except such authorization, consent, approval, registration, declaration,
filing or notice as has been obtained, accomplished or given prior to the date
hereof; (iii) violate any provision of any law, rule or regulation (including,
without limitation, Regulation X of the Board of Governors of the Federal
Reserve System) or of any order, writ, injunction or decree presently in effect
having applicability to the Borrower or of the Borrower's articles of
incorporation or bylaws; (iv) result in a breach of or constitute a default
under any indenture or loan or credit agreement or any other material agreement,
lease or instrument to which the Borrower is a party or by which it or its
properties may be bound or affected; or (v) result in, or require, the creation
or imposition of any mortgage, deed of trust, pledge, lien, security interest or
other charge or encumbrance of any nature (other than the Security Interest)
upon or with respect to any of the properties now owned or hereafter acquired by
the Borrower.
5.3. LEGAL AGREEMENTS.
This Agreement constitutes and, upon due execution by the Borrower,
the other Loan Documents will constitute the legal, valid and binding
obligations of the Borrower, enforceable against the Borrower in accordance with
their respective terms, except to the extent such enforcement may be limited by
applicable bankruptcy, insolvency and other laws affecting the rights of
creditors generally.
5.4. SUBSIDIARIES.
The Borrower has no Subsidiaries.
5.5. FINANCIAL CONDITION; NO ADVERSE CHANGE.
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The Borrower has heretofore furnished to the Lender its audited
financial statements for its fiscal year ended February 28, 1998 and unaudited
financial statements for the fiscal year-to-date period ended January 30, 1999
and those statements fairly present the Borrower's financial condition on the
dates thereof and the results of its operations and cash flows for the periods
then ended and were prepared in accordance with generally accepted accounting
principles. Since the date of the most recent financial statements, there has
been no material adverse change in the Borrower's business, properties or
condition (financial or otherwise).
5.6. LITIGATION.
There are no actions, suits or proceedings pending or, to the
Borrower's knowledge, threatened against or affecting the Borrower or any of its
Affiliates or the properties of the Borrower or any of its Affiliates before any
court or governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, which, if determined adversely to the
Borrower or any of its Affiliates, would have a material adverse effect on the
financial condition, properties or operations of the Borrower or any of its
Affiliates.
5.7. REGULATION U.
The Borrower is not engaged in the business of extending credit for
the purpose of purchasing or carrying margin stock (within the meaning of
Regulation U of the Board of Governors of the Federal Reserve System), and no
part of the proceeds of any Advance will be used to purchase or carry any margin
stock or to extend credit to others for the purpose of purchasing or carrying
any margin stock.
5.8. TAXES.
The Borrower and its Affiliates have paid or caused to be paid to the
proper authorities when due all federal, state and local taxes required to be
withheld by each of them. The Borrower and its Affiliates have filed all
federal, state and local tax returns which to the knowledge of the officers of
the Borrower or any Affiliate, as the case may be, are required to be filed, and
the Borrower and its Affiliates have paid or caused to be paid to the respective
taxing authorities all taxes as shown on said returns or on any assessment
received by any of them to the extent such taxes have become due.
5.9. TITLES AND LIENS.
The Borrower has good and marketable title to all Collateral described
in the collateral reports provided to the Lender and all other Collateral,
properties and assets reflected in the latest financial statements referred to
in SECTION 5.5 and all proceeds thereof, free and clear of all mortgages,
security interests, liens and encumbrances, except for Permitted Liens. No
financing statement naming the Borrower as debtor is on file in any office
except to perfect only Permitted Liens.
5.10. PLANS.
Except as set forth in SCHEDULE 5.10, neither the Borrower nor any of
its Affiliates maintains or has maintained any Plan. Neither the Borrower nor
any Affiliate has received any notice or has any knowledge to the effect that it
is not in full compliance with any of the
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requirements of ERISA. No Reportable Event or other fact or circumstance which
may have an adverse effect on the Plan's tax qualified status exists in
connection with any Plan. Neither the Borrower nor any of its Affiliates has:
(a) Any accumulated funding deficiency within the meaning of ERISA;
or
(b) Any liability or knows of any fact or circumstances which could
result in any liability to the Pension Benefit Guaranty Corporation, the
Internal Revenue Service, the Department of Labor or any participant in
connection with any Plan (other than accrued benefits which or which may
become payable to participants or beneficiaries of any such Plan).
5.11. DEFAULT.
The Borrower is in compliance with all provisions of all agreements,
instruments, decrees and orders to which it is a party or by which it or its
property is bound or affected, the breach or default of which could have a
material adverse effect on the Borrower's financial condition, properties or
operations.
5.12. ENVIRONMENTAL MATTERS.
(a) DEFINITIONS. As used in this Agreement, the following terms
shall have the following meanings:
(i) "Environmental Law" means any federal, state, local or
other governmental statute, regulation, law or ordinance dealing with
the protection of human health and the environment.
(ii) "Hazardous Substances" means pollutants, contaminants,
hazardous substances, hazardous wastes, petroleum and fractions
thereof, and all other chemicals, wastes, substances and materials
listed in, regulated by or identified in any Environmental Law.
(b) To the Borrower's best knowledge, there are not present in, on
or under the Premises any Hazardous Substances in such form or quantity as
to create any liability or obligation for either the Borrower or the Lender
under common law of any jurisdiction or under any Environmental Law, and to
the Borrower's best knowledge, no Hazardous Substances have ever been
stored, buried, spilled, leaked, discharged, emitted or released in, on or
under the Premises in such a way as to create any such liability.
(c) To the Borrower's best knowledge, the Borrower has not disposed
of Hazardous Substances in such a manner as to create any liability under
any Environmental Law.
(d) There are no pending requests, claims, notices, investigations,
demands, administrative proceedings, hearings or litigation, relating in
any way to the Premises or the
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Borrower, alleging liability under, violation of, or noncompliance with any
Environmental Law or any license, permit or other authorization issued
pursuant thereto. To the Borrower's best knowledge, no such matter is
threatened or impending.
(e) To the Borrower's best knowledge, the Borrower's businesses are
conducted in accordance with all Environmental Laws and all licenses,
permits and other authorizations required pursuant to any Environmental Law
and necessary for the lawful and efficient operation of such businesses are
in the Borrower's possession and are in full force and effect. No permit
required under any Environmental Law is scheduled to expire within twelve
(12) months and there is no threat that any such permit will be withdrawn,
terminated, limited or materially changed.
(f) To the Borrower's best knowledge, the Premises are not and never
have been listed on the National Priorities List, the Comprehensive
Environmental Response, Compensation and Liability Information System or
any similar federal, state or local list, schedule, log, inventory or
database.
(g) The Borrower has delivered to Lender all environmental
assessments, audits, reports, permits, licenses and other documents
describing or relating in any way to the Premises or Borrower's businesses.
5.13. SUBMISSIONS TO LENDER.
All financial and other information provided to the Lender by or on
behalf of the Borrower in connection with the Borrower's request for the credit
facilities contemplated hereby is reasonably accurate in all material respects
and, as to projections, valuations or proforma financial statements, present a
good faith opinion as to such projections, valuations and proforma condition and
results.
5.14. FINANCING STATEMENTS.
The Borrower previously provided to the Lender signed financing
statements sufficient when filed to perfect the Security Interest and the other
security interests created by the Security Documents. The Lender has a valid
and perfected security interest in all Collateral and all other collateral
described in the Security Documents which is capable of being perfected by
filing financing statements. None of the Collateral or other collateral covered
by the Security Documents is or will become a fixture on real estate, unless a
sufficient fixture filing is in effect with respect thereto.
5.15. RIGHTS TO PAYMENT.
Each right to payment and each instrument, document, chattel paper and
other agreement constituting or evidencing Collateral or other collateral
covered by the Security Documents is (or, in the case of all future Collateral
or such other collateral, will be when arising or issued) the valid, genuine and
legally enforceable obligation of the account debtor or other obligor named
therein or in the Borrower's records pertaining thereto as being obligated to
pay such obligation.
6. BORROWER'S AFFIRMATIVE COVENANTS
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So long as the Obligations shall remain unpaid, or the Credit Facility
shall remain outstanding, the Borrower will comply with the following
requirements, unless the Lender shall otherwise consent in writing:
6.1. REPORTING REQUIREMENTS.
The Borrower will deliver, or cause to be delivered, to the Lender
each of the following, which shall be in form and detail acceptable to the
Lender:
(a) as soon as available, and in any event within 120 days after the
end of each fiscal year of the Borrower, the Borrower's audited financial
statements with the unqualified opinion of independent certified public
accountants selected by the Borrower and acceptable to the Lender, which
annual financial statements shall include the Borrower's balance sheet as
at the end of such fiscal year and the related statements of the Borrower's
income, retained earnings and cash flows for the fiscal year then ended,
prepared, if the Lender so requests, on a consolidating and consolidated
basis to include Guarantor and any Affiliates, all in reasonable detail and
prepared in accordance with GAAP, together with (i) copies of all
management letters prepared by such accountants; and (ii) a certificate of
the Borrower's chief financial officer stating that such financial
statements have been prepared in accordance with GAAP and whether or not
such officer has knowledge of the occurrence of any Default or Event of
Default hereunder and, if so, stating in reasonable detail the facts with
respect thereto;
(b) as soon as available and in any event within 20 days after the
end of each month, an unaudited/internal balance sheet and statements of
income and cash flow of the Borrower as at the end of and for such month
and for the year to date period then ended, prepared, if the Lender so
requests, on a consolidating and consolidated basis to include Guarantor
and any Affiliates, in reasonable detail and stating in comparative form
the figures for the corresponding date and periods in the previous year,
all prepared in accordance with GAAP, subject to year-end audit
adjustments; and accompanied by a certificate of the Borrower's chief
financial officer, substantially in the form of EXHIBIT B hereto stating
(i) that such financial statements have been prepared in accordance with
GAAP, subject to year-end audit adjustments, (ii) whether or not such
officer has knowledge of the occurrence of any Default or Event of Default
hereunder not theretofore reported and remedied and, if so, stating in
reasonable detail the facts with respect thereto, and (iii) all relevant
facts in reasonable detail to evidence, and the computations as to, whether
or not the Borrower is in compliance with the requirements set forth in
SECTIONS 6.11 and 6.12;
(c) within 20 days after the end of each month or more frequently if
the Lender so requires, agings of the Borrower's accounts receivable and
its accounts payable, and within 15 days after the end of each month an
inventory certification report, and a calculation of the Borrower's
Accounts, Eligible Accounts, Inventory and Eligible Inventory as at the end
of such month or shorter time period;
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(d) within 45 days after the beginning of each fiscal year of the
Borrower, the projected income statements for each month of such year, and
if requested, the projected balance sheets for each month, each in
reasonable detail, representing the Borrower's good faith projections and
certified by the Borrower's chief financial officer as being the most
accurate projections available and identical to the projections used by the
Borrower for internal planning purposes, together with such supporting
schedules and information as the Lender may in its reasonable discretion
require;
(e) immediately after the commencement thereof, notice in writing of
all litigation and of all proceedings before any governmental or regulatory
agency affecting the Borrower of the type described in SECTION 5.12 or
which seek a monetary recovery against the Borrower in excess of $250,000;
(f) as promptly as practicable (but in any event not later than five
business days) after an officer of the Borrower obtains knowledge of the
occurrence of any breach, default or event of default under any Security
Document or any event which constitutes a Default or Event of Default
hereunder, notice of such occurrence, together with a detailed statement by
a responsible officer of the Borrower of the steps being taken by the
Borrower to cure the effect of such breach, default or event;
(g) as soon as possible and in any event within 30 days after the
Borrower knows or has reason to know that any Reportable Event with respect
to any Plan has occurred, the statement of the Borrower's chief financial
officer setting forth details as to such Reportable Event and the action
which the Borrower proposes to take with respect thereto, together with a
copy of the notice of such Reportable Event to the Pension Benefit Guaranty
Corporation;
(h) as soon as possible, and in any event within 10 days after the
Borrower fails to make any quarterly contribution required with respect to
any Plan under Section 412(m) of the Internal Revenue Code of 1986, as
amended, the statement of the Borrower's chief financial officer setting
forth details as to such failure and the action which the Borrower proposes
to take with respect thereto, together with a copy of any notice of such
failure required to be provided to the Pension Benefit Guaranty
Corporation;
(i) promptly upon request of the Lender, a list of all of Borrower's
locations and the fax number for each location, along with the telephone
and fax number for the landlord of each location;
(j) promptly upon knowledge thereof, notice of any change in the
persons constituting the Borrower's executive officers;
(k) promptly upon knowledge thereof, notice of any loss of or
material damage to any Collateral or other collateral covered by the
Security Documents or of any substantial adverse change in any Collateral
or such other collateral or the prospect of payment thereof;
(l) promptly after the sending or filing thereof, copies of all
regular and periodic reports which the Borrower shall file with the
Securities and Exchange Commission or any national securities exchange;
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(m) promptly upon knowledge thereof, notice of the Borrower's
violation of any law, rule or regulation, the non-compliance with which
could materially and adversely affect the Borrower's business or its
financial condition;
(n) from time to time, with reasonable promptness, any and all
receivables schedules, collection reports, deposit records, equipment
schedules, copies of invoices to account debtors, shipment documents and
delivery receipts for goods sold, and such other material, reports, records
or information as the Lender may reasonably request; and
(o) promptly upon request by Lender, and in any event within ten
(10) days of such a request by Lender, copies of any and all leases
pursuant to which Borrower occupies any Premises.
6.2. BOOKS AND RECORDS; INSPECTION AND EXAMINATION.
The Borrower will keep accurate books of record and account for itself
pertaining to the Collateral and pertaining to the Borrower's business and
financial condition in which true and complete entries will be made in
accordance with GAAP and, upon the Lender's request, will permit any officer,
employee, attorney or accountant for the Lender to audit, review, make extracts
from or copy any and all corporate and financial books and records of the
Borrower at all times during ordinary business hours, to send and discuss with
account debtors and other obligors requests for verification of amounts owed to
the Borrower, and to discuss the Borrower's affairs with any of its senior
officers and its independent accountants. Upon two Banking Days' notice to
Borrower, the Borrower will permit the Lender, or its employees, accountants,
attorneys or agents, to examine and inspect any Collateral, other collateral
covered by the Security Documents or any other property of the Borrower at any
time during ordinary business hours; provided, however that if the Lender
reasonably believes that a Default or an Event of Default may have occurred,
Lender shall not be required to give prior notice of such inspections. For
purposes of this SECTION 6.2, visits by employees or agents of Lender to
stores operated by Borrower shall not be deemed to be inspections requiring
prior notice as long as such visits are conducted during normal business hours.
6.3. ACCOUNT VERIFICATION.
During any Default Period, the Lender may send or require the Borrower
to send requests for verification of accounts or notices of assignment to
account debtors and other obligors. At any time during any Default Period, the
Lender may also telephone account debtors and other obligors to verify accounts.
6.4. COMPLIANCE WITH LAWS.
(a) The Borrower will (i) comply with the requirements of applicable
laws and regulations, the non-compliance with which would materially and
adversely affect its business or its financial condition and (ii) use and
keep the Collateral, and require that others use and keep the Collateral,
only for lawful purposes, without violation of any federal, state or local
law, statute or ordinance.
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(b) Without limiting the foregoing undertakings, the Borrower
specifically agrees that it will comply with all applicable Environmental
Laws and obtain and comply with all permits, licenses and similar approvals
required by any Environmental Laws, and will not generate, use, transport,
treat, store or dispose of any Hazardous Substances in such a manner as to
create any liability or obligation under the common law of any jurisdiction
or any Environmental Law.
6.5. PAYMENT OF TAXES AND OTHER CLAIMS.
The Borrower will pay or discharge, when due, (a) all taxes,
assessments and governmental charges levied or imposed upon it or upon its
income or profits, upon any properties belonging to it (including, without
limitation, the Collateral) or upon or against the creation, perfection or
continuance of the Security Interest, prior to the date on which penalties
attach thereto, (b) all federal, state and local taxes required to be withheld
by it, and (c) all lawful claims for labor, materials and supplies which, if
unpaid, might by law become a lien or charge upon any properties of the
Borrower; provided, that the Borrower shall not be required to pay any such tax,
assessment, charge or claim whose amount, applicability or validity is being
contested in good faith by appropriate proceedings and for which proper reserves
have been made.
6.6. MAINTENANCE OF PROPERTIES.
(a) The Borrower will keep and maintain the Collateral, the other
collateral covered by the Security Documents and all of its other
properties necessary or useful in its business in good condition, repair
and working order (normal wear and tear excepted) and will from time to
time replace or repair any worn, defective or broken parts; provided,
however, that nothing in this SECTION 6.6 shall prevent the Borrower from
discontinuing the operation and maintenance of any of its properties if
such discontinuance is, in the Lender's judgment, desirable in the conduct
of the Borrower's business and not disadvantageous in any material respect
to the Lender.
(b) The Borrower will defend the Collateral against all claims or
demands of all persons (other than the Lender) claiming the Collateral or
any interest therein.
(c) The Borrower will keep all Collateral and other collateral
covered by the Security Documents free and clear of all security interests,
liens and encumbrances except Permitted Liens.
6.7. INSURANCE.
The Borrower will obtain and at all times maintain insurance with
insurers believed by the Borrower to be responsible and reputable, in such
amounts and against such risks as may from time to time be required by the
Lender, but in all events in such amounts and against such risks as is usually
carried by companies engaged in similar business and owning similar properties
in the same general areas in which the Borrower operates. Without limiting the
generality of the foregoing, the Borrower will at all times maintain business
interruption insurance including coverage for force majeure and keep all
tangible Collateral insured against risks of fire (including so-called extended
coverage), theft, collision (for Collateral consisting of motor vehicles) and
such other risks and in such amounts as the Lender may reasonably request, with
any loss payable to the Lender to the extent of its interest, and all policies
of such insurance shall contain a lender's loss payable
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endorsement for the Lender's benefit acceptable to the Lender. All policies of
liability insurance required hereunder shall name the Lender as an additional
insured.
6.8. PRESERVATION OF EXISTENCE.
The Borrower will preserve and maintain its existence and all of its
rights, privileges and franchises necessary or desirable in the normal conduct
of its business and shall conduct its business in an orderly, efficient and
regular manner.
6.9. DELIVERY OF INSTRUMENTS.
Upon request by the Lender, the Borrower will promptly deliver to the
Lender in pledge all instruments, documents and chattel papers constituting
Collateral, duly endorsed or assigned by the Borrower.
6.10. PERFORMANCE BY THE LENDER.
If the Borrower at any time fails to perform or observe any of the
foregoing covenants contained in this ARTICLE 6 or elsewhere herein, and if such
failure shall continue for a period of ten calendar days after the Lender gives
the Borrower written notice thereof (or in the case of the agreements contained
in SECTIONS 3.3, 6.5 and 6.7, immediately upon the occurrence of such
failure, without notice or lapse of time), the Lender may, but need not, perform
or observe such covenant on behalf and in the name, place and stead of the
Borrower (or, at the Lender's option, in the Lender's name) and may, but need
not, take any and all other actions which the Lender may reasonably deem
necessary to cure or correct such failure (including, without limitation, the
payment of taxes, the satisfaction of security interests, liens or encumbrances,
the performance of obligations owed to account debtors or other obligors, the
procurement and maintenance of insurance, the execution of assignments, security
agreements and financing statements, and the endorsement of instruments); and
the Borrower shall thereupon pay to the Lender on demand the amount of all
monies expended and all costs and expenses (including reasonable attorneys' fees
and legal expenses) incurred by the Lender in connection with or as a result of
the performance or observance of such agreements or the taking of such action by
the Lender, together with interest thereon from the date expended or incurred at
the Floating Rate. To facilitate the Lender's performance or observance of such
covenants of the Borrower, the Borrower hereby irrevocably appoints the Lender,
or the Lender's delegate, acting alone, as the Borrower's attorney in fact
(which appointment is coupled with an interest) with the right (but not the
duty) from time to time to create, prepare, complete, execute, deliver, endorse
or file in the name and on behalf of the Borrower any and all instruments,
documents, assignments, security agreements, financing statements, applications
for insurance and other agreements and writings required to be obtained,
executed, delivered or endorsed by the Borrower under this SECTION 6.10.
6.11. MINIMUM CASH FLOW; MINIMUM CASH ON HAND.
The Borrower will maintain on a rolling twelve-month basis, determined
as at the end of each fiscal quarter, Cash Flow at or above ($2,000,000).
Notwithstanding the foregoing, in the
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event the Borrower fails to maintain the required level of Cash Flow set forth
in the foregoing sentence, such failure will not constitute an Event of Default
hereunder in the event the sum of Borrower's cash and cash equivalents (as
determined in accordance with GAAP) as of the end of such measurement period
equals or exceeds the following amounts during the periods set forth opposite
such amounts:
<TABLE>
<CAPTION>
MINIMUM CASH AND CASH
PERIOD EQUIVALENTS
<S> <C>
Funding Date through February 26, 2000 $4,000,000
February 27, 2000 through March 3, 2001 $3,000,000
March 4, 2001 through June 30, 2002 $2,000,000
</TABLE>
6.12. MINIMUM INVENTORY TURNS RATIO.
The Borrower will maintain, on a rolling twelve-month basis,
determined as at the end of each fiscal quarter, an Inventory Turns Ratio at not
less than 3.00 to 1.00.
7. NEGATIVE COVENANTS
So long as the Obligations shall remain unpaid, or the Credit Facility
shall remain outstanding, the Borrower agrees that, without the Lender's prior
written consent:
7.1. LIENS.
The Borrower will not create, incur or suffer to exist any mortgage,
deed of trust, pledge, lien, security interest upon or, assignment or transfer
of any of its assets, now owned or hereafter acquired, to secure any
indebtedness; EXCLUDING, HOWEVER, from the operation of the foregoing, the
following (collectively, "Permitted Liens"):
(a) in the case of any of the Borrower's property which is not
Collateral or other collateral described in the Security Documents,
covenants, restrictions, rights, easements and minor irregularities in
title which do not materially interfere with the Borrower's business or
operations as presently conducted;
(b) mortgages, deeds of trust, pledges, liens, security interests
and assignments in existence on the date hereof and listed in SCHEDULE 7.1
hereto, securing indebtedness for borrowed money permitted under SECTION
7.2;
(c) the Security Interest and liens and security interests created
by the Security Documents;
(d) purchase money security interests relating to the acquisition of
machinery and equipment of the Borrower not exceeding the lesser of cost or
fair market value thereof, not exceeding $50,000 in the aggregate during
any fiscal year and so long as no Default Period is then in existence and
none would exist immediately after such acquisition;
(e) liens encumbering leasehold improvements and fixtures granted in
favor of Borrower's landlords pursuant to leases;
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(f) liens securing capitalized lease obligations, to the extent such
capitalized lease obligations are permitted hereunder; and
(g) liens for taxes, payment of which is not yet due, or which are
being contested in good faith by Borrower through appropriate proceedings
properly instituted and diligently conducted, and for which adequate
reserves have been established on its books by the Borrower.
7.2. INDEBTEDNESS.
The Borrower will not incur, create, assume or permit to exist any
indebtedness or liability on account of deposits or advances or any indebtedness
for borrowed money or letters of credit issued on the Borrower's behalf, or any
other indebtedness or liability evidenced by notes, bonds, debentures or similar
obligations, except:
(a) indebtedness arising hereunder;
(b) indebtedness of the Borrower in existence on the date hereof and
listed in SCHEDULE 7.2 hereto;
(c) indebtedness relating to liens permitted in accordance with
SECTION 7.1;
(d) capitalized lease obligations incurred from and after the date
of this Agreement through the Original Maturity Date not to exceed
$4,000,000 in the aggregate;
(e) trade debt owed to vendors incurred in the ordinary course of
business.
7.3. GUARANTIES.
The Borrower will not assume, guarantee, endorse or otherwise become
directly or contingently liable in connection with any obligations of any other
Person, except:
(a) the endorsement of negotiable instruments by the Borrower for
deposit or collection or similar transactions in the ordinary course of
business; and
(b) guaranties, endorsements and other direct or contingent
liabilities in connection with the obligations of other Persons, in
existence on the date hereof and listed in SCHEDULE 7.2 hereto.
7.4. INVESTMENTS AND SUBSIDIARIES.
(a) Without the prior written consent of Lender, which consent will
not be unreasonably withheld, the Borrower will not purchase or hold
beneficially any stock or other securities or evidences of indebtedness of,
make or permit to exist any loans or advances to, or make any investment or
acquire any interest whatsoever in, any other Person, including
specifically but without limitation any partnership or joint venture,
except:
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(i) investments in direct obligations of the United States
of America or any agency or instrumentality thereof whose obligations
constitute full faith and credit obligations of the United States of
America having a maturity of one year or less, commercial paper issued
by U.S. corporations rated "A-1" or "A-2" by Standard & Poors
Corporation or "P-1" or "P-2" by Moody's Investors Service or
certificates of deposit or bankers' acceptances having a maturity of
one year or less issued by members of the Federal Reserve System
having deposits in excess of $100,000,000 (which certificates of
deposit or bankers' acceptances are fully insured by the Federal
Deposit Insurance Corporation);
(ii) travel advances or loans (other than Stock Purchase
Loans) to the Borrower's officers and employees not exceeding at any
one time an aggregate of $50,000;
(iii) Stock Purchase Loans in an amount not to exceed the sum
of $200,000 to any one Person and $2,200,000 in the aggregate at any
one time; and
(iv) advances in the form of progress payments, prepaid rent
not exceeding two months or security deposits.
(b) Without the prior written consent of the Lender, which consent
will be unreasonably withheld, the Borrower will not create or permit to
exist any Subsidiary.
7.5. DIVIDENDS.
Except as set forth below, the Borrower will not declare or pay any
dividends (other than dividends payable solely in stock of the Borrower) on any
class of its stock or make any distribution in respect thereof, either directly
or indirectly.
7.6. SALE OR TRANSFER OF ASSETS; SUSPENSION OF BUSINESS OPERATIONS.
The Borrower will not sell, lease, assign, transfer or otherwise
dispose of (i) the stock of any Subsidiary, (ii) all or a substantial part of
its assets, or (iii) any Collateral or any interest therein (whether in one
transaction or in a series of transactions) to any other Person other than the
sale of Inventory in the ordinary course of business and will not liquidate,
dissolve or suspend business operations. The Borrower will not in any manner
transfer any property without prior or present receipt of full and adequate
consideration.
7.7. CONSOLIDATION AND MERGER; ASSET ACQUISITIONS.
The Borrower will not consolidate with or merge into any Person, or
permit any other Person to merge into it, or acquire (in a transaction analogous
in purpose or effect to a consolidation or merger) all or substantially all the
assets of any other Person, unless:
(a) the corporation formed by such consolidation or into which the
Borrower or the Guarantor, as the case may be, is merged (if the Borrower
or the Guarantor is not the surviving entity) or the Person which acquires
by conveyance or transfer all or substantially all of the properties and
assets of the Borrower or the Guarantor, as the case may be, (i) shall be a
corporation organized and existing under the laws of the United States of
America or
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any State or the District of Columbia, (ii) shall expressly assume by an
amendment to or restatement of this Agreement, executed and delivered to
the Lender, in form satisfactory to the Lender, the performance of every
covenant of this Agreement on the part of the Borrower and the Guarantor to
be performed or observed and (iii) if such corporation or Person is a
holding company with a significant portion of its operations conducted and
assets held by one or more subsidiaries, shall provide for guaranties from
such subsidiaries on substantially the same terms and conditions as are set
forth in the Guaranty;
(b) immediately after giving effect to such transaction, no Event of
Default, and no event which, after notice or lapse of time, or both, would
become an Event of Default, shall have occurred and be continuing;
(c) immediately after giving effect to such transaction, the
corporation formed by such consolidation or into which the Borrower or the
Guarantor, as the case may be, is merged or the Person which acquired by
conveyance or transfer all or substantially all of the properties and
assets of the Borrower or the Guarantor, as the case may be, shall have a
tangible net worth of not less than the consolidated tangible net worth of
the Borrower and Guarantor immediately preceding such transaction;
(d) the Borrower and the Guarantor have delivered to the Lender an
officer's certificate and an opinion of counsel (which opinion may rely, as
to factual matters, upon a certificate of an executive officer of the
Borrower or the Guarantor) stating that such consolidation, merger,
conveyance or transfer and such amendment or restatement complies with this
Section 7.7setAc and that all conditions precedent herein relating to such
transaction have been complied with; and
(e) such merger, consolidation or sale has been approved prior to
the transaction in writing by the Lender.
Upon any consolidation or merger of the Borrower or the Guarantor into another
entity, or any conveyance or transfer of all or substantially all of the
properties and assets of the Borrower or the Guarantor in accordance herewith,
the successor entity formed by such consolidation or into which the Borrower or
the Guarantor, as the case may be, is merged or to which such conveyance or
transfer is made shall succeed to, and be substituted for, and may exercise
every right and power of the Borrower under this Agreement with the same effect
as if such successor entity had been named as the Borrower herein.
7.8. SALE AND LEASEBACK.
The Borrower will not enter into any arrangement, directly or
indirectly, with any other Person whereby the Borrower shall sell or transfer
any real or personal property, whether now owned or hereafter acquired, and then
or thereafter rent or lease as lessee such property or any part thereof or any
other property which the Borrower intends to use for substantially the same
purpose or purposes as the property being sold or transferred.
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7.9. RESTRICTIONS ON NATURE OF BUSINESS.
Without the advance written consent of the Lender, which consent shall
not be unreasonably withheld, the Borrower will not engage in any line of
business materially different from that presently engaged in by the Borrower and
will not purchase, lease or otherwise acquire assets not related to its
business.
7.10. ACCOUNTING.
The Borrower will not adopt any material change in accounting
principles other than as required or permitted by GAAP. The Borrower will not
adopt, permit or consent to any change in its fiscal year unless such change is
made in accordance with GAAP and all applicable tax laws and regulations.
7.11. DEFINED BENEFIT PENSION PLANS.
The Borrower will not adopt, create, assume or become a party to any
defined benefit pension plan, unless disclosed to the Lender pursuant to
SECTION 5.10.
7.12. OTHER DEFAULTS.
The Borrower will not permit any breach, default or event of default
to occur under any note, loan agreement, indenture, lease, mortgage, contract
for deed, security agreement or other contractual obligation binding upon the
Borrower.
7.13. PLACE OF BUSINESS; NAME.
The Borrower will not transfer its chief executive office or principal
place of business, or, except in the ordinary course of its business, move,
relocate, close or sell any business location. The Borrower will not permit any
tangible Collateral or any records pertaining to the Collateral to be located in
any state or area in which, in the event of such location, a financing statement
covering such Collateral would be required to be, but has not in fact been,
filed in order to perfect the Security Interest. The Borrower will not change
its name without the prior written consent of the Lender.
7.14. ORGANIZATIONAL DOCUMENTS.
The Borrower will not amend its certificate of incorporation, articles
of incorporation or bylaws except as may otherwise be permitted under this
Agreement or in a manner adverse to the interests of the Lender or which would
impair the ability of the Lender to realize all of its benefits hereunder.
8. EVENTS OF DEFAULT, RIGHTS AND REMEDIES
8.1. EVENTS OF DEFAULT.
"Event of Default", wherever used herein, means any one of the
following events:
(a) Default in the payment of the Obligations when they become due
and payable;
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(b) Failure to pay when due any amount specified in SECTION 2.3
relating to the Borrower's Obligation of Reimbursement, or failure to pay
immediately when due or upon termination of the Credit Facility any amounts
required to be paid for deposit in the Special Account under SECTION 2.4
or;
(c) Default in the payment of any fees, commissions, costs or
expenses required to be paid by the Borrower under this Agreement;
(d) The Borrower or any Guarantor shall be or become insolvent, or
admit in writing its or his inability to pay its or his debts as they
mature, or make an assignment for the benefit of creditors; or the Borrower
or any Guarantor shall apply for or consent to the appointment of any
receiver, trustee, or similar officer for it or him or for all or any
substantial part of its or his property; or such receiver, trustee or
similar officer shall be appointed without the application or consent of
the Borrower or such Guarantor, as the case may be; or the Borrower or any
Guarantor shall institute (by petition, application, answer, consent or
otherwise) any bankruptcy, insolvency, reorganization, arrangement,
readjustment of debt, dissolution, liquidation or similar proceeding
relating to it or him under the laws of any jurisdiction; or any such
proceeding shall be instituted (by petition, application or otherwise)
against the Borrower or any such Guarantor; or any judgment, writ, warrant
of attachment or execution or similar process shall be issued or levied
against a substantial part of the property of the Borrower or any
Guarantor;
(e) A petition shall be filed by or against the Borrower or any
Guarantor under the United States Bankruptcy Code naming the Borrower or
such Guarantor as debtor;
(f) Any representation or warranty made by the Borrower in this
Agreement, by any Guarantor in any guaranty delivered to the Lender, or by
the Borrower (or any of its officers) or any Guarantor in any agreement,
certificate, instrument or financial statement or other statement
contemplated by or made or delivered pursuant to or in connection with this
Agreement or any such guaranty shall prove to have been incorrect in any
material respect when deemed to be effective;
(g) The rendering against the Borrower of a final judgment, decree
or order for the payment of money in excess of $250,000 and the continuance
of such judgment, decree or order unsatisfied and in effect for any period
of 30 consecutive days without a stay of execution;
(h) A default under any bond, debenture, note or other evidence of
indebtedness of the Borrower owed to any Person other than the Lender, or
under any indenture or other instrument under which any such evidence of
indebtedness has been issued or by which it is governed, or under any lease
of any of the Premises, and the expiration of the applicable period of
grace, if any, specified in such evidence of indebtedness, indenture, other
instrument or lease;
35
<PAGE>
(i) Any Reportable Event, which the Lender determines in good faith
might constitute grounds for the termination of any Plan or for the
appointment by the appropriate United States District Court of a trustee to
administer any Plan, shall have occurred and be continuing 30 days after
written notice to such effect shall have been given to the Borrower by the
Lender; or a trustee shall have been appointed by an appropriate United
States District Court to administer any Plan; or the Pension Benefit
Guaranty Corporation shall have instituted proceedings to terminate any
Plan or to appoint a trustee to administer any Plan; or the Borrower shall
have filed for a distress termination of any Plan under Title IV of ERISA;
or the Borrower shall have failed to make any quarterly contribution
required with respect to any Plan under Section 412(m) of the Internal
Revenue Code of 1986, as amended, which the Lender determines in good faith
may by itself, or in combination with any such failures that the Lender may
determine are likely to occur in the future, result in the imposition of a
lien on the Borrower's assets in favor of the Plan;
(j) An event of default shall occur under any Security Document or
under any other security agreement, mortgage, deed of trust, assignment or
other instrument or agreement securing any obligations of the Borrower
hereunder or under any note;
(k) The Borrower shall liquidate, dissolve, terminate or suspend its
business operations or otherwise fail to operate its business in the
ordinary course, or sell all or substantially all of its assets, without
the Lender's prior written consent;
(l) The Borrower shall fail to pay, withhold, collect or remit any
tax or tax deficiency when assessed or due (other than any tax deficiency
which is being contested in good faith and by proper proceedings and for
which it shall have set aside on its books adequate reserves therefor) or
notice of any state or federal tax liens shall be filed or issued;
(m) Default in the payment of any amount owed by the Borrower to the
Lender other than any indebtedness arising hereunder;
(n) Any Guarantor shall repudiate, purport to revoke or fail to
perform any such Guarantor's obligations under such Guarantor's guaranty in
favor of the Lender, or any Guarantor shall cease to exist;
(o) Any event or circumstance with respect to the Borrower shall
occur such that the Lender shall believe in good faith that the prospect of
payment of all or any part of the Obligations or the performance by the
Borrower under the Loan Documents is impaired or any material adverse
change in the business or financial condition of the Borrower shall occur;
(p) Any breach, default or event of default by or attributable to
any Affiliate under any agreement between such Affiliate and the Lender; or
(q) Default in the performance, or breach, of any covenant or
agreement of the Borrower contained in this Agreement, other than those
identified in Sections 8.1(a) through (p) above and other than a breach
of the requirements of Section 6.11, the breach of which covenant is not
cured to the Lender's satisfaction within 10 Banking Days, provided that
Lender shall have no obligation to make any Advance during any such cure
period.
36
<PAGE>
8.2. RIGHTS AND REMEDIES.
During any Default Period, the Lender may exercise any or all of the
following rights and remedies:
(a) the Lender may, by notice to the Borrower, declare the
Commitment to be terminated, whereupon the same shall forthwith terminate;
(b) the Lender may, by notice to the Borrower, declare the
Obligations to be forthwith due and payable, whereupon all Obligations
shall become and be forthwith due and payable, without presentment, notice
of dishonor, protest or further notice of any kind, all of which the
Borrower hereby expressly waives;
(c) the Lender may, without notice to the Borrower and without
further action, apply any and all money owing by the Lender to the Borrower
to the payment of the Obligations;
(d) the Lender may make demand upon the Borrower and, forthwith upon
such demand, the Borrower will pay to the Lender in immediately available
funds for deposit in the Special Account pursuant to SECTION 2.12 an amount
equal to the aggregate maximum amount available to be drawn under all
Letters of Credit then outstanding, assuming compliance with all conditions
for drawing thereunder;
(e) the Lender may exercise and enforce any and all rights and
remedies available upon default to a secured party under the UCC,
including, without limitation, the right to take possession of Collateral,
or any evidence thereof, proceeding without judicial process or by judicial
process (without a prior hearing or notice thereof, which the Borrower
hereby expressly waives) and the right to sell, lease or otherwise dispose
of any or all of the Collateral, and, in connection therewith, the Borrower
will on demand assemble the Collateral and make it available to the Lender
at a place to be designated by the Lender which is reasonably convenient to
both parties;
(f) the Lender may exercise and enforce its rights and remedies
under the Loan Documents; and
(g) the Lender may exercise any other rights and remedies available
to it by law or agreement.
Notwithstanding the foregoing, upon the occurrence of an Event of Default
described in subsections (d) or (e) of SECTION 8.1, the Obligations shall be
immediately due and payable automatically without presentment, demand, protest
or notice of any kind.
8.3. CERTAIN NOTICES.
If notice to the Borrower of any intended disposition of Collateral or
any other intended action is required by law in a particular instance, such
notice shall be deemed commercially
37
<PAGE>
reasonable if given (in the manner specified in SECTION 9.4) at least ten
calendar days before the date of intended disposition or other action.
9. MISCELLANEOUS
9.1. NO WAIVER; CUMULATIVE REMEDIES.
No failure or delay by the Lender in exercising any right, power or
remedy under the Loan Documents shall operate as a waiver thereof; nor shall any
single or partial exercise of any such right, power or remedy preclude any other
or further exercise thereof or the exercise of any other right, power or remedy
under the Loan Documents. The remedies provided in the Loan Documents are
cumulative and not exclusive of any remedies provided by law.
9.2. EXISTING CREDIT AGREEMENT.
The security interests granted by the Borrower to the Lender under
this Agreement are in addition to, and shall be consolidated with, the liens and
security interests granted by the Borrower to the Lender under the Existing
Credit Agreement and any other prior security agreement, mortgage or other
document, without affecting the lien, priority or effectiveness of those prior
liens, security interests and agreements.
9.3. AMENDMENTS.
No amendment, modification, termination or waiver of any provision of
any Loan Document or consent to any departure by the Borrower therefrom or any
release of a Security Interest shall be effective unless the same shall be in
writing and signed by the Lender, and then such waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given. No notice to or demand on the Borrower in any case shall entitle the
Borrower to any other or further notice or demand in similar or other
circumstances.
9.4. ADDRESSES FOR NOTICES.
Except as otherwise expressly provided herein, all notices, requests,
demands and other communications provided for under the Loan Documents shall be
in writing and shall be (a) personally delivered, (b) sent by first class United
States mail, (c) sent by overnight courier of national reputation, or
(d) transmitted by telecopy, in each case addressed or telecopied to the party
to whom notice is being given at its address or telecopier number as set forth
below:
If to the Borrower:
Braun's Fashions, Inc.
2400 Xenium Lane
Plymouth, Minnesota 55441
Fax: (612) 551-5198
Attention: Mr. Andrew Moller
38
<PAGE>
If to the Lender:
Norwest Bank Minnesota, National Association
Norwest Center
Sixth Street and Marquette Avenue
Minneapolis, Minnesota 55479-0152
Fax: (612) 341-2472
Attention: Mr. Leslie Tatarek
or, as to each party, at such other address or telecopier number as may
hereafter be designated by such party in a written notice to the other party
complying as to delivery with the terms of this Section. All such notices,
requests, demands and other communications shall be deemed to have been given on
(a) the date received if personally delivered, (b) when deposited in the mail if
delivered by mail, (c) the date sent if sent by overnight courier, or (d) the
date of transmission if delivered by telecopy, except that notices or requests
to the Lender pursuant to any of the provisions of ARTICLE 2 shall not be
effective until received by the Lender.
9.5. FURTHER DOCUMENTS.
The Borrower will from time to time execute and deliver or endorse any
and all instruments, documents, conveyances, assignments, security agreements,
financing statements and other agreements and writings that the Lender may
reasonably request in order to secure, protect, perfect or enforce the Security
Interest or the Lender's rights under the Loan Documents (but any failure to
request or assure that the Borrower executes, delivers or endorses any such item
shall not affect or impair the validity, sufficiency or enforceability of the
Loan Documents and the Security Interest, regardless of whether any such item
was or was not executed, delivered or endorsed in a similar context or on a
prior occasion).
9.6. COLLATERAL.
This Agreement does not contemplate a sale of accounts, contract
rights or chattel paper, and, as provided by law, the Borrower is entitled to
any surplus and shall remain liable for any deficiency. The Lender's duty of
care with respect to Collateral in its possession (as imposed by law) shall be
deemed fulfilled if it exercises reasonable care in physically keeping such
Collateral, or in the case of Collateral in the custody or possession of a
bailee or other third person, exercises reasonable care in the selection of the
bailee or other third person, and the Lender need not otherwise preserve,
protect, insure or care for any Collateral. The Lender shall not be obligated
to preserve any rights the Borrower may have against prior parties, to realize
on the Collateral at all or in any particular manner or order or to apply any
cash proceeds of the Collateral in any particular order of application.
9.7. COSTS AND EXPENSES.
The Borrower agrees to pay on demand all costs and expenses, including
(without limitation) reasonable attorneys' fees, incurred by the Lender in
connection with the Obligations,
39
<PAGE>
this Agreement, the Loan Documents, any Letters of Credit, and any other
document or agreement related hereto or thereto, and the transactions
contemplated hereby, including without limitation all such costs, expenses and
fees incurred in connection with the negotiation, preparation, execution,
amendment, administration, performance, collection and enforcement of the
Obligations and all such documents and agreements and the creation, perfection,
protection, satisfaction, foreclosure or enforcement of the Security Interest.
9.8. INDEMNITY.
In addition to the payment of expenses pursuant to SECTION 9.7, the
Borrower agrees to indemnify, defend and hold harmless the Lender, and any of
its participants, parent corporations, subsidiary corporations, affiliated
corporations, successor corporations, and all present and future officers,
directors, employees, attorneys and agents of the foregoing (the "Indemnitees")
from and against any of the following (collectively, "Indemnified Liabilities"):
(i) any and all transfer taxes, documentary taxes,
assessments or charges made by any governmental authority by reason of
the execution and delivery of the Loan Documents or the making of the
Advances;
(ii) any claims, loss or damage to which any Indemnitee may
be subjected if any representation or warranty contained in
SECTION 5.12 proves to be incorrect in any respect or as a result of
any violation of the covenant contained in SECTION 6.5(b); and
(iii) any and all other liabilities, losses, damages,
penalties, judgments, suits, claims, costs and expenses of any kind or
nature whatsoever (including, without limitation, the reasonable fees
and disbursements of counsel) in connection with the foregoing and any
other investigative, administrative or judicial proceedings, whether
or not such Indemnitee shall be designated a party thereto, which may
be imposed on, incurred by or asserted against any such Indemnitee, in
any manner related to or arising out of or in connection with the
making of the Advances and the Loan Documents or the use or intended
use of the proceeds of the Advances.
If any investigative, judicial or administrative proceeding arising from any of
the foregoing is brought against any Indemnitee, upon such Indemnitee's request,
the Borrower, or counsel designated by the Borrower and satisfactory to the
Indemnitee, will resist and defend such action, suit or proceeding to the extent
and in the manner directed by the Indemnitee, at the Borrower's sole costs and
expense. Each Indemnitee will use its best efforts to cooperate in the defense
of any such action, suit or proceeding. If the foregoing undertaking to
indemnify, defend and hold harmless may be held to be unenforceable because it
violates any law or public policy, the Borrower shall nevertheless make the
maximum contribution to the payment and satisfaction of each of the Indemnified
Liabilities which is permissible under applicable law. The Borrower's
obligation under this SECTION 9.8 shall survive the termination of this
Agreement and the discharge of the Borrower's other obligations hereunder.
9.9. PARTICIPANTS.
40
<PAGE>
The Lender and its participants, if any, are not partners or joint
venturers, and the Lender shall not have any liability or responsibility for any
obligation, act or omission of any of its participants. All rights and powers
specifically conferred upon the Lender may be transferred or delegated to any of
the Lender's participants, successors or assigns.
9.10. EXECUTION IN COUNTERPARTS.
This Agreement and other Loan Documents may be executed in any number
of counterparts, each of which when so executed and delivered shall be deemed to
be an original and all of which counterparts, taken together, shall constitute
but one and the same instrument.
9.11. BINDING EFFECT; ASSIGNMENT; COMPLETE AGREEMENT; EXCHANGING
INFORMATION.
The Loan Documents shall be binding upon and inure to the benefit of
the Borrower and the Lender and their respective successors and assigns, except
that the Borrower shall not have the right to assign its rights thereunder or
any interest therein without the Lender's prior written consent. This
Agreement, together with the Loan Documents, comprises the complete and
integrated agreement of the parties on the subject matter hereof and supersedes
all prior agreements, written or oral, on the subject matter hereof. Without
limiting the Lender's right to share information regarding the Borrower and its
Affiliates with the Lender's participants, accountants, lawyers and other
advisors, the Lender, Norwest Corporation, and all direct and indirect
subsidiaries of Norwest Corporation, may exchange any and all information they
may have in their possession regarding the Borrower and its Affiliates, and the
Borrower waives any right of confidentiality it may have with respect to such
exchange of such information; provided, however, that Lender acknowledges that
Borrower is the operating subsidiary of a publicly-held corporation and certain
information provided to Lender may consist of material, non-public documents and
Lender will maintain such non-public information identified as such by Borrower
in accordance with applicable securities laws.
9.12. SEVERABILITY OF PROVISIONS.
Any provision of this Agreement which is prohibited or unenforceable
shall be ineffective to the extent of such prohibition or unenforceability
without invalidating the remaining provisions hereof.
9.13. HEADINGS.
Article and Section headings in this Agreement are included herein for
convenience of reference only and shall not constitute a part of this Agreement
for any other purpose.
9.14. GOVERNING LAW; JURISDICTION, VENUE; WAIVER OF JURY TRIAL.
The Loan Documents shall be governed by and construed in accordance
with the substantive laws (other than conflict laws) of the State of Minnesota.
This Agreement shall be governed by and construed in accordance with the
substantive laws (other than conflict laws) of the State of Minnesota. The
parties hereto hereby (i) consent to the personal jurisdiction of the state and
41
<PAGE>
federal courts located in the State of Minnesota in connection with any
controversy related to this Agreement; (ii) waive any argument that venue in any
such forum is not convenient, (iii) agree that any litigation initiated by the
Lender or the Borrower in connection with this Agreement or the other Loan
Documents shall be venued in either the District Court of Hennepin County,
Minnesota, or the United States District Court, District of Minnesota, Fourth
Division; and (iv) agree that a final judgment in any such suit, action or
proceeding shall be conclusive and may be enforced in other jurisdictions by
suit on the judgment or in any other manner provided by law. THE PARTIES WAIVE
ANY RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED ON OR PERTAINING TO
THIS AGREEMENT.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their respective officers thereunto duly authorized as of the
date first above written.
NORWEST BANK MINNESOTA, BRAUN'S FASHIONS, INC.
NATIONAL ASSOCIATION
By: By:
---------------------------- -----------------------------
Name: Leslie Tatarek Name: Andrew K. Moller
Title: Vice President Title: Vice President Finance and
Chief Financial Officer
42
<PAGE>
ACKNOWLEDGMENT AND AGREEMENT OF GUARANTOR
The undersigned, a guarantor of the indebtedness of BRAUN'S FASHIONS,
INC. (the "Borrower") to Norwest Bank Minnesota, National Association (the
"Lender") pursuant to a Guaranty dated as of December 2, 1996 (the "Guaranty"),
hereby (i) acknowledges receipt of the foregoing Amended and Restated Revolving
Credit and Security Agreement ("Agreement"); (ii) consents to the terms and
execution of the Agreement by the Borrower; (iii) reaffirms its obligations to
the Lender pursuant to the terms of its Guaranty; (iv) reaffirms the security
interest of the Lender in its assets granted to the Lender pursuant to that
certain Security Agreement dated as of December 2, 1996 ("Security Agreement");
and (v) acknowledges that the Lender may amend, restate, extend, renew or
otherwise modify the Agreement and any indebtedness or agreement of the
Borrower, or enter into any agreement or extend additional or other credit
accommodations, without notifying or obtaining the consent of the undersigned
and without impairing the liability of the undersigned under the Guaranty and
the Security Agreement for all of the Borrower's present and future indebtedness
to the Lender.
BRAUN'S FASHIONS CORPORATION
By:
------------------------------------
Name: Andrew K. Moller
Title: Vice President Finance and Chief
Financial Officer
43
<PAGE>
TABLE OF EXHIBITS AND SCHEDULES
Exhibit A Form of Revolving Note
Exhibit B Compliance Certificate
Exhibit C Premises
___________________
Schedule 5.1 Trade Names, Chief Executive Office, Principal
Place of Business, and Locations of Collateral
Schedule 7.1 Permitted Liens
Schedule 7.2 Permitted Indebtedness and Guaranties
<PAGE>
Exhibit A to Amended and Restated Revolving
Credit and Security Agreement
AMENDED AND RESTATED REVOLVING NOTE
$12,000,000 Minneapolis, Minnesota
March 15, 1999
For value received, the undersigned, BRAUN'S FASHIONS, INC., a
Minnesota corporation (the "Borrower"), hereby promises to pay on the
Termination Date under the Credit Agreement (defined below), to the order of
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, a national banking association
(the "Lender"), at its main office in Minneapolis, Minnesota, or at any other
place designated at any time by the holder hereof, in lawful money of the United
States of America and in immediately available funds, the principal sum of
Twelve Million Dollars ($12,000,000) or, if less, the aggregate unpaid principal
amount of all Revolving Advances made by the Lender to the Borrower under the
Credit Agreement (defined below) together with interest on the principal amount
hereunder remaining unpaid from time to time, computed on the basis of the
actual number of days elapsed and a 360-day year, from the date hereof until
this Note is fully paid at the rate from time to time in effect under the
Amended and Restated Revolving Credit and Security Agreement of even date
herewith (as the same may hereafter be amended, supplemented or restated from
time to time, the "Credit Agreement") by and between the Lender and the
Borrower. The principal hereof and interest accruing thereon shall be due and
payable as provided in the Credit Agreement. This Note may be prepaid only in
accordance with the Credit Agreement.
This Note is issued pursuant, and is subject, to the Credit Agreement,
which provides, among other things, for acceleration hereof. This Note is the
Revolving Note referred to in the Credit Agreement. This Note is secured, among
other things, pursuant to the Credit Agreement and the Security Documents as
therein defined, and may now or hereafter be secured by one or more other
security agreements, mortgages, deeds of trust, assignments or other instruments
or agreements.
The Borrower hereby agrees to pay all costs of collection, including
attorneys' fees and legal expenses in the event this Note is not paid when due,
whether or not legal proceedings are commenced.
Presentment or other demand for payment, notice of dishonor and
protest are expressly waived.
BRAUN'S FASHIONS, INC.
By:
-----------------------------
Name: Andrew K. Moller
Title: Vice President Finance and
Chief Financial Officer
A-1
<PAGE>
Exhibit B to Amended and Restated Revolving
Credit and Security Agreement
COMPLIANCE CERTIFICATE
To: _________________________________
Norwest Bank Minnesota, National Association
Date: __________________, 199___
Subject: ___________________
Financial Statements
In accordance with our Amended and Restated Revolving Credit and
Security Agreement dated as of March 15, 1999 (the "Credit Agreement"), attached
are the financial statements of Braun's Fashions, Inc. (the "Borrower") as of
and for ________________, _____ (the "Reporting Date") and the year-to-date
period then ended (the "Current Financials"). All terms used in this
certificate have the meanings given in the Credit Agreement.
I certify that the Current Financials have been prepared in accordance
with GAAP, subject to year-end audit adjustments, and fairly present the
Borrower's financial condition and the results of its operations as of the date
thereof.
EVENTS OF DEFAULT. (Check one):
/ / The undersigned does not have knowledge of the occurrence of a Default
or Event of Default under the Credit Agreement.
/ / The undersigned has knowledge of the occurrence of a Default or Event
of Default under the Credit Agreement and attached hereto is a
statement of the facts with respect to thereto.
[I HEREBY CERTIFY TO THE LENDER AS FOLLOWS:
/ / THE REPORTING DATE MARKS THE END OF ONE OF THE BORROWER'S FISCAL
QUARTERS, HENCE I AM COMPLETING ALL PARAGRAPHS BELOW EXCEPT PARAGRAPH
__.
/ / THE REPORTING DATE MARKS THE END OF THE BORROWER'S FISCAL YEAR, HENCE
I AM COMPLETING ALL PARAGRAPHS BELOW.]
FINANCIAL COVENANTS. I further hereby certify as follows:
1. MINIMUM CASH FLOW; MINIMUM CASH ON HAND. Pursuant to
SECTION 6.11 of the Credit Agreement, as of the Reporting Date, the
Borrower's Cash Flow was $_______ which / / satisfies / / does not satisfy
the requirement that such amount be not less than
B-1
<PAGE>
($2,000,000) on the Reporting Date or, such Cash Flow was less than
($2,000,000) but the Borrower's cash and cash equivalents as of such date
equaled / / satisfies / / does not satisfy the requirement that such amount
be not less than the amount set forth in the table below:
<TABLE>
<CAPTION>
MINIMUM CASH AND CASH
PERIOD EQUIVALENTS
<S> <C>
Funding Date through February 26, 2000 $4,000,000
February 27, 2000 through March 3, 2001 $3,000,000
March 4, 2001 through June 30, 2002 $2,000,000
</TABLE>
2. MINIMUM INVENTORY TURNS RATIO. Pursuant to SECTION 6.12 of the
Credit Agreement, as of the Reporting Date, the Borrower's Inventory Turns
Ratio was _____ to 1.00 which / / satisfies / / does not satisfy the
requirement that such ratio be no less than 3.00 to 1.00 on the Reporting
Date:
Attached hereto are all relevant facts in reasonable detail to
evidence, and the computations of the financial covenants referred to above.
These computations were made in accordance with GAAP.
BRAUN'S FASHIONS, INC.
By:
---------------------------------
Name:
Title: Chief Financial Officer
B-2
<PAGE>
Exhibit C to Amended and Restated Revolving
Credit and Security Agreement
PREMISES
The Premises referred to in the Amended and Restated Revolving Credit
and Security Agreement are legally described as follows:
See Schedule 5.1
1
<PAGE>
Schedule 5.1 to Amended and Restated Revolving
Credit and Security Agreement
TRADE NAMES, CHIEF EXECUTIVE OFFICE, PRINCIPAL PLACE OF BUSINESS,
AND LOCATIONS OF COLLATERAL
TRADE NAMES
Braun's
Christopher & Banks
CHIEF EXECUTIVE OFFICE/PRINCIPAL PLACE OF BUSINESS
2400 Xenium Lane North
Plymouth, MN 55441
OTHER INVENTORY AND EQUIPMENT LOCATIONS
See attached list of store locations.
1
<PAGE>
Schedule 5.10 to Amended and Restated Revolving
Credit and Security Agreement
PLANS
Plan Name Plan Type
- --------- ---------
Braun's Fashions, Inc.
Retirement Savings Plan 401(k)
<PAGE>
Schedule 7.1 to Amended and Restated Revolving
Credit and Security Agreement
PERMITTED LIENS
<TABLE>
<CAPTION>
Creditor Collateral Jurisdiction Filing Date Filing No.
-------- ---------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
230 NCR Model 7450 See list of store
NCR Credit cash registers locations
Corp. as owned by Lessor and
Lessor; leased to Lessee
under capital lease
</TABLE>
<PAGE>
Schedule 7.2 to Amended and Restated Revolving
Credit and Security Agreement
PERMITTED INDEBTEDNESS AND GUARANTIES
INDEBTEDNESS
<TABLE>
<CAPTION>
Principal Maturity Monthly
Creditor Amount Date Payment Collateral
-------- ------ ---- ------- ----------
<S> <C> <C> <C> <C>
Publicly held notes $4,676,228 1/1/2005 See attached None
(Borrower and
Guarantor
co-obligors)
NCR Credit Corp. as $441,002.12 9/30/2000 $26,250.47 230 NCR Model 7450 cash
Lessor; registers owned by
Borrower and Lessor and leased to
Guarantor as Lessee under capital
co-lessees lease
</TABLE>
GUARANTIES
None.
i
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1. DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2. CROSS REFERENCES.. . . . . . . . . . . . . . . . . . . . . . . . . 8
2. AMOUNT AND TERMS OF THE CREDIT FACILITY . . . . . . . . . . . . . . . . . 8
2.1. REVOLVING ADVANCES.. . . . . . . . . . . . . . . . . . . . . . . . 8
2.2. LETTERS OF CREDIT. . . . . . . . . . . . . . . . . . . . . . . . . 9
2.3. PAYMENT OF AMOUNTS DRAWN UNDER LETTERS OF CREDIT; OBLIGATION OF
REIMBURSEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.4. SPECIAL ACCOUNT. . . . . . . . . . . . . . . . . . . . . . . . . .10
2.5. OBLIGATIONS ABSOLUTE.. . . . . . . . . . . . . . . . . . . . . . .11
2.6. INTEREST; DEFAULT INTEREST; PARTICIPATIONS; USURY. . . . . . . . .11
2.7. FEES.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
2.8. COMPUTATION OF INTEREST AND FEES; WHEN INTEREST DUE AND PAYABLE. .13
2.9. CAPITAL ADEQUACY; INCREASED COSTS AND REDUCED RETURN.. . . . . . .13
2.10. VOLUNTARY PREPAYMENT; TERMINATION OF THE CREDIT FACILITY BY THE
BORROWER; CLEANDOWN PERIOD. . . . . . . . . . . . . . . . . . . .14
2.11. TERMINATION FEE; WAIVER OF TERMINATION FEE. . . . . . . . . . . .15
2.12. MANDATORY PREPAYMENT. . . . . . . . . . . . . . . . . . . . . . .15
2.13. PAYMENT.. . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
2.14. PAYMENT ON NON-BANKING DAYS.. . . . . . . . . . . . . . . . . . .15
2.15. USE OF PROCEEDS.. . . . . . . . . . . . . . . . . . . . . . . . .16
2.16. LIABILITY RECORDS.. . . . . . . . . . . . . . . . . . . . . . . .16
3. SECURITY INTEREST; COLLATERAL ACCOUNT; OCCUPANCY; SETOFF. . . . . . . . .16
3.1. GRANT OF SECURITY INTEREST.. . . . . . . . . . . . . . . . . . . .16
3.2. NOTIFICATION OF ACCOUNT DEBTORS AND OTHER OBLIGORS.. . . . . . . .16
3.3. COLLATERAL ACCOUNT.. . . . . . . . . . . . . . . . . . . . . . . .16
3.4. ASSIGNMENT OF INSURANCE. . . . . . . . . . . . . . . . . . . . . .17
3.5. OCCUPANCY. . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
3.6. LICENSE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
3.7. FINANCING STATEMENT. . . . . . . . . . . . . . . . . . . . . . . .18
3.8. SETOFF.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
4. CONDITIONS OF LENDING . . . . . . . . . . . . . . . . . . . . . . . . . .19
4.1. CONDITIONS PRECEDENT TO THE INITIAL REVOLVING ADVANCE AND THE
INITIAL LETTER OF CREDIT.. . . . . . . . . . . . . . . . . . . . .19
4.2. CONDITIONS PRECEDENT TO ALL ADVANCES AND LETTERS OF CREDIT.. . . .21
i
<PAGE>
5. REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . . . . . . . . .21
5.1. CORPORATE EXISTENCE AND POWER; NAME; CHIEF EXECUTIVE OFFICE;
INVENTORY AND EQUIPMENT LOCATIONS; TAX IDENTIFICATION NUMBER.. . .21
5.2. AUTHORIZATION OF BORROWING; NO CONFLICT AS TO LAW OR AGREEMENTS. .22
5.3. LEGAL AGREEMENTS.. . . . . . . . . . . . . . . . . . . . . . . . .22
5.4. SUBSIDIARIES.. . . . . . . . . . . . . . . . . . . . . . . . . . .22
5.5. FINANCIAL CONDITION; NO ADVERSE CHANGE.. . . . . . . . . . . . . .22
5.6. LITIGATION.. . . . . . . . . . . . . . . . . . . . . . . . . . . .23
5.7. REGULATION U.. . . . . . . . . . . . . . . . . . . . . . . . . . .23
5.8. TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
5.9. TITLES AND LIENS.. . . . . . . . . . . . . . . . . . . . . . . . .23
5.10. PLANS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
5.11. DEFAULT.. . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
5.12. ENVIRONMENTAL MATTERS.. . . . . . . . . . . . . . . . . . . . . .24
5.13. SUBMISSIONS TO LENDER.. . . . . . . . . . . . . . . . . . . . . .25
5.14. FINANCING STATEMENTS. . . . . . . . . . . . . . . . . . . . . . .25
5.15. RIGHTS TO PAYMENT.. . . . . . . . . . . . . . . . . . . . . . . .25
6. BORROWER'S AFFIRMATIVE COVENANTS. . . . . . . . . . . . . . . . . . . . .26
6.1. REPORTING REQUIREMENTS.. . . . . . . . . . . . . . . . . . . . . .26
6.2. BOOKS AND RECORDS; INSPECTION AND EXAMINATION. . . . . . . . . . .28
6.3. ACCOUNT VERIFICATION.. . . . . . . . . . . . . . . . . . . . . . .28
6.4. COMPLIANCE WITH LAWS.. . . . . . . . . . . . . . . . . . . . . . .29
6.5. PAYMENT OF TAXES AND OTHER CLAIMS. . . . . . . . . . . . . . . . .29
6.6. MAINTENANCE OF PROPERTIES. . . . . . . . . . . . . . . . . . . . .29
6.7. INSURANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . .30
6.8. PRESERVATION OF EXISTENCE. . . . . . . . . . . . . . . . . . . . .30
6.9. DELIVERY OF INSTRUMENTS. . . . . . . . . . . . . . . . . . . . . .30
6.10. PERFORMANCE BY THE LENDER.. . . . . . . . . . . . . . . . . . . .30
6.11. MINIMUM CASH FLOW; MINIMUM CASH ON HAND.. . . . . . . . . . . . .31
6.12. MINIMUM INVENTORY TURNS RATIO.. . . . . . . . . . . . . . . . . .31
7. NEGATIVE COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . .31
7.1. LIENS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31
7.2. INDEBTEDNESS.. . . . . . . . . . . . . . . . . . . . . . . . . . .32
7.3. GUARANTIES.. . . . . . . . . . . . . . . . . . . . . . . . . . . .33
7.4. INVESTMENTS AND SUBSIDIARIES.. . . . . . . . . . . . . . . . . . .33
7.5. DIVIDENDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . .34
7.6. SALE OR TRANSFER OF ASSETS; SUSPENSION OF BUSINESS OPERATIONS. . .34
7.7. CONSOLIDATION AND MERGER; ASSET ACQUISITIONS.. . . . . . . . . . .34
7.8. SALE AND LEASEBACK.. . . . . . . . . . . . . . . . . . . . . . . .35
7.9. RESTRICTIONS ON NATURE OF BUSINESS.. . . . . . . . . . . . . . . .35
7.10. ACCOUNTING. . . . . . . . . . . . . . . . . . . . . . . . . . . .35
7.11. DEFINED BENEFIT PENSION PLANS.. . . . . . . . . . . . . . . . . .35
7.12. OTHER DEFAULTS. . . . . . . . . . . . . . . . . . . . . . . . . .36
7.13. PLACE OF BUSINESS; NAME.. . . . . . . . . . . . . . . . . . . . .36
7.14. ORGANIZATIONAL DOCUMENTS. . . . . . . . . . . . . . . . . . . . .36
ii
<PAGE>
8. EVENTS OF DEFAULT, RIGHTS AND REMEDIES. . . . . . . . . . . . . . . . . .36
8.1. EVENTS OF DEFAULT. . . . . . . . . . . . . . . . . . . . . . . . .36
8.2. RIGHTS AND REMEDIES. . . . . . . . . . . . . . . . . . . . . . . .38
8.3. CERTAIN NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . .39
9. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40
9.1. NO WAIVER; CUMULATIVE REMEDIES.. . . . . . . . . . . . . . . . . .40
9.2. EXISTING CREDIT AGREEMENT. . . . . . . . . . . . . . . . . . . . .40
9.3. AMENDMENTS.. . . . . . . . . . . . . . . . . . . . . . . . . . . .40
9.4. ADDRESSES FOR NOTICES. . . . . . . . . . . . . . . . . . . . . . .40
9.5. FURTHER DOCUMENTS. . . . . . . . . . . . . . . . . . . . . . . . .41
9.6. COLLATERAL.. . . . . . . . . . . . . . . . . . . . . . . . . . . .41
9.7. COSTS AND EXPENSES.. . . . . . . . . . . . . . . . . . . . . . . .41
9.8. INDEMNITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . .42
9.9. PARTICIPANTS.. . . . . . . . . . . . . . . . . . . . . . . . . . .43
9.10. EXECUTION IN COUNTERPARTS.. . . . . . . . . . . . . . . . . . . .43
9.11. BINDING EFFECT; ASSIGNMENT; COMPLETE AGREEMENT; EXCHANGING
INFORMATION.. . . . . . . . . . . . . . . . . . . . . . . . . . .43
9.12. SEVERABILITY OF PROVISIONS. . . . . . . . . . . . . . . . . . . .43
9.13. HEADINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . .43
9.14. GOVERNING LAW; JURISDICTION, VENUE; WAIVER OF JURY TRIAL. . . . .44
</TABLE>
iii
<PAGE>
FIRST AMENDMENT TO THE
BRAUN'S FASHIONS CORPORATION
1997 STOCK INCENTIVE PLAN
July 22, 1998
RECITALS:
A. The Braun's Fashions Corporation 1997 Stock Incentive Plan (the "Plan") was
adopted by the Board of Directors of Braun's Fashions Corporation (the
"Company") and was approved by the shareholders of the Company on July 17,
1997. The Plan is now in full force and effect.
B. The Company desires to amend the Plan to increase the number of shares of
common stock available for issuance under the Plan.
AMENDMENT:
THEREFORE, the Plan is hereby amended as follows:
1. The first sentence of paragraph 4 of the Plan is hereby amended to read as
follows:
"4. STOCK SUBJECT TO THE PLAN. The aggregate number of shares
subject to the Plan shall be four hundred fifty thousand (450,000) shares
of the Common Stock of the Company, $.01 par value per share.
2. The foregoing amendment shall be effective as of July 22, 1998, the date
the shareholders of approved this amendment at the Company's Annual Meeting
of Shareholders.
3. Except as modified hereby, the Plan shall continue in full force and
effect.
IN WITNESS WHEREOF, the Company has caused this Amendment to be executed by
its duly authorized officer as of July 22, 1998.
BRAUN'S FASHIONS CORPORATION
By:
-------------------------
William J. Prange
President
<PAGE>
BRAUNS FASHIONS CORPORATION
1998 DIRECTOR STOCK OPTION PLAN
The purpose of the Brauns Fashions Corporation 1998 Director Stock Option
Plan (the "Option Plan") is to attract and retain persons of outstanding
competence to serve on the Board of Directors of Brauns Fashions Corporation
(the "Company").
1. ADMINISTRATION. The Option Plan will be administered by the Board of
Directors of the Company. Grants of stock options under the Option Plan
("Options") and the amount and nature of the Options so granted will be
automatic, as described below.
2. STOCK SUBJECT TO THE OPTION PLAN. An aggregate of 100,000 shares of
Common Stock, par value $.0l per share ("Common Stock"), of the Company are
reserved for issuance under the Option Plan. The number of shares authorized
for issuance under the Option Plan may be increased from time to time by
approval of the Board of Directors and, if required pursuant to Rule 16b-3 under
the Securities Exchange Act of 1934 or the applicable rules of any securities
exchange or the NASD, the shareholders of the Company. In the event of any
reorganization, merger, recapitalization, stock dividend, stock split, or
similar change in the corporate structure or shares of the Company, appropriate
adjustments will be made to the number and kind of shares reserved for issuance
under the Option Plan and pursuant to outstanding Options and to the exercise
price of outstanding Options.
3. AUTOMATIC OPTION GRANTS. Under the Option Plan, each non-employee
director will automatically be granted Options to purchase shares of Common
Stock as follows:
i. On the date of the 1999 annual meeting of shareholders, each
non-employee director will automatically be granted an Option to
purchase 5,000 shares of Common Stock.
ii. Thereafter, on the date of each subsequent annual meeting of
shareholders at which the non-employee director is reelected, or
otherwise continues to serve as a director pursuant to the current
three year terms, to the Board of Directors, the non-employee director
shall automatically be granted an additional Option to purchase 5,000
shares of Common Stock.
4. VESTING, EXERCISABILITY AND EXPIRATION. All Options granted under the
Option Plan shall be fully vested when granted, but may not be exercised until
six months following the date of grant. All Options granted under the Option
Plan shall expire five years after the date of grant.
5. TRANSFERABILITY. No Option granted under the Option Plan is
assignable or transferable during the lifetime of the director, either
voluntarily or involuntarily. Options shall be exercisable during a director's
lifetime only by such director. In the event of the death of a non-employee
director, Options granted under the Option Plan may be transferred by will or
the laws of descent and distribution and may only be exercised by the executors
or administrators of such
<PAGE>
director's estate or by the person or persons to whom such director's rights
under the Option shall. pass by the director's will or the laws of descent and
distribution.
6. EXERCISE PRICE. The exercise price of Options granted under the
Option Plan shall be equal to the fair market value of one share of Common
Stock on the date of grant. For purposes of the Option Plan, "fair market
value" is the average of the high and low sales price of the Common Stock, as
reported by the NASDAQ National Market System on the date of grant. Payment for
the exercise of Options may be made in cash, by personal check payable to the
Company, by delivery of shares of Common Stock having an aggregate fair market
value on the date of exercise which is not less than the option price, or by a
combination thereof.
7. PLAN AMENDMENT AND TERMINATION. The Board of Directors may
suspend or terminate the Option Plan or any portion thereof at any time, and
may amend the Option Plan from time to time in any respect, provided that no
such amendment will be effective without approval of the shareholders, if
shareholder approval is required pursuant to Rule 16b-3 under the Securities
Exchange Act of 1934 or the applicable rules of any securities exchange or
the NASD. To the extent prohibited under Rule 16b-3 under the Securities
Exchange Act of 1934, the Option Plan may not be amended more than once every
six months. No termination, suspension or amendment of the Option Plan will
alter an outstanding Option without the consent of the holder of such Option.
Unless earlier terminated by action of the Board, the Option Plan will
terminate on July 17, 2008, and no Option shall be granted after any such
termination. Options granted and outstanding upon termination of the Option
Plan may continue to be exercised in accordance with their terms.
8. COMPLIANCE WITH SEC REGULATIONS. It is the Company's intent that the
Option Plan comply in all respects with Rule 16b-3 of the Act and any
regulations promulgated thereunder. If any provision of this plan is later
found not to be in compliance with the Rule, the provision shall be deemed null
and void. All grants and exercises of Options under the Option Plan shall be
executed in accordance with the requirements of Section 16 of the Act, as
amended, and any regulations promulgated thereunder.
9. SHAREHOLDER APPROVAL. The Option Plan shall be subject to approval by
the shareholders holding at least a majority of the voting stock of the Company
represented in person or by proxy at a duty held shareholders' meeting, and any
Option granted under the Option Plan prior to the date of such approval shall be
contingent upon such approval.
10. EFFECTIVE DATE. This Option Plan shall be effective as of July 17,
1998, subject to shareholder approval of the Option Plan as described above on
or before July 17, 1999.
11. MISCELLANEOUS. Except as otherwise provided herein, no non-employee
director shall have any claim or right to be granted an Option under the Option
Plan. Neither the Option Plan nor any action hereunder shall be construed as
giving any director any right to be retained in the service of the Company.
-2-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-K FOR THE FISCAL YEAR ENDED FEBRUARY 27, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-27-1999
<PERIOD-START> MAR-01-1998
<PERIOD-END> FEB-27-1999
<CASH> 12,587,719
<SECURITIES> 0
<RECEIVABLES> 1,397,502
<ALLOWANCES> 0
<INVENTORY> 10,799,046
<CURRENT-ASSETS> 25,607,707
<PP&E> 26,223,301
<DEPRECIATION> 13,268,337
<TOTAL-ASSETS> 40,059,616
<CURRENT-LIABILITIES> 9,183,656
<BONDS> 5,073,604
0
0
<COMMON> 47,178
<OTHER-SE> 24,682,588
<TOTAL-LIABILITY-AND-EQUITY> 40,059,616
<SALES> 110,142,393
<TOTAL-REVENUES> 110,142,393
<CGS> 71,488,228
<TOTAL-COSTS> 71,488,228
<OTHER-EXPENSES> 28,300,011
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 282,508
<INCOME-PRETAX> 10,071,646
<INCOME-TAX> 3,879,875
<INCOME-CONTINUING> 6,191,771
<DISCONTINUED> 0
<EXTRAORDINARY> 35,396<F1>
<CHANGES> 0
<NET-INCOME> 6,227,167
<EPS-BASIC> 1.37
<EPS-DILUTED> 1.31
<FN>
<F1>Results include an extraordinary gain of $35,396, or $0.01 per share, related
to the purchase at a discount from par of $4,676,000 principal face amount of
the Company's 12% Senior Notes due 2005.
</FN>
</TABLE>
