<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended May 1, 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 Number: 0-23440
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McNaughton Apparel Group Inc.
-----------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3747173
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
463 Seventh Avenue, New York, N.Y. 10018
------------------------------------------
(Address of principal executive offices)
(Zip code)
(212) 947-2960
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal
year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or 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 [X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 Par Value, 7,428,435 shares as of June 14, 1999.
<PAGE>
INDEX TO FORM 10-Q
McNaughton Apparel Group Inc.
<TABLE>
<CAPTION>
Page No.
--------
PART I. FINANCIAL INFORMATION
<S> <C>
ITEM 1.
Financial Statements:
Consolidated Balance Sheets at May 1, 1999 (Unaudited)
and October 31, 1998 3
Consolidated Statements of Operations for the thirteen and twenty-six weeks
ended May 1, 1999 and May 2, 1998 (Unaudited) 4
Consolidated Statements of Stockholders' Equity for the twenty-six
weeks ended May 1, 1999 (Unaudited) 5
Consolidated Statements of Cash Flows for the twenty-six weeks
ended May 1, 1999 and May 2, 1998 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7-12
ITEM 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations 13-18
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk 19
PART II. OTHER INFORMATION 20
</TABLE>
ITEM 1.
Legal Proceedings
ITEM 4.
Submission of matters to vote of security holders
ITEM 5.
Other Information
ITEM 6.
Exhibits and Reports on Form 8-K
2
<PAGE>
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
McNaughton Apparel Group Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
May 1, October 31,
1999 1998
(Unaudited) (Note)
-------------------------------------
(In Thousands)
<S> <C> <C>
Assets
Current assets:
Cash $ 4,184 $ 205
Due from factor 79,242 85,998
Inventory 39,075 47,386
Income taxes receivable and current deferred taxes 2,699 2,522
Prepaid expenses and other current assets 1,784 1,273
-------- --------
Total current assets 126,984 137,384
Fixed assets, net 8,952 8,261
Notes receivable from management stockholders 2,471 2,471
Intangible assets, net 42,445 43,464
Deferred financing costs, net 6,005 6,348
Other assets 3,479 3,661
-------- --------
Total assets $190,336 $201,589
======== ========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 6,534 $ 15,932
Revolving credit loan - 3,839
Accrued expenses and other current liabilities 14,533 13,629
-------- --------
Total current liabilities 21,067 33,400
12 1/2% Senior Notes due 2005 125,000 125,000
Other long-term liabilities 1,688 1,719
-------- --------
Total liabilities 147,755 160,119
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value, authorized 20,000,000 shares, 8,079,435
and 8,065,429 shares issued, respectively, and 7,428,435 and 7,414,429
shares outstanding, respectively 81 81
Capital in excess of par 23,951 23,923
Retained earnings 24,084 23,001
Treasury stock, at cost, 651,000 shares (5,535) (5,535)
-------- --------
Total stockholders' equity 42,581 41,470
-------- --------
Total liabilities and stockholders' equity $190,336 $201,589
======== ========
</TABLE>
Note: The balance sheet at October 31, 1998 has been derived from the audited
financial statements as of that date.
See accompanying notes.
3
<PAGE>
McNaughton Apparel Group Inc.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-Six Weeks Ended
--------------------------- -----------------------------
May 1, May 2, May 1, May 2,
1999 1998 1999 1998
------------- ------------ ------------- --------------
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Net sales $123,972 $94,116 $190,591 $147,624
Cost of goods sold 95,184 76,080 146,636 118,191
-------- ------- -------- --------
Gross profit 28,788 18,036 43,955 29,433
Selling, general and administrative expenses 17,511 13,290 30,810 23,963
Depreciation and amortization 1,005 402 2,036 751
-------- ------- -------- --------
Income from operations 10,272 4,344 11,109 4,719
Interest expense and amortization of deferred financing costs 4,780 2,114 9,286 3,815
Other income, net (40) (41) (147) (82)
-------- ------- -------- --------
Income before provision for income taxes 5,532 2,271 1,970 986
Provision for income taxes 2,490 955 887 515
-------- ------- -------- --------
Net income $ 3,042 $ 1,316 $ 1,083 $ 471
======== ======= ======== ========
Basic earnings per share:
Net income $0.41 $0.18 $0.15 $0.06
======== ======= ======== ========
Weighted average number of common shares outstanding 7,428 7,413 7,424 7,412
======== ======= ======== ========
Diluted earnings per share:
Net income $0.41 $0.18 $0.15 $0.06
======== ======= ======== ========
Weighted average number of common shares outstanding
7,494 7,423 7,457 7,427
assuming dilution ======== ======= ======== ========
</TABLE>
See accompanying notes
4
<PAGE>
McNaughton Apparel Group Inc.
Consolidated Statement of Stockholders' Equity
for the Twenty-Six Weeks Ended May 1, 1999
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Capital
------------ in Excess Retained Treasury
Shares Amount of Par Earnings Stock Total
------------ ----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
In Thousands)
Balance at October 31, 1998 8,065 $81 $23,923 $23,001 $(5,535) $41,470
Net income for the twenty-six weeks
ended May 1, 1999 - - - 1,083 - 1,083
Issuance of 14,006 shares of common
stock through the employee
stock purchase plan 14 - 28 - - 28
------------- ------------- ------------- ------------- ------------- -------------
Balance at May 1, 1999 8,079 $81 $23,951 $24,084 $(5,535) $42,581
============= ============= ============= ============= ============= =============
</TABLE>
See accompanying notes.
5
<PAGE>
McNaughton Apparel Group Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Twenty-Six Weeks Ended
-----------------------------------------
May 1, May 2,
1999 1998
------------------------------------------
<S> <C> <C>
(In Thousands)
Net income $ 1,083 $ 471
Adjustments to reconcile net loss to net cash provided by
(used for) operating activities:
Depreciation and amortization of fixed assets 925 637
Amortization of intangible assets and deferred financing costs 1,740 582
Changes in operating assets and liabilities:
Due from factor 6,756 (4,620)
Inventory 8,311 (6,993)
Income taxes receivable and current deferred taxes (177) 687
Prepaid expenses and other current assets (511) (152)
Other assets 182 (1,417)
Accounts payable (9,398) 1,129
Accrued expenses and other current liabilities 904 (1,047)
Other long-term liabilities (31) 10
------- --------
Net cash provided by (used for) operating activities 9,784 (10,713)
------- --------
Investing activities
Purchase of fixed assets (1,616) (1,077)
Additional purchase price (92) (133)
------- --------
Net cash used for investing activities (1,708) (1,210)
------- --------
Financing activities
Net (repayments) advances under revolving credit agreement (3,839) 13,042
Deferred financing costs (286) -
Proceeds from issuance of common stock 28 12
Repayment of term loan - (1,500)
------- --------
Net cash (used for) provided by financing activities (4,097) 11,554
------- --------
Increase (decrease) in cash 3,979 (369)
Cash at beginning of period 205 529
------- --------
Cash at end of period $ 4,184 $ 160
======= ========
Supplemental disclosures
Income taxes paid $ 230 $ 50
Interest paid $ 8,070 $ 3,367
</TABLE>
See accompanying notes.
6
<PAGE>
McNaughton Apparel Group Inc.
Notes to Consolidated Financial Statements
(Unaudited)
1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements of McNaughton
Apparel Group Inc. and its wholly-owned subsidiaries (the "Company") have been
prepared in accordance with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes necessary for a fair presentation of financial position, results of
operations and cash flows in conformity with generally accepted accounting
principles. In the opinion of management, all normal and recurring adjustments
and accruals considered necessary for a fair presentation of the Company's
financial position at May 1, 1999 and the results of operations for the thirteen
weeks and twenty-six weeks ended May 1, 1999 and May 2, 1998 and cash flows for
the twenty-six weeks ended May 1, 1999 and May 2, 1998 have been included.
These statements should be read in conjunction with the audited consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K filed with the Securities and Exchange Commission.
Operating results for the thirteen weeks and twenty-six weeks ended May 1, 1999
are not necessarily indicative of the results that may be expected for the
fiscal year ending November 6, 1999.
The consolidated financial statements include the accounts of McNaughton
Apparel Group Inc. and its wholly-owned subsidiaries. All material intercompany
balances and transactions have been eliminated in consolidation.
The Company operates on a 52-53 week accounting period. The Company's
fiscal year ends on October 31, if such date falls on a Saturday, or the first
Saturday following October 31.
The Company changed its name from Norton McNaughton, Inc. to McNaughton
Apparel Group Inc. on February 9, 1999.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Deferred Financing Costs
Deferred financing costs were incurred in fiscal 1997 in connection with
the Company's credit facility. Such financing costs were amortized on a
straight-line basis over the three-year term of the related credit facility.
The balance of such costs were written off as an extraordinary loss when the
facility was repaid in June 1998.
Deferred financing costs were incurred in fiscal 1998 in connection with
obtaining the Company's current revolving credit agreement and the Company's
issuance of 12 1/2% Senior Notes due 2005 (the "Senior Notes"). Such deferred
financing costs are being amortized on a straight-line basis over the three-year
term of the current financing agreement and over the seven-year term of the
Senior Notes.
Earnings Per Share
Basic earnings per share is computed based on the weighted average number
of common shares outstanding during the period presented. Diluted earnings per
share is computed based on the weighted average number of common shares
outstanding during the period and the effect of dilutive options outstanding
during the period using the treasury stock method. For the thirteen weeks and
twenty-six weeks ended May 1, 1999, the dilutive effect of options outstanding
during the period using the treasury stock method was 66,000 shares and 33,000
shares, respectively. For the thirteen weeks and twenty-six weeks ended May 2,
1998, the dilutive effect of options outstanding during the period using the
treasury stock method was 10,000 shares and 15,000 shares, respectively.
Revenue Recognition
Revenues are recorded at the time of shipment of merchandise. The Company
establishes reserves for sales discounts, returns and allowances. Sales
discounts represent customary trade discounts which may be negotiated with the
Company's customers as a payment term of the sale. Sales allowances represent
sales rebates which may be granted to customers and other miscellaneous
deductions from accounts receivable. The Company records sales discounts
granted as a reduction of sales at the time of shipment. Sales returns and
allowances are reserved for as a reduction of sales based upon estimated future
returns and allowances related to current sales.
7
<PAGE>
McNaughton Apparel Group Inc.
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
2. Acquisitions
Miss Erika
- ----------
On September 30, 1997, a wholly-owned subsidiary of the Company completed
the acquisition of substantially all the assets and the assumption of
substantially all the liabilities of Miss Erika, a privately-held manufacturer
of women's moderately-priced apparel. The purchase price of Miss Erika
consisted of $24.0 million in cash paid at the closing, the assumption of $2.5
million of indebtedness and certain other contractual obligations. In addition,
the Company has agreed to pay an additional contingent payment in cash and/or
the Company's, $0.01 par value, common stock ("Common Stock") in the event that
certain earnings targets are achieved by Miss Erika for the two fiscal years
ending November 6, 1999. The aggregate contingent payment, if any, payable by
the Company is equal to the amount by which four times the average of Miss
Erika's earnings before interest expense, income taxes, depreciation and
amortization, as defined in the Miss Erika purchase agreement ("Miss Erika
EBITDA"), for the two fiscal years ending November 6, 1999, exceeds $24.0
million. Any additional consideration paid for Miss Erika will be accounted for
as additional purchase price and will be reflected in intangible assets. At the
Company's discretion, the Company may, subject to a maximum number of shares,
pay all or any portion of the contingent payment in shares of Common Stock. The
Miss Erika purchase agreement limits the number of shares of Common Stock
payable by the Company to a number of shares which, after giving effect to their
issuance, does not exceed 12% of the aggregate number of outstanding shares of
Common Stock at the time of payment. The Company has agreed to cause any shares
of Common Stock issued as a contingent payment to be registered under the
Securities Act. The Company intends to pay the cash portion, if any, of the
contingent consideration from internally generated funds and borrowings under
the Company's revolving credit facility. Miss Erika achieved Miss Erika EBITDA
during fiscal 1998 and to date during fiscal 1999 which, if sustained in for the
remainder of fiscal 1999, will result in the payment of significant additional
consideration, however, the Company cannot predict the amount of additional
consideration that may be payable.
Jeri-Jo
- -------
On June 18, 1998, a wholly-owned subsidiary of the Company completed the
acquisition of Jeri-Jo acquiring substantially all the assets and assuming
substantially all the liabilities of the privately-held apparel importers of
moderately-priced juniors' and misses' updated sportswear. The purchase price
paid in the Jeri-Jo acquisition was (i) $55.0 million in cash at the closing of
the acquisition, (ii) the assumption of indebtedness of $10.9 million and
certain other contractual obligations. In addition, the Company agreed to pay an
additional contingent payment in cash and its Common Stock in the event that
certain earnings targets are achieved by Jeri-Jo for the two years subsequent to
the closing of the Jeri-Jo acquisition. The Jeri-Jo purchase agreement requires
that the Company pay at least 50% of the required contingent payment in cash.
The aggregate contingent payment, if any, payable by the Company is equal to the
excess of (1) the sum of (A) five times Jeri-Jo's average earnings before
interest expense, income taxes, depreciation and amortization, as defined in the
Jeri-Jo purchase agreement ("Jeri-Jo EBITDA"), for the two years ending June 30,
2000, plus (B) 0.50 times any such average Jeri-Jo EBITDA between $17.0 million
and $20.0 million, plus (C) one times any such average Jeri-Jo EBITDA over $20.0
million, over (2) $55.0 million. Any additional consideration paid for Jeri-Jo
will be accounted for as additional purchase price and will be reflected in
intangible assets. The Company has secured any obligation to pay the cash
portion of the contingent payment by delivery of a stand-by letter of credit in
the face amount of $30.0 million, which letter of credit may be drawn upon, in
whole or in part, in certain circumstances, including in the event of a default
under the cash contingent payment obligation, if any. The Company has agreed to
cause offers and sales by the holders of any shares of Common Stock issued as a
contingent payment to be registered under the Securities Act, including, if
requested, in an underwritten offering. The Jeri-Jo purchase agreement provides
that in certain events, the sellers under the Jeri-Jo purchase agreement will
have the option to accelerate the Company's contingent payment obligation. In
such events, the accelerated contingent payment obligation would be payable in
cash in an amount equal to the amount by which (i) five times the greater of
$17.0 million or an amount equal to Jeri-Jo's annualized EBITDA (as defined in
the Jeri-Jo purchase agreement) at the time of such event exceeds (ii) $55.0
million. The Company intends to pay the cash portion of the contingent
consideration from internally generated funds and borrowings under the Company's
revolving credit facility. Jeri-Jo achieved Jeri-Jo EBITDA for the ten month
period ended May 1, 1999 which, if sustained, will result in the payment of
significant additional consideration, however, the Company cannot predict the
amount of additional consideration that may be payable.
8
<PAGE>
2. Acquisitions (continued)
The acquisitions were accounted for as purchases, and Miss Erika's and
Jeri-Jo's results are included in the consolidated statements of operations
beginning September 30, 1997 and June 18, 1998, respectively. The unaudited pro
forma consolidated results of operations for the thirteen weeks and twenty-six
weeks ended May 2, 1998, assuming consummation of the Jeri-Jo acquisition and
related financings at the beginning of the respective periods are as follows:
<TABLE>
<CAPTION>
Thirteen Weeks Twenty-Six Weeks
Ended May 2, 1998 Ended May 2, 1998
-----------------------------------------------------------------------
As reported Pro forma As reported Pro forma
-----------------------------------------------------------------------
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Net sales $94,116 $112,625 $147,624 $187,739
Income from operations $ 4,344 $ 7,579 $ 4,719 $ 10,010
Depreciation and amortization $ 402 $ 961 $ 751 $ 1,882
Net income $ 1,316 $ 1,549 $ 471 $ 371
Net income per share:
Basic $ 0.18 $ 0.21 $ 0.06 $ 0.05
Diluted $ 0.18 $ 0.21 $ 0.06 $ 0.05
</TABLE>
The pro forma adjustments are based upon available information and
assumptions that management believes are reasonable at the time made. The
unaudited pro forma financial information does not purport to present the
results of operations of the Company had the acquisition of Jeri-Jo occurred on
the date specified, nor is it necessarily indicative of the financial position
or results of operations that may be achieved in the future.
3. Sales to Major Customers
For the thirteen weeks ended May 1, 1999 and May 2, 1998, net sales made to
three customers were approximately 21.6%, 12.1%, and 10.9%, and approximately
24.4%, 11.6% and 13.9%, respectively. For the twenty-six weeks ended May 1,
1999 and May 2, 1998, net sales made to three customers were approximately
21.8%, 12.7%, and 11.6%, and approximately 20.9%, 13.2% and 12.1%, respectively.
4. Inventory
Inventory is stated at the lower of cost (first-in, first-out basis) or market.
Inventories consist of the following:
<TABLE>
<CAPTION>
May 1, October 31,
1999 1998
----------------- -----------
(In Thousands)
<S> <C> <C>
Raw materials $ 2,293 $ 3,733
Work in process 1,130 1,158
Finished goods 35,652 42,495
------- -------
$39,075 $47,386
======= =======
</TABLE>
5. Intangible Assets
Intangible assets consist of the following:
<TABLE>
<CAPTION>
May 1, October 31,
1999 1998
------- -------
(In Thousands)
<S> <C> <C>
Tradenames and trademarks $17,592 $17,500
Goodwill 26,932 26,918
------- -------
44,524 44,418
Less accumulated amortization 2,079 954
------- -------
$42,445 $43,464
======= =======
</TABLE>
9
<PAGE>
6. Notes Receivable from Management Stockholders
In 1993, the Company loaned certain management stockholders $3,000,000 in
the aggregate. Each loan is evidenced by a limited recourse promissory note
with interest accruing at 5.84% per annum. The Company's recourse on the
promissory notes is limited to the management stockholders' pledges of a portion
of their Common Stock of the Company.
In the event of any sale or transfer of shares of Common Stock by any of
the management stockholders, such person is required to make a principal
repayment of his loan from the Company in an amount equal to the product of (i)
the percentage representing the number of shares sold by such person to the base
amount set forth in the promissory note, and (ii) the outstanding balance of the
notes as of the date of the promissory note. No other principal payments are
required under the loans except for the payment at maturity. The loans mature
on November 5, 2003 at which time full payment is to be made by the management
stockholders for the balance of their respective loans. All necessary payments
have been made under the terms of the loans by the management stockholders.
As of May 1, 1999, the fair market value of the Company's Common Stock held
by such persons was $12,610,453 and the fair market value of the stock pledged
by the management stockholders as security for the loans was $4,710,311. The
aggregate principal balance of all loans to management stockholders was
$2,470,862. The loan balance set forth above reflects the required principal
payments of $529,138 resulting from sales of Common Stock by management
stockholders.
7. Financing Arrangements
In connection with the Miss Erika acquisition, on September 30, 1997, the
Company entered into a $140 million secured term loan and revolving credit
facility with NationsBanc Commercial Corporation and The CIT Group/Commercial
Services, Inc. (the "Prior Credit Agreement"). The proceeds were used to
finance the acquisition and for ongoing working capital requirements of the
Company and its subsidiaries. The Prior Credit Agreement provided for a $15
million term loan and $125 million revolving credit and letter of credit
facility, and had an initial expiration date of October 2, 2000. Prior thereto,
the Company's working capital requirements were funded by borrowings pursuant to
its factoring agreement.
The Prior Credit Agreement provided for interest to be paid monthly in
arrears on revolving credit loan balances at an annual rate equal to the prime
rate at NationsBank, N.A. less 0.25%. Interest on the term loan was at an
annual rate equal to the prime rate at NationsBank, N.A. plus 0.25% and required
monthly principal payments of $250,000 on the first day of each month and a
final installment of $6,250,000 on October 2, 2000.
Concurrent with the closing of the Jeri-Jo acquisition on June 18, 1998,
the Company entered into a $175 million secured revolving credit and letter of
credit facility with NationsBanc Commercial Corporation, The CIT
Group/Commercial Services, Inc. and Fleet Bank N.A. (the "Current Credit
Agreement"). The facility is used to finance ongoing working capital
requirements of the Company and its subsidiaries. The Current Credit Agreement
is a three-year secured revolving credit and letter of credit facility, with
interest on outstanding borrowings determined, at the Company's option, based
upon stated margins below the prime rate at Nations Bank, N.A. or in excess of
LIBOR rates. Presently, the interest rate under the Current Credit Agreement is
50 basis points below the prime rate (based upon the current prime rate, the
interest rate under the Current Credit Agreement is 7.25% per annum). Available
credit under the Current Credit Agreement is as follows: revolving credit
advances not to exceed $60.0 million, documentary letters of credit not to
exceed $130.0 million and stand-by letters of credit not to exceed $45.0 million
(including the $30.0 million stand-by letter of credit to secure the Company's
cash contingent payment obligation in connection with the Jeri-Jo acquisition),
with aggregate letters of credit not to exceed $160.0 million. Under the
Current Credit Agreement, the aggregate credit available to the Company is equal
to the lesser of (i) $175.0 million or (ii) the sum of 85% of eligible accounts
receivable and 60% of eligible inventory. The Current Credit Agreement contains
a number of restrictive covenants, including covenants which limit incurrence of
liens and indebtedness, limit transactions with affiliates, acquisitions, sales
of assets, investments and other restricted payments, and require that the
Company maintain certain fixed charge coverage, cash flow coverage and leverage
ratios and meet specified minimum levels of working capital and net worth. The
Company and its subsidiaries guarantee the Company's obligations under the
Current Credit Agreement and have granted a lien on substantially all of their
respective assets to secure the obligations under the Current Credit Agreement.
The weighted average interest rate on the revolving credit facility was 8.0% for
fiscal 1998 and 7.1% for the first half of fiscal 1999. The Company continued
to factor accounts receivable pursuant to factoring arrangements.
On June 18, 1998, the Company also issued the Senior Notes due 2005. The
proceeds of the Senior Notes were used to finance the Jeri-Jo acquisition and to
refinance then existing indebtedness of the Company and Jeri-Jo. The Company's
obligations under the Senior Notes are unsecured and are guaranteed by all of
the Company's subsidiaries. The indenture governing the Senior Notes (the
"Indenture") contains a number of restrictive covenants, including covenants
which limit the incurrence of liens and indebtedness, limit transactions with
affiliates, sales of assets, investments and other restricted payments.
10
<PAGE>
7. Financing Arrangements (continued)
At May 1, 1999, the Company had indebtedness totaling $125.0 million of
Senior Notes and had no borrowings under its revolving credit facility under the
Current Credit Agreement. In addition, at May 1, 1999, the Company had
obligations under undrawn letters of credit in the aggregate face amount of
approximately $91.5 million and had total additional available credit under the
Current Credit Agreement of approximately $39.4 million pursuant to the
borrowing base formula set forth therein.
8. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
<TABLE>
<CAPTION>
May 1, October 31,
1999 1998
-----------------------------------------
(In Thousands)
<S> <C> <C>
Interest on $125.0 million 12 1/2%
Senior Notes $ 6,511 $ 5,773
Reserve for litigation 2,500 2,500
Contractual bonuses payable 1,877 2,325
Profit sharing contribution payable 328 720
Other accrued expenses and current 3,317 2,311
liabilities ------- -------
$14,533 $13,629
======= =======
</TABLE>
9. Stock Repurchase
The Company's Board of Directors authorized a stock repurchase program,
under which the Company may repurchase up to $7.5 million of the Company's
Common Stock. Shares may be purchased from time to time in the open market and
in block transactions. As of May 1, 1999, the Company has purchased a total of
651,000 shares at an aggregate cost of approximately $5.5 million. The
Company's ability to repurchase shares of Common Stock is restricted by the
Indenture and the Current Credit Agreement.
10. Legal Proceedings
On July 14, 1998, Norton McNaughton of Squire, Inc.'s ("Norton")
distribution and cutting contractors (collectively, "Plaintiffs"), filed an
action in the New York State Supreme Court for New York County which, as
amended, is entitled Cutting Edge Services, Inc. and Railroad Enterprises, Inc.
----------------------------------------------------------
v. Norton McNaughton of Squire, Inc. and Norton McNaughton, Inc. Plaintiffs
- ----------------------------------------------------------------
claim that Norton breached its contracts with them because, among other things,
Miss Erika and Jeri-Jo failed to use Plaintiffs' services as allegedly required
under Norton's contracts with Plaintiffs. The Company believes these contracts
do not require Miss Erika or Jeri-Jo to utilize Plaintiffs' services. This
action seeks substantial compensatory and punitive damages and related
declaratory relief concerning rights under the contracts. On December 30, 1998,
the Company and Norton moved to dismiss most of Plaintiffs' claims. The Company
believes the claims are meritless and intends to defend this matter vigorously.
There can be no assurance that the Company will be successful in defending the
action or that any determination rendered would not have a material adverse
effect on the business, financial condition, results of operations and cash flow
of the Company.
The Company is involved in certain other legal actions and claims arising
in the ordinary course of business. It is the opinion of management that such
litigation and claims will be resolved without material adverse effect on the
Company's business, financial condition, results of operations and cash flow.
In connection with the Cutting Edge Services, Inc. and Railroad Enterprises,
Inc. lawsuit, as well as other pending litigation, the Company established a
litigation reserve of $2.5 million in fiscal 1998 (see Note 8).
11. Shareholder Rights Plan
On January 19, 1996, the Company's Board of Directors adopted a Shareholder
Rights Plan in which shareholders of record on February 8, 1996 received a
dividend distribution of one common share purchase right for each outstanding
share of the Common Stock held. Each right entitles the holder to purchase
Common Stock at an initial exercise price of $32.00.
11
<PAGE>
11. Shareholder Rights Plan (continued)
The rights are not exercisable or transferable apart from the Common Stock
until the earlier to occur of (i) ten days following a public announcement that
a person or group of affiliated or associated persons have acquired beneficial
ownership of 20% or more of the outstanding Common Stock of the Company, or (ii)
ten business days following the commencement of, or announcement of, an
intention to make a tender offer or exchange offer, the consummation of which
would result in the beneficial ownership by a person or group of 20% or more of
such outstanding Common Stock.
The rights are redeemable by the Company's Board of Directors at a price of
$0.01 per right at any time prior to the acquisition by a person or group of
beneficial ownership of 20% or more of the Company's Common Stock.
If a person or group acquires 20% or more of the Company's outstanding
Common Stock, each right will entitle the holder to purchase, at the right's
exercise price, a number of shares of the Company's Common Stock having a market
value at that time of twice the right's exercise price. If the Company is
acquired in a merger or other business combination transaction, each right will
entitle its holder to purchase, at the right's exercise price, a number of the
acquiring company's common shares having a market value at that time of twice
the right's exercise price.
12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
- -------
On September 30, 1997, a wholly-owned subsidiary of the Company completed
the acquisition of substantially all the assets and the assumption of
substantially all the liabilities of Miss Erika, a privately-held manufacturer
of women's moderately priced apparel. The purchase price of Miss Erika
consisted of $24.0 million in cash paid at the closing, the assumption of $2.5
million of indebtedness and certain other contractual obligations. In addition,
the Company has agreed to pay an additional contingent payment in cash and/or
Common Stock in the event that certain earnings targets are achieved by Miss
Erika for the two fiscal years ending November 6, 1999.
On June 18, 1998, a wholly-owned subsidiary of the Company completed the
acquisition of substantially all of the assets of Jeri-Jo and assumed
substantially all the liabilities of the privately-held apparel importers of
moderately-priced juniors' and misses' updated sportswear. The purchase price
paid in the Jeri-Jo acquisition was (i) $55.0 million in cash at the closing of
the acquisition, (ii) the assumption of indebtedness of $10.9 million and
certain other contractual obligations. In addition, the Company agreed to pay
an additional contingent payment in cash and Common Stock in the event that
certain earnings targets are achieved by Jeri-Jo for the two years subsequent to
the closing of the Jeri-Jo acquisition.
Concurrent with the closing of the Jeri-Jo acquisition, the Company entered
into the Current Credit Agreement, a $175.0 million secured revolving credit and
letter of credit facility with NationsBanc Commercial Corporation, The CIT
Group/Commercial Services, Inc. and Fleet Bank N.A. The facility is used to
finance ongoing working capital requirements of the Company and its
subsidiaries.
On June 18, 1998, the Company also sold $125.0 million of unsecured 12
1/2% Senior Notes due 2005. The terms and conditions of the Senior Notes are
governed by the Indenture. The proceeds of the Senior Notes were used to
finance the Jeri-Jo acquisition and to refinance then existing indebtedness of
the Company and Jeri-Jo. The Company's obligations under the Senior Notes are
guaranteed by all of the Company's subsidiaries.
The Company's business strategy is to expand its branded product lines,
broaden its customer base and further develop its global product sourcing
capabilities. A key component of this business strategy involves the selective
acquisition of complimentary businesses and brands. In connection therewith,
the Company completed the Miss Erika and Jeri-Jo acquisitions. As a result of
the acquisitions, the following discussion of the Company's historical financial
condition and results of operations is not necessarily indicative of future
results.
The Company's continuing focus on improving profitability has also led the
Company to undertake certain merchandising initiatives to improve gross profit
and gross profit margins with respect to the Norton McNaughton product lines.
The Company has reduced the number of products (i.e., reduced the number of
SKU's) offered in any particular collection of its Norton McNaughton product
lines in an effort to minimize the number of unrelated items unsold by retailers
at the end of a selling period and to reduce any related sales allowances. In
addition, by taking advantage of product sourcing opportunities, the Company has
been able to offer higher quality and more diverse products to retailers at
lower price points in an effort to further enhance sales of Norton McNaughton
products and to further reduce sales allowances. As a result of these
initiatives, the Company anticipates that revenue levels in its Norton
McNaughton product lines in fiscal 1999 will decrease from those in fiscal 1998.
As is the norm in the apparel industry, the Company engages in promotional
activity with its customers which affects the Company's sales, gross profit and
gross profit margins. Accordingly, the Company's sales, gross profit and gross
profit margins vary from quarter to quarter and year to year. In addition, the
Company generally ships its products in accordance with normal apparel industry
shipping cycles. This may result in shipments to customers occurring before or
after a particular fiscal quarter end, thereby affecting both fiscal quarter to
quarter comparisons and quarter to quarter results during a fiscal year.
Correspondingly, sales, gross profit and gross profit margins may be affected by
the timing of shipping cycles or the delivery of finished goods.
The Company contracts for the manufacture of all of its products and
substantially all of its products are produced overseas. Contract manufacturing
allows the Company to avoid significant capital expenditures for manufacturing
facilities and the fixed costs of maintaining a large production work force.
Foreign contract manufacturing allows it to take advantage of lower
manufacturing costs, thereby allowing it to reduce prices to its customers. The
Company believes that foreign sourcing for moderately-priced merchandise also
allows it to avail itself of a well-equipped and skilled labor force, thereby
allowing it to produce a higher quality, better-valued product for its
customers. The Company offsets the longer lead-time necessary for foreign
sourced fabrics and manufacturing by early and timely attention to production
planning.
13
<PAGE>
This Management's Discussion and Analysis contains forward-looking
information about the Company's anticipated operating results. The Company's
ability to achieve its projected results is dependent on many factors which are
outside of management's control. Some of the most significant factors would be
a deterioration in retailing conditions for women's and junior's apparel, an
increase in price pressures and other competitive factors, any of which could
result in an unanticipated decrease in gross profit margins, unanticipated
problems arising with the integration of Miss Erika's and Jeri-Jo's businesses,
the unanticipated loss of a major customer, the unanticipated loss of a major
contractor or supplier, year 2000 issues, particularly with respect to the
Company's vendors and customers, unanticipated problems arising out of Norton
McNaughton of Squire's relocation of its distribution function to South Carolina
where the activities will be performed "in-house", and weather conditions which
could impact retail traffic and the Company's ability to ship on a timely basis.
Accordingly, there can be no assurance that the Company will achieve its
anticipated operating results.
Results of Operations
- ---------------------
The following table is derived from the Company's Consolidated Statements
of Operations and sets forth, for the periods indicated, selected operating data
as a percentage of net sales:
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-Six Weeks Ended
-------------------------- --------------------------
May 1, 1999 May 2, 1998 May 1, 1999 May 2, 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 76.8 80.8 76.9 80.1
----- ----- ----- -----
Gross profit 23.2 19.2 23.1 19.9
Selling, general and administrative expenses 14.1 14.1 16.2 16.2
Depreciation and amortization 0.8 0.5 1.1 0.5
----- ----- ----- -----
Income from operations 8.3 4.6 5.8 3.2
Interest expense and amortization of
deferred financing costs 3.9 2.3 4.9 2.6
Other income, net (0.1) (0.1) (0.1) (0.1)
----- ----- ----- -----
Income before provision for income taxes 4.5 2.4 1.0 0.7
Provision for income taxes 2.0 1.0 0.4 0.4
----- ----- ----- -----
Net income 2.5% 1.4% 0.6% 0.3%
===== ===== ===== =====
</TABLE>
Quarter Ended May 1, 1999 Compared to Quarter Ended May 2, 1998
- ---------------------------------------------------------------
Net sales were $124.0 million for the second quarter of fiscal 1999
compared to $94.1 million for the second quarter of fiscal 1998. The increase in
net sales of $29.9 million was primarily attributable to the addition by the
Energie, Currants and Jamie Scott product lines of $27.3 million in net sales
following the acquisition of Jeri-Jo on June 18, 1998 and an increase in net
sales in the Erika product lines of $10.7 million. This increase was offset in
part by a decrease in net sales of $8.7 million in the Norton McNaughton product
lines .
Gross profit margin was 23.2% for the second quarter of fiscal 1999
compared to 19.2% for the second quarter of fiscal 1998. The increase in gross
profit margin was primarily due to the addition of gross profit from the
Energie, Currants and Jamie Scott product lines beginning on June 18, 1998. This
increase was offset in part by a decrease in the gross profit margin of the
Norton McNaughton product lines in the second quarter of fiscal 1999.
Selling, general and administrative expenses ("SG&A" expenses) were $17.5
million, or 14.1% of net sales, in the second quarter of fiscal 1999 compared to
$13.3 million, or 14.1% of net sales, in the second quarter of fiscal 1998. The
increase in SG&A of $4.2 million resulted primarily from the acquisition of
Jeri-Jo and an increase in other SG&A expenses.
Depreciation and amortization was $1.0 million for the second quarter of
fiscal 1999 compared to $400,000 for the second quarter of fiscal 1998. The
increase was primarily due to the amortization of goodwill resulting from the
Jeri-Jo acquisition.
Interest expense increased to $4.8 million in the second quarter of fiscal
1999 from $2.1 million in the second quarter of fiscal 1998. The increase of
$2.7 million was primarily attributable to incremental interest expense
associated with debt incurred to acquire Jeri-Jo.
14
<PAGE>
Twenty-Six Weeks Ended May 1, 1999 Compared to Twenty-Six Weeks Ended May 2,
- ----------------------------------------------------------------------------
1998
- ----
Net sales were $190.6 million for the first half of fiscal 1999 compared to
$147.6 million for the first half of fiscal 1998. The increase in net sales of
$43.0 million was primarily attributable to the addition by the Jeri-Jo product
lines of $47.6 million following the acquisition of Jeri-Jo on June 18, 1998 and
an increase in net sales in the Erika product lines of $9.6 million. These
increases were offset in part by a decrease in net sales of $15.7 million in the
Norton McNaughton product lines.
The gross profit margin was 23.1% for the first half of fiscal 1999
compared to 19.9% for first half of fiscal 1998. The increase in gross profit
margin was primarily due to the addition of gross profit from the Energie,
Currants and Jamie Scott product lines beginning June 18, 1998. This increase
was offset in part by a decrease in the gross profit margin of the Norton
McNaughton product lines in the first half of fiscal 1999.
SG&A expenses were $30.8 million, or 16.2% of net sales, in the first half
of fiscal 1999 compared to $24.0 million, or 16.2% of net sales, in the first
half of fiscal 1998. The increase in SG&A of $6.8 million resulted primarily
from the acquisition of Jeri-Jo and an increase in other SG&A expenses.
Depreciation and amortization was $2.0 million for the first half of fiscal
1999 compared to $800,000 for the first half of fiscal 1998. The increase was
primarily due to the amortization of goodwill resulting from the Jeri-Jo
acquisition.
Interest expense increased to $9.3 million in the first half of fiscal 1999
from $3.8 million in the first half of fiscal 1998. The increase of $5.5 million
was primarily attributable to incremental interest expense associated with debt
incurred to acquire Jeri-Jo.
Liquidity and Capital Resources
- -------------------------------
The Company is highly leveraged. On May 1, 1999, the Company had
indebtedness totaling $125.0 million of Senior Notes and had no borrowings under
its revolving credit facility under the Current Credit Agreement. In addition,
at May 1, 1999, the Company had obligations under undrawn letters of credit in
the aggregate face amount of approximately $91.5 million and had total
additional available credit under the Current Credit Agreement of approximately
$39.4 million pursuant to the borrowing base formula set forth therein. The
Company may be permitted to incur substantial additional indebtedness pursuant
to the terms of the Current Credit Agreement.
The Company's ability to make scheduled payments of principal or to pay the
interest on, or to refinance its indebtedness, or to fund planned capital
expenditures will depend on its future performance, which, to a certain extent,
is subject to general economic, financial, competitive, legislative, regulatory
and other factors that are beyond its control. Based upon the current level of
operations, management believes that cash flow from operations and available
cash, together with available borrowings under the Current Credit Agreement,
will be adequate to meet the Company's liquidity needs for the foreseeable
future.
The Company's liquidity requirements arise from the funding of the
Company's working capital needs, primarily inventory and accounts receivable,
and will arise from the additional consideration payable in connection with the
Miss Erika acquisition and Jeri-Jo acquisition. The Company's primary sources of
working capital are cash flow from operations and advances under the Current
Credit Agreement. The Company's borrowing requirements for working capital
purposes are seasonal, with peak working capital needs generally arising during
the second and third fiscal quarters and extending through the fourth fiscal
quarter. The Company had working capital of $105.9 million at May 1, 1999 as
compared to $104.0 million at October 31, 1998.
The Company sells its accounts receivable to a factor without recourse, up
to a maximum established by the factor for each customer. Receivables sold in
excess of these limitations are subject to recourse in the event of nonpayment
by the customer. The factor receives a commission for all purchased accounts
receivable which is calculated based on the net amount of gross sales less sales
discounts.
On September 30, 1997, a wholly-owned subsidiary of the Company completed
the acquisition of substantially all the assets and the assumption of
substantially all the liabilities of Miss Erika, a privately-held manufacturer
of women's moderately-priced apparel. The purchase price of Miss Erika consisted
of $24.0 million in cash paid at the closing, the assumption of $2.5 million of
indebtedness and certain other contractual obligations. In addition, the Company
has agreed to pay an additional contingent payment in cash and/or Common Stock
in the event that certain earnings targets are achieved by Miss Erika for the
two fiscal years ending November 6, 1999. The aggregate contingent payment, if
any, payable by the Company is equal to the amount by which four times the
average of Miss Erika's earnings before interest expense, income taxes,
depreciation and amortization, as defined in the Miss Erika purchase agreement
("Miss Erika EBITDA"), for the two fiscal years ending November 6, 1999, exceeds
$24.0 million. Any additional consideration paid for Miss Erika will be
accounted for as additional purchase price and will be reflected in intangible
assets. At the Company's discretion, the Company may, subject to a maximum
number of shares, pay all or any portion of the contingent payment in shares of
Common Stock. The Miss Erika purchase agreement limits the number of shares of
Common Stock payable by the Company to a number of shares which, after giving
effect to their issuance, does not exceed 12% of the aggregate number of
outstanding shares of Common Stock at the time of payment. The Company has
agreed to cause any shares of Common
15
<PAGE>
Stock issued as a contingent payment to be registered under the Securities Act.
The Company intends to pay the cash portion, if any, of the contingent
consideration from internally generated funds and borrowings under the Company's
revolving credit facility. Miss Erika achieved Miss Erika EBITDA during fiscal
1998 and to date during fiscal 1999 which, if sustained for the remainder of
fiscal 1999, will result in the payment of significant additional consideration,
however, the Company cannot predict the amount of additional consideration that
may be payable.
The Company entered into a $140.0 million secured term loan and revolving
credit facility with The CIT Group/Commercial Services, Inc. and NationsBanc
Commercial Corporation on September 30, 1997 in connection with the Miss Erika
acquisition. The proceeds were used to finance the Miss Erika acquisition and
for ongoing working capital requirements of the Company. Pursuant to this credit
arrangement, Norton continued to factor its accounts receivable, as well as the
accounts receivable of Miss Erika. This credit arrangement was refinanced by the
Current Credit Agreement in June 1998.
On June 18, 1998, a wholly-owned subsidiary of the Company completed the
acquisition of Jeri-Jo, acquiring substantially all the assets and assuming
substantially all the liabilities of the privately-held apparel importers of
moderately-priced juniors' and misses' updated sportswear. The purchase price
paid in the Jeri-Jo acquisition was (i) $55.0 million in cash at the closing of
the acquisition, (ii) the assumption of indebtedness of $10.9 million and
certain other contractual obligations. In addition, the Company agreed to pay an
additional contingent payment in cash and its Common Stock in the event that
certain earnings targets are achieved by Jeri-Jo for the two years subsequent to
the closing of the Jeri-Jo acquisition. The Jeri-Jo purchase agreement requires
that the Company pay at least 50% of the required contingent payment in cash.
The aggregate contingent payment, if any, payable by the Company is equal to the
excess of (1) the sum of (A) five times Jeri-Jo's average earnings before
interest expense, income taxes, depreciation and amortization, as defined in the
Jeri-Jo purchase agreement ("Jeri-Jo EBITDA"), for the two years ending June 30,
2000, plus (B) 0.50 times any such average Jeri-Jo EBITDA between $17.0 million
and $20.0 million, plus (C) one times any such average Jeri-Jo EBITDA over $20.0
million, over (2) $55.0 million. Any additional consideration paid for Jeri-Jo
will be accounted for as additional purchase price and will be reflected in
intangible assets. The Company secured any obligation to pay the cash portion
of the contingent payment by delivery of a stand-by letter of credit in the face
amount of $30.0 million, which letter of credit may be drawn upon, in whole or
in part, in certain circumstances, including in the event of a default under the
cash contingent payment obligation, if any. The Company has agreed to cause
offers and sales by the holders of any shares of Common Stock issued as a
contingent payment to be registered under the Securities Act, including, if
requested, in an underwritten offering. The Jeri-Jo purchase agreement provides
that in certain events, the sellers under the Jeri-Jo purchase agreement will
have the option to accelerate the Company's contingent payment obligation. In
such events, the accelerated contingent payment obligation would be payable in
cash in an amount equal to the amount by which (i) five times the greater of
$17.0 million or an amount equal to Jeri-Jo's annualized EBITDA (as defined in
the Jeri-Jo purchase agreement) at the time of such event exceeds (ii) $55.0
million. The Company intends to pay the cash portion of the contingent
consideration from internally generated funds and borrowings under the Company's
revolving credit facility. Jeri-Jo achieved Jeri-Jo EBITDA for the ten month
period ended May 1, 1999 which, if sustained, will result in the payment of
significant additional consideration, however, the Company cannot predict the
amount of additional consideration that may be payable.
Concurrent with the closing of the Jeri-Jo acquisition on June 18, 1998,
the Company entered into the Current Credit Agreement, a $175 million secured
revolving credit and letter of credit facility with NationsBanc Commercial
Corporation, The CIT Group/Commercial Services, Inc. and Fleet Bank N.A. The
facility is used to finance ongoing working capital requirements of the Company
and its subsidiaries. The Current Credit Agreement is a three-year secured
revolving credit and letter of credit facility, with interest on outstanding
borrowings determined, at the Company's option, based upon stated margins below
the prime rate or in excess of LIBOR rates. Presently, the interest rate under
the Current Credit Agreement is 50 basis points below the prime rate at Nations
Bank, N.A. (based upon the current prime rate, the interest rate under the
Current Credit Agreement is 7.25% per annum). Available credit under the Current
Credit Agreement is as follows: revolving credit advances not to exceed $60.0
million, documentary letters of credit not to exceed $130.0 million and stand-by
letters of credit not to exceed $45.0 million (including the $30.0 million
stand-by letter of credit to secure the Company's cash contingent payment
obligation in connection with the Jeri-Jo acquisition), with aggregate letters
of credit not to exceed $160.0 million. Under the Current Credit Agreement, the
aggregate credit available to the Company is equal to the lesser of (i) $175.0
million or (ii) the sum of 85% of eligible accounts receivable and 60% of
eligible inventory. The Company and its subsidiaries guarantee the Company's
obligations under the Current Credit Agreement and have granted a lien on
substantially all of their respective assets to secure the obligations under the
Current Credit Agreement. The weighted average interest rate on the revolving
credit facility was 8.0% for fiscal 1998 and 7.1% for the first half of fiscal
1999. The Company continued to factor accounts receivable pursuant to factoring
arrangements.
On June 18, 1998, the Company also issued the Senior Notes due 2005. The
proceeds of the Senior Notes were used to finance the Jeri-Jo acquisition and to
refinance then existing indebtedness of the Company and Jeri-Jo. The Company's
obligations under the Senior Notes are unsecured and are guaranteed by all of
the Company's subsidiaries.
The Current Credit Agreement contains a number of restrictive covenants,
including covenants which limit the incurrence of liens and indebtedness, limit
transactions with affiliates, acquisitions, sales of assets, investments and
other restricted payments, and require that the Company maintain certain fixed
charge coverage, cash flow coverage and leverage ratios and meet specified
minimum
16
<PAGE>
levels of working capital and net worth. The Indenture contains a number of
restrictive covenants, including covenants which limit the incurrence of liens
and indebtedness, and restricted payments, as defined therein.
The Company anticipates that in the remainder of fiscal 1999 it will incur
capital expenditures of approximately $2.5 million to $2.8 million principally
in connection with relocating Norton's warehouse and distribution facility to
the southeastern United States and the upgrade of the Company's management
information systems, which includes the Company's migration to new financial and
warehouse management software packages. The Company expects that it will incur a
total of approximately $3.4 million to $3.7 million in connection with the
relocation of Norton's warehouse and distribution facility during fiscal 1999
and 2000. The Company expects to finance these capital expenditures from
internally generated funds and advances under the Current Credit Agreement. The
expenditures required to modify portions of the Company's software so that it
will function properly in the year 2000 will not have a material impact on the
Company's business, operations, financial condition or cash flow. Maintenance or
modification costs will be expensed as incurred, while the costs of new software
will be capitalized and amortized over the software's useful life. See "The Year
2000 Issue" below.
The Company's Board of Directors authorized a stock repurchase program,
under which the Company may repurchase up to $7.5 million of the Company's
Common Stock. Shares may be purchased from time to time in the open market and
in block transactions. As of May 1, 1999, the Company had purchased a total of
651,000 shares at an aggregate cost of approximately $5.5 million. The Company's
ability to repurchase shares of Common Stock is restricted by the Indenture and
the Current Credit Agreement.
The moderate rate of inflation over the past few years has not had a
significant impact on the Company's sales or profitability. Inflation is not
expected to have a significant impact on the Company's business.
Seasonality
- -----------
Historically, the Company has achieved its highest sales in the fourth
quarter and, to a lesser extent, the second quarter of each fiscal year. As a
result of the Miss Erika and Jeri-Jo acquisitions, the Company anticipates that
it will experience its highest sales in the second and fourth quarters. This
pattern results primarily from the timing of shipments for each season, although
the timing of shipments can vary from quarter to quarter and season to season.
Spring season merchandise is generally shipped in the Company's second fiscal
quarter between February and April, and fall season merchandise is generally
shipped in the Company's fourth fiscal quarter between August and October.
The Year 2000 Issue
- -------------------
The Company is working to resolve the potential impact of the year 2000
(the "Year 2000") on its processing of date sensitive information and network
systems. The nationwide issue which has arisen given the approach of the year
2000 is the result of computer programs being written using two digits rather
than four digits to define the applicable year. Any of the Company's computer
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, but not limited
to a temporary inability to process transactions, send invoices, or engage in
similar normal business activities.
The Company is continuing to assess its exposure to the Year 2000 problem,
and has established a comprehensive approach to that exposure. Generally, the
Company has Year 2000 exposure in the following areas: (i) financial and
management operating computer systems used to manage the Company's business, and
(ii) computer systems used by third parties, in particular, financial
institutions, customers and suppliers of the Company.
The Company has delegated responsibility to a group of executives to
coordinate the identification, evaluation and implementation of changes to
computer systems and applications necessary to achieve the Company's goal of a
Year 2000 date conversion which would minimize the effect on its customers, and
avoid disruption to business operations. The Company is also focusing on
hardware and software tools, programming and outside forces that may affect its
operations, including its vendors, banks and customers. The Company's analysis
of the Year 2000 threat is ongoing and will be continuously updated throughout
fiscal 1999, as necessary.
The Company has taken an inventory of all systems and software in order to
identify all business and computer applications, so that it can identify
potential compliance problems. The Company has initiated communications with all
of its significant customers, suppliers, contractors and major systems
developers to determine their plans to remedy any Year 2000 issues that arise in
their business. The Company is compiling a database of information based upon
these responses, which is expected to be updated throughout fiscal 1999. To the
extent problems are identified, the Company will implement corrective
procedures, where necessary, then test the applications for Year 2000
compliance. The Company expects to complete this project prior to December 31,
1999. However, there can be no assurance that the systems of other companies on
which the Company's systems rely will be timely converted and would not have a
material adverse effect on the Company's systems.
17
<PAGE>
The Company estimates that its Year 2000 effort will have a nominal cost
impact, although it can make no assurances as to the ultimate cost of the Year
2000 effort or the total cost of information systems. Such costs will be
expensed as incurred, except to the extent such costs are incurred for the
purchase or lease of capital equipment. The Company's total Year 2000 project
cost and estimates to complete include the estimated costs and time associated
with the impact of third party Year 2000 issues based on presently available
information. The Company expects to make some of the necessary modifications
through its ongoing investment in system upgrades. The Company is in the process
of updating its purchasing, production and shipping systems to be Year 2000
compliant and is in the process of implementing a new financial software
package. The Company anticipates that these systems will be Year 2000 compliant
by July 1999. The Company anticipates that it will incur approximately $400,000
in the remainder of fiscal 1999 in connection therewith.
If the Company is unsuccessful in completing remediation of non-compliant
systems, and if customers or vendors cannot rectify Year 2000 issues, the
Company could incur additional costs, which may be substantial, to develop
alternative methods of managing its business and replacing non-compliant
equipment, and may experience delays in receipts from vendors, shipments to
customers, or payments to vendors. The Company is in the process of developing
contingency plans for critical functions in the event of non-compliance by its
customers and vendors.
18
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates. The table presents
principal cash flows and weighted-average interest rates by expected maturity
dates for the Company's debt obligations at May 1, 1999.
Fiscal Year
-----------
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 Thereafter Total
---- ---- ---- ---- ---- ------------- -----------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Short-term debt:
Revolving credit - - - - - - -
Prime rate less 50 basis points 7.25% - - - - - 7.25%
Long-term debt:
$125 million Senior Notes - - - - - $125,000 $125,000
Interest rate 12.5% 12.5% 12.5% 12.5% 12.5% 12.5% 12.5%
</TABLE>
19
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
On July 14, 1998, Norton McNaughton of Squire, Inc.'s ("Norton")
distribution and cutting contractors (collectively, "Plaintiffs"), filed an
action in the New York State Supreme Court for New York County which, as
amended, is entitled Cutting Edge Services, Inc. and Railroad Enterprises, Inc.
----------------------------------------------------------
v. Norton McNaughton of Squire, Inc. and Norton McNaughton, Inc. Plaintiffs
- ----------------------------------------------------------------
claim that Norton breached its contracts with them because, among other things,
Miss Erika and Jeri-Jo failed to use Plaintiffs' services as allegedly required
under Norton's contracts with Plaintiffs. The Company believes these contracts
do not require Miss Erika or Jeri-Jo to utilize Plaintiffs' services. This
action seeks substantial compensatory and punitive damages and related
declaratory relief concerning rights under the contracts. On December 30, 1998,
the Company and Norton moved to dismiss most of Plaintiffs' claims. The Company
believes the claims are meritless and intends to defend this matter vigorously.
There can be no assurance that the Company will be successful in defending the
action or that any determination rendered would not have a material adverse
effect on the business, financial condition, results of operations and cash flow
of the Company.
The Company is involved in certain other legal actions and claims arising
in the ordinary course of business. It is the opinion of management that such
litigation and claims will be resolved without material adverse effect on the
Company's business, financial condition, results of operations and cash flow.
In connection with the Cutting Edge Services, Inc. and Railroad Enterprises,
Inc. lawsuit, as well as other pending litigation, the Company established a
litigation reserve of $2.5 million in fiscal 1998.
Item 4. Submission of Matters to Vote of Security Holders
The Company's annual meeting of stockholders was held on March 15,
1999. The following directors were elected:
<TABLE>
<CAPTION>
WITHHOLDING
NAME FOR AUTHORITY
------------------- --------- -----------
<S> <C> <C>
Sanford Greenberg.. 5,551,858 1,942
Peter Boneparth.... 5,551,858 1,942
Amanda J. Bokman... 5,551,824 1,976
Stuart Bregman..... 5,551,858 1,942
Bradley P. Cost.... 5,551,858 1,942
Ben Mayo........... 5,551,858 1,942
Robert Siegel...... 5,551,858 1,942
</TABLE>
The appointment of Ernst & Young LLP as independent auditors for the fiscal
year ended November 6, 1999 was ratified with 5,552,458 shares voting in favor,
1,342 shares voting against and no shares abstaining.
Item 5. Other Information
On June 7, 1999, McNaughton Apparel Group Inc. announced that its Board of
Directors had appointed Peter Boneparth as its Chief Executive Officer. Mr.
Boneparth succeeds Sanford Greenberg who will continue in an active role as
Chairman. Mr. Boneparth also retains his titles of President and Chief
Operating Officer. In connection therewith, the Company entered into Amended
and Restated Employment Agreements with Messrs. Greenberg and Boneparth, which
extended the initial terms of their employment agreements to November 2, 2001
and November 1, 2003, respectively.
Item 6. Exhibits and Reports on Form 8-K
<TABLE>
<S> <C>
Exhibit 3.1 Certificate of Amendment of Certificate of Incorporation of
McNaughton Apparel Group Inc. (incorporated herein by reference to
Exhibit 3.1 of the Registrant's Form 10-Q for the quarter ended
January 30, 1999).
Exhibit 3.2 Certificate of Incorporation of McNaughton Apparel Group, Inc.
(incorporated herein by reference to Exhibit 3.2 of the Registrant's
Form 10-Q for the quarter ended January 30, 1999).
Exhibit 3.3 Certificate of Ownership and Merger of McNaughton Apparel Group
Inc. into Norton McNaughton, Inc. (incorporated herein by reference to
Exhibit 3.3 of the Registrant's Form 10-Q for the quarter ended
January 30, 1999).
Exhibit 3.4 By-Laws of McNaughton Apparel Group Inc. (incorporated herein by
reference to Exhibits to the Registrant's Registration Statement on
Form S-1 No. 33-74200).
Exhibit 10.1 Agreement of lease dated May 14, 1999, between North Point Park,
LLC and McNaughton Apparel Holdings Inc.
</TABLE>
20
<PAGE>
<TABLE>
<S> <C>
Exhibit 10.1a First Amendment, dated May 27, 1999, to Agreement of Lease dated
May 14, 1999, between North Point Park, LLC and McNaughton Apparel
Holdings Inc.
Exhibit 10.2 Agreement of Guaranty dated May 14, 1999, between North Point
Park, LLC and McNaughton Apparel Group Inc.
Exhibit 10.3 Amended and Restated Employment Agreement dated June 7, 1999,
between Norton McNaughton of Squire, Inc. and Sanford Greenberg.
Exhibit 10.4 Amended and Restated Employment Agreement dated June 7, 1999,
between Norton McNaughton of Squire, Inc. and Peter Boneparth.
Exhibit 27 Financial Data Schedule (for SEC purposes only)
</TABLE>
The Registrant filed no Current Reports on Form 8-K for the thirteen weeks ended
May 1, 1999.
21
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
MCNAUGHTON APPAREL GROUP INC.
(Registrant)
Date: June 15, 1999 By /s/Amanda J. Bokman
-------------------------
AMANDA J. BOKMAN
Vice President, Chief
Financial Officer,
Secretary and Treasurer
(Duly Authorized Officer
and Principal Financial
and Accounting Officer)
22
<PAGE>
MCNAUGHTON APPAREL GROUP INC.
463 7TH AVENUE
NEW YORK, NY 10018
June 15, 1999
VIA EDGAR
- ---------
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, DC 20549
RE: McNaughton Apparel Group Inc.
-----------------------------
Dear Sir or Madam:
McNaughton Apparel Group Inc. (formerly, Norton McNaughton, Inc.) and
Subsidiaries (the "Company"), pursuant to the Securities Exchange Act of 1934
(the "Act") and the rules and regulations thereunder, transmits herewith for
filing with the Securities and Exchange Commission under the Act the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended May 1, 1999 together
with all exhibits thereto.
If you have any questions or comments concerning the enclosed documents,
please telephone the undersigned at any time at (212) 971-8374.
Very truly yours,
MCNAUGHTON APPAREL GROUP INC.
/s/ Amanda J. Bokman
--------------------
Amanda J. Bokman
Vice President, Chief Financial Officer,
Secretary and Treasurer
<PAGE>
Exhibit 10.1
AGREEMENT OF LEASE
Single Tenant Building
THIS AGREEMENT OF LEASE, dated as of May 14, 1999, by and between NORTH
POINT PARK, LLC, organized and existing under the laws of the State of South
Carolina (together with its heirs, successors and permitted assigns, the
"Landlord") and MCNAUGHTON APPAREL HOLDINGS INC., organized and existing under
the laws of the State of South Carolina (together with its heirs, successors and
permitted assigns, the "Tenant").
WITNESSETH:
1. Premises. Landlord does hereby demise and let unto Tenant and Tenant
does hereby lease and take from Landlord for the term and upon the terms,
covenants, conditions and provisions set forth herein all that tract of land
located at Ashley Phosphate Extension, City of Hanahan, Berkeley County, South
Carolina (herein called the "Lot") which is outlined in red on Exhibit "A"
hereto, together with the building (herein called the "Building") and
improvements to be constructed thereon in accordance with Article 2 hereof and
the benefit of all rights, appurtenances, privileges, easements, rights of
ingress or egress, licenses or hereditaments now or hereafter belonging or
appertaining to any of the foregoing (the Lot, the Building, such benefits and
any other improvements thereon being herein collectively called the "Premises").
Tenant acknowledges that Landlord does not own the Lot as of the date hereof but
is a contract vendee for the purchase of the Lot. Landlord represents and
warrants that it has valid and enforceable contract rights to purchase the Lot.
Landlord's obligations hereunder are contingent upon Landlord's obtaining title
to the Lot on or before June 15, 1999. If Landlord has not obtained title to
the Lot on or before June 15, 1999, both Landlord and Tenant shall have the
right to terminate this Agreement by written notice, and upon such termination
neither party shall have any further obligations to each other whatsoever except
that Landlord shall return to Tenant any security deposit held by Landlord in
connection herewith and shall take all necessary action to cause the Letter of
Credit required by Section 31 of this Lease to be terminated. In the event that
Tenant requests Landlord to make application for a Fee in Lieu of Property Tax
as described in Section 6 hereof, it is understood and agreed that Landlord may
be required to convey title to all or part of the Premises to Berkeley County,
South Carolina in which event Landlord shall lease the Premises, or such part
thereof, from Berkeley County and this Lease shall automatically be converted
from a lease to a sublease between Landlord and Tenant.
2. Completion by Landlord.
(a) The Premises shall be completed in accordance with the plans, which
shall include but not be limited to civil, architectural, structural,
mechanical, electrical, plumbing and fire protection plans, attached hereto as
Exhibit "B" (herein called the "Plans") and the specifications attached hereto
as Exhibit "C" (herein called the "Specifications") (collectively, "Landlord's
Work"). All necessary construction shall be commenced promptly and shall be
Substantially Completed (as hereinafter defined) promptly and with due
diligence in accordance with the time periods set forth herein, ready for use
and occupancy by Tenant on the date set forth in Article 3. Provided, however,
that the time for Substantial Completion of the Premises shall be extended
1
<PAGE>
for additional periods of time equal to the time lost by Landlord or Landlord's
contractors, subcontractors or suppliers due to strikes or other labor troubles,
governmental restrictions and limitations, scarcity, unavailability or delays in
obtaining fuel, labor or materials, war or other national emergency, accidents,
floods, defective materials, fire damage or other casualties, adverse weather
conditions, or any cause similar or dissimilar to the foregoing beyond the
reasonable control of Landlord or Landlord's contractors, subcontractors or
suppliers (collectively, "Force Majeure Events"). All construction shall be done
in a good and workmanlike manner and shall comply at the time of completion with
all Permitted Encumbrances (as hereinafter defined), applicable and lawful laws,
ordinances, regulations and orders of the federal, state, county or other
governmental authorities having jurisdiction thereof. Tenant and its authorized
agents, employees and contractors shall have the right, at Tenant's own risk,
expense and responsibility at all reasonable times prior to the Commencement
Date as hereinafter defined, to enter the Premises for the purpose of taking
measurements, installing its furnishings and equipment and performing the work
described on Exhibit "D" attached hereto (collectively, "Tenant's Work");
provided that Tenant, in so doing, shall not unreasonably interfere with or
delay the work to be performed hereunder by Landlord, and Tenant shall use
contractors and workmen compatible with the contractors and workmen engaged in
the work to be performed hereunder by Landlord, and Tenant shall have obtained
Landlord's written consent prior to installing any fixtures not expressly
authorized hereby.
(b) Tenant may request changes to the Plans or Specifications. Landlord
shall have the right to approve or disapprove such requested changes in the
exercise of its reasonable discretion. In no event shall Landlord be required
to approve a requested change if, in Landlord's sole judgment, the requested
change will result in a construction delay in excess of forty-five (45) days.
Within fifteen (15) days after Tenant shall request a change to the Plans and
Specifications, Landlord shall notify Tenant in writing as to whether the change
requested by Tenant will, in Landlord's reasonable and good faith judgment,
entail additional construction costs and/or additional construction time. If,
in Landlord's reasonable and good faith judgment, such changes will entail
additional construction costs and/or additional construction time, such written
notice shall contain Landlord's reasonable estimate of the additional
construction costs and/or additional construction time that the same will
entail. If Landlord shall not so notify Tenant within such fifteen (15) day
period, then:
(i) the Plans and Specifications shall be changed as set forth in
Tenant's request ;
(ii) Tenant shall not be obligated to pay any additional construction
costs as a result of such changes; and
(iii) The scheduled completion date (as otherwise extended in
accordance with the terms hereof) shall not be modified as a result
thereof.
If Landlord shall so notify Tenant that the changes will entail additional
construction costs and/or additional construction time, Tenant shall notify
Landlord in writing within three (3) business days after such determination as
to whether Tenant wishes to make the changes in question. If Tenant shall not
so notify Landlord, it shall be conclusively deemed that Tenant has elected to
2
<PAGE>
withdraw the proposed change in the Plans and Specifications. If Tenant shall
notify Landlord that Tenant nonetheless wishes to make the change in question,
then:
(i) Landlord's Plans and Specifications shall be changed as set forth in
Tenant's request;
(ii) Tenant agrees to begin paying rent under this Lease as of the date,
reasonably determined by Landlord, that Substantial Completion would have
been achieved but for Tenant's requested changes;
(iii) to the extent that Landlord shall incur additional construction
costs resulting from such changes, Tenant shall pay to Landlord, as and
when Landlord incurs the same, the actual and direct amount of such
additional construction costs except to the extent they exceed Landlord's
original good faith estimate by more than fifteen percent (15%) in which
event Tenant shall only be responsible for the first fifteen percent (15%)
of the construction costs that are in excess of Landlord's good faith
estimate; and
(iv) to the extent that such changes shall entail additional
construction time, the Target Completion Date (as hereinafter defined and
as otherwise extended in accordance with the terms hereof) shall be
extended by the number of days of additional construction time actually
incurred in connection with such changes (even though such time may exceed
Landlord's original good faith estimate).
(c) The Landlord hereby agrees to provide Tenant with a notice (the
"Anticipated Completion Notice") that Tenant may begin the construction of
Tenant's Work, which notice shall be given by Landlord to Tenant upon the
earlier of: (i) ninety (90) days prior to the anticipated date of Substantial
Completion of the Building; or (ii) the earliest date that the progress of
Landlord's construction is such that the commencement of Tenant's Work will not
significantly interfere with the completion of Landlord's construction
obligations. Notwithstanding the delivery of the Anticipation Completion
Notice, Landlord reserves the right to revise the anticipated date of
Substantial Completion. Upon receipt of the Anticipated Completion Notice,
Tenant shall be permitted to install a mezzanine storage deck in the Premises
provided that Tenant installs the fire protection equipment required by
applicable law in connection with such improvement and that the Tenant otherwise
complies with all applicable laws and regulations in the conduct of Tenant's
Work.
(d) During the construction of the Building, Tenant and its consultants and
engineers shall have the right to attend all regularly scheduled contractor and
project construction meetings, to inspect all relevant construction documents
and records, to meet with construction personnel at reasonable times and to
inspect the construction site from time to time. The purpose of the foregoing
is to allow Tenant to monitor the course of construction, as well as to resolve
any questions or comments regarding whether Landlord's Work is progressing in a
good and workmanlike manner in accordance with the Plans and Specifications.
Without limiting any of Tenant's rights set forth herein, Tenant's
representatives shall have no voting or other decision rights at any meetings
they attend. Tenant acknowledges that Landlord may also invite other
3
<PAGE>
individuals, including, without limitation, representatives of Liberty Property
Trust, to attend all such meetings.
3. Term.
(a) The term of this lease shall commence on the later of January 30, 2000
or on the date when the Premises and the improvements required to be constructed
by Landlord under Article 2 hereof shall have been Substantially Completed
(herein called the "Commencement Date"). If the date of Substantial Completion
is delayed as a result of changes requested by Tenant and Tenant was notified,
in writing, that such changes would result in delays, the term of the lease and
the payment of rent shall commence as if the Premises were Substantially
Complete on the originally scheduled date but no earlier than March 1, 2000, as
extended for reasons other than those caused by Tenant. Unless sooner
terminated in accordance with the terms hereof, the term of this lease shall end
without the necessity for notice from either party to the other at 12:01 a.m.
local time on the fifteenth (15th) anniversary of the first day of the first
full calendar month following the date, which shall not occur until all free
rent periods provided for hereunder, if applicable, have expired, that Tenant is
first obligated to pay rent under the terms and conditions of this Lease (herein
called the "Expiration Date").
This Lease shall become effective upon the later to occur of both (i) the
execution of this Lease by Landlord and Tenant; and (ii) the delivery by Tenant
to Landlord of the initial Letter of Credit described in Section 31 of this
Lease.
(b) For purposes of this Lease, the Premises shall be "Substantially
Complete" on the day that Landlord obtains a certificate of occupancy for the
Building and the certification of: (i) an architect that: (A) to the best of the
architect's knowledge, information and belief, the Building was constructed in
general conformance with the plans and specifications; and (B) in the
architect's professional opinion, the Building is in compliance with applicable
laws, codes and ordinances; and (ii) the Landlord's general contractor that: (A)
the Building has been constructed in accordance with the plans and
specifications; and (B) the construction of the Building has been completed in a
good and workmanlike manner. Landlord and Tenant agree that any dispute as to
whether or not Substantial Completion has occurred shall be resolved as provided
in Section 23 hereof. The Premises shall be considered to be Substantially
Completed notwithstanding the fact that minor or insubstantial details of
construction, mechanical adjustment or decoration remain to be performed, which
details Landlord shall promptly thereafter perform at Landlord's sole cost and
expense. The Premises shall be considered to be Substantially Complete if
Landlord is unable to obtain the required certificate of occupancy or
architect's certification (or general contractor's certification) due to
Tenant's failure to complete any aspect of Tenant's Work. Without limiting any
of the foregoing, Landlord and Tenant acknowledge and agree that the Premises
shall be considered Substantially Complete notwithstanding the fact that: (i)
gravity feed sanitary sewer service for the Premises may not have been completed
by the Berkeley County Water and Sewer Authority in which event the Premises
shall be deemed Substantially Complete if Landlord, at its expense, has
constructed or caused the construction of a temporary septic tank sanitary sewer
system to serve the Premises which shall (A) be in the form of either a
temporary septic tank or "pump and haul" system that is approved by the South
Carolina Department of Health and Environmental Control; and (B)
4
<PAGE>
provide the same level of service as would be provided by the permanent gravity
feed sanitary sewer (it being agreed that Landlord will bear all costs related
to the operation, maintenance, repair and hauling charges of any temporary sewer
system); or (ii) the road that connects the Premises to North Rhett Avenue shall
not have been accepted for dedication by Berkeley County, in which event the
Premises shall be deemed Substantially Complete if Landlord has obtained a
private access easement for Tenant's use which road shall (A) be paved; (B)
allow vehicular (including truck) ingress and egress over the private road area
not yet dedicated; and (C) be maintained at Landlord's cost and expense.
(c) Landlord also agrees to provide Tenant with a notice of Substantial
Completion of the Building (the "Substantial Completion Notice"). Tenant shall,
within ten (10) days of the Substantial Completion Notice, provide Landlord with
a list of "punch list" items and Landlord agrees to promptly complete such punch
list items; provided, however, that the term of this Lease, and Tenant's
-------- -------
obligation to pay rent hereunder, shall commence upon Substantial Completion
notwithstanding the existence of any "punch list" items. Subject to Tenant's
rights under Section 23, Tenant agrees that it shall execute and deliver the
Acceptance Certificate, subject to "punch-list" items, required by Section 23(c)
of this Lease notwithstanding the existence of any "punch-list" items.
(d) Landlord and Tenant agree that the target completion date for the
Building (excluding Tenant work) is February 29, 2000 (as extended by Force
Majeure Events, by the provisions of Section 2 of this Lease, or as otherwise
provided herein, the "Target Completion Date"). In the event that the Building
shall not be Substantially Complete on or prior to the date (as extended by any
Force Majeure or as provided in Section 2(b), the "Rent Penalty Date") that is
sixty (60) days after the Target Completion Date, the Commencement Date shall be
the date on which Substantial Completion actually occurs and Tenant shall be
given a credit against rent which would otherwise have been payable from and
after the date of Substantial Completion equal to one (1) day of free rent for
each one (1) day that the Commencement Date occurs after the Rent Penalty Date
(such number of days of free rent, the "Rent Penalty"). Tenant shall have no
right to terminate this Lease on account of any delay in Landlord's Substantial
Completion of the Premises except that Tenant shall have the right to terminate
this Lease upon five (5) days advance written notice to Landlord if Substantial
Completion does not occur prior to the date that is four (4) months after the
Rent Penalty Date. Notwithstanding the fact that the Target Completion Date and
Rent Penalty Date may be extended by reason of Force Majeure or as otherwise
provided in this Lease, Landlord and Tenant agree that Tenant shall, regardless
of the occurrence of any Force Majeure event, have the right to terminate this
Lease if the Building is not Substantially Completed on or prior to August 31,
2000. At any time prior to the repayment in full of Landlord's initial
construction loan for the Building where Tenant has the right to exercise a
termination right, Landlord may request from Tenant and Tenant shall provide to
Landlord, within five (5) business days of a Landlord request, a written notice
stating either that Tenant has elected to terminate the Lease or stating that
Tenant will not exercise any termination right for a period of at least thirty
(30) days from the date of Tenant's statement. Landlord and Tenant agree that
Landlord shall have the right to deliver to Tenant a notice of termination of
this Lease (the "Landlord Termination Notice") upon the first to occur of the
following: (i) the date that is five (5) months after the occurrence of the Rent
Penalty Date, as such date may be extended by Force Majeure or as otherwise
provided in this Lease; or (ii) December 31, 2000,
5
<PAGE>
regardless of whether or not any Force Majeure event has occurred. In the event
that Landlord has delivered a Landlord Termination Notice to Tenant as provided
in the preceding sentence, Tenant shall, within five (5) business days of its
receipt of such Landlord Termination Notice, advise Landlord in writing whether
or not Tenant agrees to waive the accrual of any Rent Penalty from and after the
date of the Landlord Termination Notice. If, upon Tenant's receipt of the
Landlord Termination Notice, Tenant fails to agree by written notice to Landlord
within five (5) business days to waive the accrual of any Rent Penalty from and
after the date of the Landlord Termination Notice, then this Lease shall be
terminated as of the date of the Landlord Termination Notice and Tenant shall be
entitled to receive on account of Landlord's termination an amount equal to the
monetary value of the Rent Penalty that had accrued to Tenant's benefit as of
the date of the Landlord Termination Notice. If Tenant advises Landlord within
five (5) business days of its receipt of the Landlord Termination Notice that it
has agreed to waive the accrual of any Rent Penalty from and after the date of
the Landlord Termination Notice, the Landlord Termination Notice shall be deemed
withdrawn and Landlord and Tenant shall each be obligated to continue
performance under this Lease for a period of five (5) months (the "Extension
Period") from and after the date of the Landlord Termination Notice and no Rent
Penalty shall accrue to Tenant's benefit during the period from and after the
date of the Landlord Termination Notice. In addition, both Landlord and Tenant
agree to waive any termination right during the Extension Period. Upon the
expiration of the Extension Period, either Landlord or Tenant may terminate this
Lease by written notice and if Landlord shall terminate the Lease upon the
expiration of the Extension Period, Tenant shall be entitled to receive on
account of Landlord's termination an amount equal to the monetary value of the
Rent Penalty that had accrued to Tenant's benefit as of the date of the Landlord
Termination Notice delivered by Landlord prior to the commencement of the
Extension Period. If, upon the expiration of the Extension Period neither
Landlord nor Tenant elects to terminate this Lease, the Building is
Substantially Completed and Tenant occupies the Premises as contemplated herein,
then Tenant shall be entitled to the benefit of the Rent Penalty that accrued
prior to the delivery by Landlord of the Landlord Termination Notice delivered
by Landlord prior to the commencement of the Extension Period.
(e) Option to Renew. Provided Tenant is not in default of any provisions
---------------
of this Lease either at the time it provides notice of renewal or at the
expiration of the initial term of this Lease, the term of this Lease may be
extended twice at the option of the Tenant for consecutive five (5) year
periods. Such options shall be exercised by written notice to Landlord given at
least one hundred eighty (180) days but no more than one (1) year prior to the
expiration of the initial term or first extended term, as the case may be, of
this Lease. Any extension of the Term of this Lease shall be upon the same
terms, covenants and conditions of this Lease except that the Minimum Annual
Rent shall be equal to the lesser of: (i) one hundred five percent (105%) of the
Minimum Annual Rent paid during the immediately preceding year; or (ii) fair
market value. Payment of all additional rent and other charges to be made by
Tenant for the initial term of this Lease shall continue during any extension
period. Any termination of this Lease shall automatically terminate all
unexercised rights of further extensions. If Landlord and Tenant cannot agree
upon the fair market value of Minimum Annual Rent to be paid during a renewal of
this Lease, Landlord and Tenant shall each appoint an appraiser and such
appraisers shall, within thirty (30) days of their appointment, together
determine the fair market value of Minimum Annual Rent. If such two appraisers
cannot agree upon the fair market value of Minimum Annual Rent, they shall
submit separate appraisals to a third appraiser
6
<PAGE>
appointed by them who shall submit an appraisal for the fair market value of
Minimum Annual Rent. In such event, the Minimum Annual Rent that shall be
binding upon the parties hereto shall be the average of the three appraisals.
4. Use of Premises. Tenant shall occupy the Premises throughout the term
and shall use the same for and only for a distribution facility with appurtenant
offices or any other lawful use; provided, however, that Tenant shall not be
permitted to use the Premises for any use not permitted by applicable zoning
regulations or by any covenants and restrictions to which the Premises is made
subject during the term of this Lease.
5. Rent.
(a) Minimum Annual Rent. Subject to Section 3(d), from and after the later
to occur of March 1, 2000, and the date of Substantial Completion, Tenant shall
pay a minimum annual rent of One Million One Hundred Fifty-Five Thousand and
No/100 ($1,155,000.00) Dollars without notice or demand, and without set off in
equal monthly installments of Ninety Six Thousand Two Hundred Fifty & No/100
($96,250.00) Dollars in advance on the first day of each calendar month during
the first five years of this lease term, which shall be increased to One Million
Three Hundred Twenty Thousand & No/100 ($1,320,000.00) Dollars per annum payable
One Hundred Ten Thousand and No/100 ($110,000.00) Dollars per month during the
second five years of the term of this Lease and One Million Four Hundred Seventy
Eight Thousand Four Hundred and No/100 ($1,478,400.00) Dollars per annum in
monthly installments of One Hundred Twenty Three Thousand Two Hundred & No/100
($123,200.00) Dollars during the last five years of the lease term.
Provided, however, that rent for the first full month after the Commencement
Date shall be paid no later than the Commencement Date. If the Commencement
Date shall fall on a day other than the first day of a calendar month, the rent
shall apportioned pro rata on a per diem basis for the period between the
Commencement Date and the first day of the following calendar month. In
addition, Tenant shall pay Landlord without setoff the additional rent as
hereinafter set forth. Unless otherwise specifically provided, all sums shall
be paid to Landlord at the address given in Article 30 hereof.
6. Taxes and Other Impositions.
(a) Payment. As additional rent hereunder, at least thirty (30) days
before any fine, penalty, interest or cost may be added thereto for the non-
payment thereof (or sooner if elsewhere herein required), Tenant shall pay
throughout the term of this lease all levies, taxes, assessments, water and
sewer rents and charges, liens, license and permit fees, charges for public
utilities and all other charges, imposts or burdens of whatsoever kind and
nature, general or special, foreseen or unforeseen, whether or not
particularized by name, ordinary or extraordinary, which are applicable to the
term of this lease, and which are created, levied, assessed, confirmed,
adjudged, imposed or charged by any federal, state or municipal government or
public authority, or under any law, ordinance or regulation thereof, or pursuant
to any recorded covenants or agreements (all of which are hereinafter referred
to as "Impositions") upon or with respect to the Premises, the Lot or any
improvements made thereto, any part of the foregoing, any
7
<PAGE>
appurtenances thereto, or directly upon this lease or the rent payable hereunder
or amounts payable by any subtenants or other occupants of the Premises, or upon
this transaction or any related documents to which Tenant is a party or
successor in interest, or against Landlord because of Landlord's estate or
interest herein. If Tenant is permitted by the assessing and collecting
authorities and by all mortgagees and elects to pay any Imposition in
installments, Tenant shall not be responsible for any unpaid installments
thereof which become due and payable after the expiration or sooner termination
of the term of this lease. Tenant shall pay each Imposition at Landlord's
election to Landlord or directly to the government or other public authority
charged with the collection of such Imposition; and in the latter event, Tenant
shall furnish Landlord, not later than ten (10) days prior to the last day upon
which they may be paid without any fine, penalty, interest or cost, receipts or
other evidence satisfactory to Landlord of the payment of all such Impositions.
If requested by Tenant, Landlord will submit the appropriate applications
and enter into the appropriate agreements to cause the Premises to be subject to
a "Fee In Lieu of Property Tax" under South Carolina law. In the event Tenant
makes such a request, Tenant agrees to reimburse Landlord, as additional rent
hereunder, for all costs and expenses incurred by Landlord in connection with
making such an application and in connection with drafting and negotiating
appropriate agreements with Berkeley County including, without limitation, legal
fees and expenses. Tenant understands and agrees that it shall be responsible
not only for the legal fees and expenses of Landlord's counsel but also for the
legal fees and expenses of counsel retained by Berkeley County. Berkeley County
has advised Landlord that, if an application for a Fee In Lieu of Property Tax
is made by Landlord, Berkeley County will be represented by the law firm of
Nexsen Pruet Jacobs Pollard & Robinson LLP.
(b) New Methods of Taxation. Nothing herein contained shall be interpreted
as requiring Tenant to pay any income, excess profits, corporate capital stock,
or franchise tax imposed or assessed upon Landlord, unless such tax or any
similar tax is levied or assessed in lieu of all or any part of any Imposition
or an increase in any Imposition. If under the requirements of any state or
local law with respect to such new method of taxation Tenant is prohibited from
paying such new tax which is material in amount, Landlord may, at its election,
terminate this lease by giving at least six (6) months advance written notice
thereof to Tenant.
(c) Monthly Deposits. Notwithstanding the foregoing provisions of this
Article 6, Landlord shall have the right upon the occurrence and continuance of
a default by Tenant under this Lease, at its option, to require Tenant to pay to
Landlord or to any mortgagee, at the time when the monthly installment of
minimum rent is payable, an amount equal to one-twelfth (1/12th) of the annual
Impositions as estimated by Landlord. If Landlord elects to have Tenant make
such payments, Tenant also shall pay to Landlord or to such mortgagee, as the
case may be, at least thirty (30) days before any fine, penalty, interest or
cost may be added thereto for the non-payment thereof, the amount by which the
Impositions becoming due exceed the monthly payments on account thereof
previously made by Tenant. The amounts paid by Tenant pursuant to this Paragraph
(c) shall be used to pay the Impositions, but such amounts shall not be deemed
to be trust funds and no interest shall be payable thereon.
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(d) Contest by Landlord. Landlord may bring proceedings to contest the
validity or amount of any Imposition or to recover payments therefor. Tenant
shall cooperate with Landlord with respect to such proceedings to the extent
reasonably necessary and Landlord shall be entitled to deduct from any refund
actually obtained all reasonable costs, fees and expenses incurred in connection
with such proceedings as additional rent.
(e) Contest by Tenant. Tenant, without postponement of payment, may bring
proceedings to contest the validity or amount of any Imposition or to recover
payments therefor. Tenant shall save Landlord harmless from all costs and
expenses in connection with such proceedings. Landlord shall cooperate with
Tenant with respect to such proceedings to the extent reasonably necessary, but
all costs, fees and expenses incurred in connection with such proceedings shall
be borne by Tenant, Tenant shall give Landlord advance written notice of
Tenant's intention to take any such action.
7. Insurance.
(a) Types. Tenant, at Tenant's sole cost and expense, shall maintain and
keep in effect throughout the term with policies from an insurer and in form and
substance all satisfactory to Landlord:
(i) insurance against loss or damage to the Building and all other
improvements now or hereafter located on the Premises by fire, earthquake and
such other casualties as may be included in the all-risk insurance from time to
time available, in an amount equal to the full insurable replacement value of
the Building and improvements (which shall be deemed to be Ten Million Five
Hundred Thousand Dollars ($10,500,000.00)), the policy to have attached thereto
replacement cost, agreed amount and rental coverage (for a period of one (1)
year) endorsements or comparable forms of coverage;
(ii) insurance against liability for bodily injury (including death)
or property damage in or about the Premises, under a policy of comprehensive
general public liability insurance, with such limits as to each as may be
reasonably required by Landlord from time to time but not less than $500,000 for
each person and $1,000,000 for each occurrence of bodily injury (including
death) and $500,000 for property damage;
(iii) boiler insurance (if applicable), plate glass insurance, war
risk insurance (when available), and such other forms of insurance as may be
specified from time to time by Landlord; all such insurance shall be in such
reasonable types and amounts as may be specified from time to time by Landlord
or by any mortgagee and commercially available at reasonable cost; and
(iv) any other reasonable insurance coverage that may be required from
time to time by any mortgagee or that may be required generally by institutional
mortgagees.
(b) Insured Parties. The policies of insurance described in Paragraphs
(a)(i), (iii) and (iv) of this Article 7 shall name Landlord as an insured
party, as its interest may appear, and in addition shall contain a standard
mortgagee endorsement in favor of all mortgagees or, at the
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election of any such mortgagee, any reasonable variation of such endorsement.
The policies of insurance described in Paragraph (a)(ii) of this Article 7 shall
name both Landlord and Tenant as the insured parties.
(c) Policies. Each policy of insurance required by Paragraph (a) of this
Article 7 shall provide that it shall not be canceled without at least thirty
(30) days prior written notice to Landlord and to any mortgagee named in any
endorsement thereto. Each policy shall have an executive notice endorsement or
comparable form of coverage attached thereto to the effect that no act or
omission of Tenant shall affect the obligation of the insurer to pay the full
amount of any loss sustained.
(d) Evidence of Coverage. At least thirty (30) days prior to the
Commencement Date, a certificate of insurance for each policy shall be delivered
to Landlord by Tenant. Tenant may carry any insurance required by this Article 7
under a blanket policy, applicable to the Premises, in which event Tenant shall
deliver the insurer's certificates thereof and two certified copies of the
underlying policy in lieu of the original, showing all of the terms of such
coverage applicable to the Premises and showing the insured parties as
aforesaid. If Tenant shall fail, refuse or neglect to obtain or to maintain any
insurance that it is required to provide, or to furnish Landlord with
satisfactory evidence of coverage within the time required and Tenant shall fail
to cure such insurance deficiency after Landlord has provided Tenant with five
(5) days advance written notice of such insurance deficiency, Landlord shall
have the right to purchase such insurance. All payments for such insurance made
by Landlord shall be recoverable by Landlord from Tenant, together with interest
thereon, as additional rent promptly upon being billed therefor.
(e) Waiver of Subrogation. Each of the parties hereto hereby releases the
other, to the extent of the releasing party's insurance coverage, from any and
all liability for any loss or damage covered by such insurance which may be
inflicted upon the property of such party even if such loss or damage shall be
brought about by the fault or negligence of the other party, its agents or
employees; provided, however, that this release shall be effective only with
respect to loss or damage occurring during such time as the appropriate policy
of insurance shall contain a clause to the effect that this release shall not
affect said policy or the right of the insured to recover thereunder. If any
policy does not permit such a waiver, and if the party to benefit therefrom
requests that such a waiver be obtained, the other party agrees to obtain an
endorsement to its insurance policies permitting such waiver of subrogation if
it is available. If an additional premium is charged for such waiver, the party
benefiting therefrom agrees to pay the amount of such additional premium
promptly upon being billed therefor.
8. Repairs and Maintenance.
(a) Except as specifically otherwise provided in Paragraph (b) of this
Article, Tenant, at its sole cost and expense and throughout the term of this
lease, shall keep and maintain in good order and condition the Building and the
other improvements now or hereafter located upon the Premises, and any
sidewalks, parking areas, curbs and access ways upon or adjoining the Premises,
and shall promptly make all repairs necessary to keep and maintain such good
order and condition, whether such repairs are interior or exterior, ordinary or
extraordinary, foreseen or
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unforeseen. Tenant shall not use or permit the use of any portion of the
Premises for outdoor storage. When used in this Article 8, the term "repairs'
shall include replacements and renewals when necessary. All repairs made by
Tenant shall utilize materials and equipment which are at least equal in quality
and usefulness to those originally used in constructing the Building and the
Premises. Tenant shall maintain and repair all HVAC systems appurtenant to the
Building using a service firm(s) acceptable to Landlord which shall provide
service and maintenance in accordance with the manufacturer's recommendations
and shall provide a copy of the contract to Landlord.
(b) Landlord, throughout the term of this lease and at Landlord's sole
cost and expense, shall make all necessary repairs to the footings and
foundations and the structural elements of the building including structural
steel columns and girders forming a part of the Premises but excluding the roof;
provided, however, that Landlord shall have no responsibility to make any repair
unless and until Landlord receives written notice of the need for such repair,
and provided further that Landlord shall have no responsibility to repair any
damage which arises out of or is caused by Tenant's use, manner of use or
occupancy of the Premises, or by Tenant's installations in or upon the Premises,
or by any act or omission of Tenant or any employee, agent, contractor or
invitee of Tenant.
(c) Except for those matters with respect to which Landlord is
specifically made responsible as described in paragraph (b) above, Tenant shall
keep and maintain all portions of the Premises (including, without limitation,
the roof of the Building) and any sidewalks, parking areas, curbs and access
ways adjoining the Premises in a clean and orderly condition, free of
accumulation of dirt, rubbish, snow and ice and shall keep and maintain all open
areas of the Premises not built upon or paved as landscaped areas in a neat and
orderly condition by performing all necessary tasks, including, but not limited
to, grass cutting, seeding, watering, weeding and replacing any dead or diseased
planting.
9. Utility Charges. Tenant shall be solely responsible for and shall pay
promptly all rents, costs and charges for water service, sewer service, gas,
electricity, light, heat, steam, power, telephone and other communication
services, and any and all other utilities or services rendered or supplied upon
or in connection with the Premises.
10. Net Lease. Except for the obligations of Landlord expressly set forth
herein, this lease is a "net lease" and Landlord shall receive the minimum
annual rent as hereinabove provided as net income from the Premises, not
diminished by any Imposition or any expenses or charges required to be paid to
maintain and carry the Premises or to continue the ownership of Landlord other
than payments under any mortgages now existing or hereafter created by Landlord,
and, except as set forth herein, Landlord is not and shall not be required to
render any services of any kind to Tenant.
11. Governmental Regulations. Landlord covenants and agrees that it shall
deliver the Premises to Tenant in a condition such that the Premises complies
with all applicable laws and regulations. With regard to all or any part of the
Premises or to the use or manner of use of the Premises, or to the sidewalks,
parking areas, curbs and access ways adjoining the Premises, or to the fixtures
and equipment in the Premises, throughout the term of this lease and at its sole
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cost and expense, Tenant shall: (i) comply promptly with all laws, ordinances,
notices, orders, rules, regulations and requirements of all federal state and
municipal governments and all departments, commissions, boards and officers
thereof, and of the National Board of Fire Underwriters or any other body now or
hereafter constituted exercising similar functions relating to Tenant's business
and Tenant's obligations under this Lease; and (ii) keep in force at all times
all licenses, consents and permits necessary for the lawful use of the Premises
for the purposes herein provided; and (iii) comply with the requirements of all
public liability, fire, and other policies of insurance covering the Premises
whether any of the foregoing are foreseen or unforeseen, ordinary or
extraordinary. Provided, however, that Tenant shall not be required to comply
with the foregoing laws, ordinances and notices with respect to the footings and
foundations and the structural elements of the Building, including, without
limitation, structural steel columns and girders forming a part of the Premises
unless the need for such compliance arises out of or is caused by Tenant's use,
manner of use or occupancy of the Premises, or by Tenant's installations in or
upon the Premises or by any act or omission of Tenant or any employee, agent,
contractor or invitee of Tenant.
12. Signs. Except for signs which are located wholly within the interior
of the Building and which are not visible from the exterior of the Premises, no
signs shall be placed, erected, maintained or painted at any place upon the
Premises without the prior written consent of Landlord as to the size, design,
color, location, content, illumination, composition or material and mobility
thereof. All signs shall be maintained by Tenant in good condition during the
term of this lease, and Tenant shall remove all signs at the termination of this
lease and shall remain and restore any damage caused by the installation or
removal thereof.
13. Alterations, Additions and Fixtures.
(a) Subject to the provisions of Article 14 hereof, Tenant shall have the
right to install in the Building any trade fixtures from time to time during the
term of this lease; provided, however, that no such installation or removal
thereof shall affect the structural portions of the Building and that Tenant
shall repair and restore any damage or injury to the Premises caused thereby.
(b) Tenant shall not make or permit to be made any alterations,
improvements or additions to the Premises without on each occasion first
presenting to Landlord plans and specifications therefor and obtaining
Landlord's prior written consent thereto; except that Tenant may make
nonstructural changes to the interior of the Building without the consent of
Landlord provided that: (i) Tenant supplies Landlord with plans and
specifications and any necessary permits therefor at least ten (10) days in
advance of commencing construction thereof; (ii) such alterations and
improvements do not impair the structural strength of the Building or any other
improvements or reduce the value of the Premises; (iii) Tenant shall take or
cause to be taken all steps that are required by Article 14 hereof and that are
required or permitted by law in order to avoid the imposition of any mechanic's,
laborer's or materialman's lien upon the Premises, Building or Lot; and (iv) the
occupants of any adjoining real estate are not annoyed or disturbed by reason
thereof. Any and all alterations, improvements and additions to the Premises
which are constructed, installed or otherwise made by Tenant shall be the
property of Tenant until the expiration or sooner termination of this lease; at
that time all such alterations and additions shall
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remain on the Premises and become the property of Landlord without payment
therefor by Landlord; unless, upon the termination of this lease, Landlord shall
give written notice to Tenant to remove the same; in which event Tenant will
remove such alterations, improvements and additions, and repair and restore any
damage to the Premises caused by the installation or removal thereof. Prior to
the completion of any alteration, Landlord and Tenant agree to execute a written
statement as to whether or not the improvement or alteration shall be required
to be removed upon the expiration of this Lease. Landlord and Tenant agree that
the mezzanine rack to be installed by Tenant and all of Tenant's Work shall
remain the property of Tenant upon the expiration or earlier termination of this
Lease. In the event Tenant elects to remove the mezzanine rack or any of
Tenant's Work upon the expiration of earlier termination of this Lease, Tenant
shall obtain the necessary building permits and authorizations to do so, and
shall repair and restore the Premises in a good and workman-like manner to its
original condition less normal wear and tear and in such manner as to conform to
all applicable building codes and regulations. In the event Tenant elects not to
remove the mezzanine rack or any of Tenant's Work upon the expiration or earlier
termination of this Lease, then such of the mezzanine rack and Tenant's Work as
remains after Tenant vacates the Premises shall automatically become the
property of Landlord.
14. Mechanics' Liens. Tenant shall promptly pay any contractors and
materialmen who supply labor, work or materials to Tenant at the Premises so as
to minimize the possibility of a lien attaching to the Premises or the Lot.
Tenant shall take all steps permitted by law in order to avoid the imposition of
any such mechanic's, laborer's or materialman's lien upon the Premises or the
Lot. Should any such lien or notice of lien be filed, for work performed for
Tenant other than by Landlord, Tenant shall bond against or discharge the same
within fifteen (15) days after the lien or claim is filed or formal notice of
said lien or claim has been issued regardless of the validity of such lien or
claim. Nothing in this lease is intended to authorize Tenant to do or cause any
work or labor to be done or any materials to be supplied for the account of
Landlord, all of the same to be solely for Tenant's account and at Tenant's risk
and expense. Throughout this lease the term "mechanic's lien" is used to
include any lien, encumbrance or charge levied or imposed upon the premises or
the Lot or any interest therein or income therefrom on account of any
mechanic's, laborer's or materialman's lien or arising out of any debt or
liability to or any claim or demand of any contractor mechanic, supplier,
materialman or laborer and shall include without limitation any mechanic's
notice of intention given to Landlord or Tenant, any stop order given to
Landlord or Tenant, any notice of refusal to pay naming Landlord or Tenant and
any injunctive or equitable action brought by any person entitled to any
mechanic's lien.
15. Landlord's Right of Entry.
(a) Tenant shall permit Landlord and the authorized representatives of
Landlord and of any mortgagee or any prospective mortgagee to enter the Premises
at all reasonable times upon reasonable advance notice (except in emergency
situations) for the purpose of (i) inspecting them or (ii) making any necessary
repairs thereto or to the Property and performing any work therein. During the
progress of any work on the Premises Landlord will attempt not to inconvenience
Tenant, but shall not be liable for inconvenience, annoyance, disturbance, loss
of business or other damage to Tenant (except in the case of Landlord's willful
misconduct or gross
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negligence) by reason of making any repair or by bringing or storing materials,
supplies, tools and equipment on the Premises during the performance of any
work, and the obligations of Tenant under this lease shall not be thereby
affected in any manner whatsoever.
(b) Landlord shall have the right at all reasonable times to enter and to
exhibit the Premises for the purpose of sale or mortgage, and, during the last
nine (9) months of the term of this lease, to enter and to exhibit the Premises
to any prospective tenant.
16. Damage by Fire or Other Casualty.
(a) If the Premises shall be damaged or destroyed by fire or other
casualty, Tenant shall promptly notify Landlord, and Landlord, subject to the
conditions set forth in this Article 16, shall repair, rebuild or replace such
damage and restore the Premises to substantially the same condition in which
they were immediately prior to such damage or destruction; provided, however,
that Landlord shall only be obligated to restore such damage which is covered by
the fire and other extended coverage insurance policies.
(b) The work shall be commenced promptly and completed with due diligence,
taking into account the time required by Landlord to effect a settlement with,
and procure insurance proceeds from, the insurer, and for delays beyond
Landlord's reasonable control.
(c) The net amount of any insurance proceeds (excluding proceeds received
pursuant to a rental coverage endorsement) recovered by reason of the damage or
destruction of the Premises in excess of the cost of adjusting the insurance
claim and collecting the insurance proceeds (such excess amount being
hereinafter called the "net insurance proceeds") shall be applied towards the
reasonable cost of restoration and sums held by Landlord for that purpose shall
be maintained in a segregated account. If in Landlord's reasonable judgment the
net insurance proceeds will not be adequate to complete such restoration,
Landlord shall have the right to terminate this lease and all the unaccrued
obligations of the parties hereto by sending a written notice of such
termination to Tenant, the notice to specify a termination date no less than ten
(10) days after its transmission; provided, however, that except during the last
year of the term, Tenant may require Landlord to withdraw the notice of
termination by agreeing to pay the cost of restoration in excess of the net
insurance proceeds and by giving Landlord adequate security for such payment
prior to the termination date specified in Landlord's notice of termination. If
in Landlord's reasonable judgment the net insurance proceeds are not adequate to
repair or reconstruct the Building to its condition immediately prior to the
casualty, and Landlord does not elect to so terminate the lease, Tenant shall
pay, upon notice that Landlord shall restore, out of funds other than such net
insurance proceeds, the amount by which the cost of restoration estimated by
Landlord will exceed the net insurance proceeds, such sum payable by Tenant to
be later readjusted to such actual excess upon the completion of restoration. If
such net insurance proceeds are more than adequate, the amount by which such net
insurance proceeds exceed the cost of restoration will be retained by Landlord
or applied to repayment of any mortgage secured by the Premises.
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(d) Landlord's obligation or election to restore the Premises under this
Article shall not include the repair, restoration or replacement of the
fixtures, improvements, alterations, furniture or any other property owned,
installed, made by, or in the possession of Tenant.
(e) In the event of a casualty and prior to the repair thereof, rent
hereunder shall abate in proportion to the square footage of the Premises that
becomes unusable and any other portion of the Premises that is caused to become
unusable by reason of casualty to another portion of the Premises. In the event
that more than seventy-five percent (75%) of the Premises becomes unusable due
to a casualty, the entire amount of the Minimum Annual Rent shall abate until
the repair thereof.
(f) Within thirty (30) days of the occurrence of a fire or other casualty,
Landlord shall deliver to Tenant a notice (the "Casualty Notice") setting forth
the estimated time that will be necessary to repair the Premises. In the event
that the notice specifies a period longer than one hundred fifty (150) days,
then Tenant shall have the option, to be exercised within ten (10) days of its
receipt of the Casualty Notice, to terminate this Lease.
17. No Abatement of Rent Except as Specifically Provided. Except as
expressly provided as to damage by fire or by any other casualty in Paragraph
16(e) and as to condemnation in Paragraphs 19(a) and (b), there shall be no
abatement or reduction of the minimum rent, additional rent or other sums
payable hereunder for any cause whatsoever, and this lease shall not terminate,
and Tenant shall not be entitled to surrender the Premises.
18. Indemnification of Landlord and Tenant. Tenant will indemnify
Landlord and save Landlord harmless from and against any and all claims,
actions, damages, liability and expense (including without limitation fees of
attorneys, investigators and experts) in connection with loss of life, personal
injury or damage to property caused to any person in or about the Premises or
arising out of the occupancy or use by Tenant of the Premises or any part
thereof or occasioned wholly or in part by any act or omission of Tenant, its
agents, contractors, employees, licensees or invitees; unless such loss, injury
or damage was caused by the negligence of Landlord, its agents, employees,
licensees or invitees. Without limiting the foregoing, Tenant will forever
release and hold Landlord harmless from all claims arising out of damage to
Tenant's property unless such damage occurs as a result of Landlord's negligent
failure to make repairs after having received written notice of the need for
such repair. In case any such claim, action or proceeding is brought against
Landlord, upon notice from Landlord and at Tenant's sole cost and expense,
Tenant shall resist or defend such claim, action or proceeding or shall cause it
to be resisted or defended by an insurer.
Landlord will indemnify Tenant and save Tenant harmless from and against
any and all claims, actions, damages, liability and expense (including without
limitation fees of attorneys, investigators and experts) in connection with loss
of life, personal injury or damage to property arising from the negligence of
Landlord, its agents, contractors, employees, licensees or invitees except to
the extent such loss, injury or damage was caused in whole or in part by the
negligence of Tenant, its agents, employees, licensees or invitees or from any
breach of this Lease by Landlord.
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19. Condemnation.
(a) Termination. (i) If fifty percent (50%) or more of the Premises are
covered by a condemnation; or (ii) subject to the provisions of Paragraph (b)(i)
hereof, if any of the Premises is covered by a condemnation and, in Landlord's
sole opinion, it would be impractical or the condemnation proceeds are
insufficient to restore the remainder of the Premises; then, in any such event,
at Landlord's option, this lease shall terminate and all obligations hereunder
shall cease as of the date upon which possession is taken by the condemnor and
the rent herein reserved shall be apportioned and paid in full by Tenant to
Landlord to that date and all rent prepaid for periods beyond that date shall
forthwith be repaid by Landlord to Tenant.
If fifty percent (50%) or more of the Premises or twenty-five percent (25%)
or more of the floor area of the Building are covered by a condemnation, Tenant
shall have the right upon written notice to Landlord to terminate this Lease. In
the event of such a termination, then, this lease shall terminate and all
obligations hereunder shall cease as of the date upon which possession is taken
by the condemnor and the rent herein reserved shall be apportioned and paid in
full by Tenant to Landlord to that date and all rent prepaid for periods beyond
that date shall forthwith be repaid by Landlord to Tenant
(b) Partial Condemnation.
(i) If there is a partial condemnation and Landlord decides to
terminate pursuant to Paragraph (a) hereof, except during the last year of the
term, Tenant may require Landlord to withdraw its notice of termination by: (A)
giving Landlord written notice thereof within ten (10) days from transmission of
Landlord's notice to Tenant of Landlord's intention to terminate, (B) agreeing
to pay the cost of restoration in excess of the condemnation proceeds reduced by
those sums expended by Landlord in collecting the condemnation proceeds, and (C)
giving Landlord adequate security for such payment within such ten (10) day
period.
(ii) If there is a partial condemnation and this lease has not been
terminated pursuant to Paragraph (a) hereof Landlord shall restore the Building
and the improvements which are part of the Premises to a condition and size as
nearly comparable as reasonably possible to the condition and size thereof
immediately prior to the date upon which possession shall have been taken by the
condemnor. If the condemnation proceeds are more than adequate to cover the cost
of restoration and Landlord's expenses in collecting the condemnation proceeds,
any excess proceeds shall be retained by Landlord or applied to repayment of any
mortgage secured by the Premises.
(iii) If there is a partial condemnation and Landlord has not
exercised its right to terminate on the date upon which the condemnor shall have
obtained possession, the obligations of Landlord and Tenant under the lease
shall be unaffected by such condemnation except that there shall be an equitable
abatement for the balance of the term of the minimum annual rent according to
the value of the Premises before and after the date upon which the condemnor
shall have taken possession. In the event that the parties are unable to agree
upon the amount of such abatement, either party may submit the issue to
arbitration.
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(c) Award. In the event of a condemnation affecting Tenant, Tenant shall
have the right to make a claim against the condemnor for removal expenses,
business dislocation damages and moving expenses; provided and to the extent,
however, that such claims or payments do not reduce the sums otherwise payable
by the condemnor to Landlord. Except as aforesaid, Tenant hereby waives all
claims against Landlord and against the condemnor, and Tenant hereby assigns to
Landlord all claims against the condemnor including, without limitation, all
claims for leasehold damages and diminution in value of Tenant's leasehold
interest.
(d) Temporary Taking. If the condemnor should take only the right to
possession for a fixed period of time or for the duration of an emergency or
other temporary condition, then, notwithstanding anything hereinabove provided,
this lease shall continue in full force and effect without any abatement of
rent, but the amounts payable by the condemnor with respect to any period of
time prior to the expiration or sooner termination of this lease shall be paid
by the condemnor to Landlord and the condemnor shall be considered a subtenant
of Tenant. Landlord shall apply the amount received from the condemnor
applicable to the rent due hereunder net of costs to Landlord for the collection
thereof, or as much thereof as may be necessary for the purposes, toward the
amount due from Tenant as rent for that period; and, Tenant shall pay to
Landlord any deficiency between the amount thus paid by the condemnor and the
amount of the rent, or Landlord shall pay to Tenant any excess of the amount of
the award over the amount of the rent.
20. Quiet Enjoyment. Tenant, upon paying the minimum rent, additional
rent and other charges herein provided for, and observing and keeping all
covenants, agreements and conditions of this lease on its part to be kept, shall
quietly have and enjoy the Premises during the term of this lease without
hindrance or molestation by anyone claiming by or through Landlord, subject,
however, to the exceptions, reservations and conditions of this lease.
21. Assignment and Subletting.
(a) Restricted Assignment. Tenant shall not assign, mortgage, pledge or
encumber this lease, or sublet the whole or any part of the Premises, without
the prior written consent of Landlord which consent shall not be unreasonably
withheld or delayed. This prohibition against assigning or subletting shall be
construed to include a prohibition against any assignment or subletting by
operation of law, and/or a transfer by any person or persons controlling Tenant
on the date of the lease of such control to a person or persons not controlling
Tenant on the date of the lease. In the event of any assignment of this lease
made with or without Landlord's consent, Tenant nevertheless shall remain liable
for the performance of all of the terms, conditions and covenants of this lease
and shall require any assignee to execute and deliver to Landlord an assumption
of liability agreement in form satisfactory to Landlord, including an assumption
by the assignee of all of the obligations of Tenant and the assignee's
ratification of and agreement to be bound by all the provisions of this lease.
Landlord and Tenant agree that any profit which may inure to the benefit of
Tenant as a result of any subletting of the Premises or assignment of this
lease, whether or not consented to by Landlord, shall be divided equally between
Landlord and Tenant.
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(b) Percentage Agreements. It is agreed that Tenant shall not enter into
any assignment, sublease, license, concession or other agreement for use,
occupancy or utilization of the whole or any part of the Premises with or
without Landlord's consent, which provides for rental or other payment for such
use, occupancy or utilization based, in whole or in part on the net income or
profits derived by any person or entity from the space leased, used, occupied or
utilized (other than an amount based on a fixed percentage or percentages of
receipts or sales), and any such purported assignment, sublease, license,
concession or other agreement shall be absolutely void and ineffective as a
conveyance of any right or interest in the possession, use, occupancy or
utilization of any part of the Premises.
(c) Waiver of Lien. Upon at least ten (10) days written notice from
Tenant, Landlord agrees to execute a waiver, subject to the reasonable approval
of Landlord's counsel, of any lien in favor of Landlord with respect to the
Tenant's furniture, fixtures and equipment.
(d) Anything contained in Section 21 to the contrary notwithstanding,
provided that this Lease shall then be in full force and effect, Tenant shall
have the right without Landlord's consent, at any time and from time to time, to
assign this lease, or sublet all or part of the Premises, to:
(i) any person or entity which directly or indirectly controls, is
controlled by or under common control with Tenant;
(ii) any person or entity that purchases or acquires all or
substantially all of the assets and/or stock of Tenant; or
(iii) any person or entity resulting from a merger or consolidation of
Tenant with any other corporation or entity or any reorganization of
Tenant.
Provided, however, that the terms of this Paragraph 21(d) shall not be
applicable, and Landlord's prior written consent shall be required, unless the
successor to Tenant has a net worth computed in accordance with generally
accepted accounting principles at least equal to the net worth of Tenant as of
the date hereof. Any successor to Tenant shall at all times operate the
Premises in accordance with the provisions of the Lease. Notwithstanding any
assignment or sublet permitted by this Paragraph 21(d), the original Tenant
shall remain liable for the performance of the terms and conditions as provided
in Paragraph 21(a) and shall otherwise comply with the requirements of this
Paragraph 21. For purposes hereof, "controls," "controlled by" or "under common
control with" means ownership of 50% or more of the outstanding capital stock or
other ownership interests of such person or entity. Tenant may grant a
collateral assignment of this Lease as security to any of Tenant's lenders
identified in Paragraph 31(b) hereof or otherwise approved by Landlord.
(e) Any guarantee of this Lease shall not be affected by any assignment or
sublet of this Lease, whether or not permitted or approved by Landlord.
22. Subordination. This lease and Tenant's rights hereunder shall be
subject and subordinate at all times in lien and priority to any first mortgage
or other primary encumbrance
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now or hereafter placed upon or affecting the Premises, and to any second
mortgage or encumbrance with the consent of the first mortgagee, and to all
renewals, modifications, consolidations and extensions thereof, without the
necessity of any further instrument or act on the part of Tenant; provided,
--------
however, that such subordination shall be subject to Tenant's right not to
- -------
have its rights under this Lease disturbed so long as Tenant shall not be in
default with respect to any of its obligations under this Lease. Tenant's
subordination but right not to be disturbed shall be memorialized in a
commercially reasonable subordination and non-disturbance agreement in a form
reasonably acceptable to Landlord's mortgagee. Tenant shall execute and deliver
upon demand any further instrument or instruments confirming the subordination
of this lease to the lien of any such first mortgage or to the lien of any other
mortgage if requested to so do by Landlord with the consent of the first
mortgagee, and any further instrument or instruments of attornment that may be
desired by any such mortgagee or Landlord. Notwithstanding the foregoing, any
mortgagee may at any time subordinate its mortgage to this lease, without
Tenant's consent, by giving notice in writing to Tenant, and thereupon this
lease shall be deemed prior to such mortgage without regard to their respective
dates of execution and delivery, and in that event such mortgagee shall have the
same rights with respect to this lease as though this lease had been executed
prior to the execution and delivery of the mortgage and had been assigned to
such mortgagee.
In addition to the foregoing, Tenant agrees to deliver, for the benefit of
Landlord's construction lender, the form of Nondisturbance, Attornment and
Subordination Agreement attached hereto as Exhibit "E".
23. Memorandum of Lease; Tenant's Certificate.
(a) Tenant and Landlord, at any time and from time to time and within five
(5) days after Landlord's or Tenant's, as the case may be, written request,
shall execute, acknowledge and deliver to Landlord or Tenant, as the case may
be, a short form or memorandum of this lease for recording purposes. Landlord
and Tenant agree to use the form of memorandum of lease attached hereto as
Exhibit "F".
(b) Tenant, at any time and from time to time and within five (5) days
after Landlord's written request, so long as there are no material and
substantial defects in the Premises which Landlord is obligated to remedy and
which Landlord is not proceeding to remedy, and so long as Landlord is not
otherwise in default of this lease, shall execute, acknowledge and deliver to
Landlord a written instrument (in the form attached hereto as Exhibit "G" or
such other form as Landlord may reasonably request) in recordable form
certifying that this lease is unmodified and in full force and effect (or, if
there have been modifications, that it is in full force and effect as modified
and stating the modifications); stating that the improvements required by
Article 2 hereof have been Substantially Completed; certifying that Tenant has
accepted possession of the Premises; stating the date on which the term of the
lease commenced and the dates to which minimum rent, additional rent and other
charges have been paid in advance, if any; stating that to the best knowledge of
the signer of such instrument Landlord is not in default of this lease; stating
any other fact or certifying any other condition reasonably requested by
Landlord or required by any mortgagee or prospective mortgagee or purchaser of
the Premises or any interest therein; and stating that it is understood that
such instrument may be
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relied upon by any mortgagee or prospective mortgagee or purchaser of the
Premises or any interest therein or by any assignee of Landlord's interest in
this lease or by any assignee of any mortgagee. The foregoing instrument shall
be addressed to Landlord and to any mortgagee, prospective mortgagee, purchaser
or other party specified by Landlord.
In addition to the foregoing, Tenant agrees to deliver, for the benefit of
Landlord's construction lender, the following documents: (i) the form of pre-
construction estoppel attached hereto as Exhibit "H"; and (ii) the form of post-
construction estoppel attached hereto as Exhibit "I".
(c) Tenant acknowledges that, upon the completion of the improvements
contemplated by this Lease, in accordance with the terms hereof, the delivery by
Tenant to Landlord of a certificate, in the form of Exhibit "G" attached hereto,
to the effect that such improvements have been Substantially Completed in
accordance with the terms and conditions of this Lease and that such
improvements have been accepted by Tenant (the "Acceptance Certificate") is
critical to the original Landlord's ability to sell its interest in the Premises
to a contemplated successor landlord. Tenant acknowledges that Tenant's
agreement to deliver the Acceptance Certificate is a material inducement for
Landlord agreeing to enter into this Lease. Tenant agrees to deliver the
Acceptance Certificate within twenty (20) days of Landlord's notice to Tenant
that the Building is Substantially Complete; provided, however, that such period
will be extended, if necessary, so that Tenant shall not be obligated to deliver
the Acceptance Certificate until ten (10) calendar days after the date Tenant
receives a copy of an as-built plans and specifications for the Premises
together with copies of the certificate of occupancy for the Building, all
permits related to the Premises, and a copy of any construction test results
obtained by Landlord. Tenant's execution of the Acceptance Certificate shall not
constitute a waiver of any claims that Tenant may have pertaining to any matter
that would not have come to Tenant's attention in connection with a commercially
reasonable diligent investigation of the Premises at the time of Tenant's
delivery of the Acceptance Certificate; provided, however, that Tenant's claims
pertaining to matters covered by the warranties attached hereto as Exhibit "J"
may be limited as provided in Section 27 hereof.
If Tenant cannot deliver the full Acceptance Certificate because Tenant
does not believe the certification required therein to be true with respect to
any significant matter, Tenant shall deliver the Acceptance Certificate with
such significant exceptions and significant qualifications as it deems
appropriate based on a certification from Tenant's architect or engineering
consultant ("Tenant's Consultant"). Subject to the immediately preceding
sentence, Tenant shall be obligated to deliver the Acceptance Certificate
without exceptions or qualifications if the Building has been Substantially
Completed by Landlord. Tenant shall not be entitled to deliver the Acceptance
Certificate with exceptions or qualifications based upon "punch list" or similar
items, it being understood and agreed that the only items that Tenant may raise
as exceptions or qualifications in the Acceptance Certificate are those matters
so significant so as render the Building not Substantially Complete. If
Landlord's architect or engineering consultant ("Landlord's Consultant")
disagrees with the exceptions and qualifications taken by Tenant's Consultant
after trying to resolve a disagreement for a period of fifteen (15) days, then
Landlord's Consultant and Tenant's Consultant shall select a third person who is
an independent architect. Such independent architect shall resolve the dispute
in its sole and absolute discretion.
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If Landlord's Consultant and Tenant's Consultant shall be unable to agree upon
the appointment of the independent architect within ten (10) days after the end
of such fifteen (15) day period, they shall give written notice of such failure
to each of Landlord and Tenant and if Landlord and Tenant shall fail to agree
upon the appointment of such independent architect with ten (10) days after the
architects give such notice, then, within ten (10) days thereafter, either of
the parties upon notice to the other party may apply for such appointment to the
American Arbitration Association in New York, New York. Landlord and Tenant
shall each bear all the respective costs and expenses of the architects or
consultants they respectively choose and shall share equally the costs and
expenses of selecting and authorizing any independent architect. Upon resolution
of any such dispute, Tenant shall issue the Acceptance Certificate consistent
with the applicable architects' determination. During any dispute between
Landlord and Tenant as to whether Substantial Completion has occurred, Tenant
shall occupy the Premises and commence paying rent as if the date of Substantial
Completion is the date originally designated by Landlord; provided, however,
that Tenant may state that such rent (or a portion thereof) is being paid under
protest. If the applicable architects determine that the Building was not
Substantially Complete on the date initially designated by Landlord, the
applicable architects shall include in their determination a statement of the
percentage of the Premises that was not available for Tenant's use by reason of
such failure to Substantially Complete the Premises and Tenant, for the period
in which it occupied the Premises while the Premises was not Substantially
Complete, shall be entitled to an abatement of rent in proportion to the
percentage of the Premises that was not available for Tenant's use during such
time.
Without limiting the effect of any other provision of this Lease, in the
event that Tenant refuses to deliver an Acceptance Certificate consistent with
the determination of the applicable architects as set forth above, then (i)
Landlord, in addition to any and all other remedies provided for in this Lease,
shall be entitled to draw upon the entire amount of the Letter of Credit
described in Section 31 of this Lease to be held and applied in accordance with
the terms hereof; and (ii) Tenant hereby appoints Landlord as its attorney in
fact to execute and deliver the Acceptance Certificate, such appointment being
coupled with an interest and irrevocable.
24. Curing Tenant's Defaults. If Tenant shall be in default in the
performance of any of its obligations hereunder, Landlord, without any
obligation to do so, in addition to any other rights it may have in law or
equity, may elect to cure such default on behalf of Tenant after written notice
(except in the case of emergency) to Tenant. Tenant shall reimburse Landlord
upon demand for any sums paid or costs incurred by Landlord in curing such
default, including interest thereon from the respective dates of Landlord's
making the payments and incurring such costs, which sums and costs together with
interest thereon shall be deemed additional rent payable promptly upon being
billed therefor.
25. Surrender.
(a) Subject to the terms of Paragraphs 13(b) and 16(a) and (c) hereof at
the expiration or earlier termination of the term hereof, Tenant shall promptly
yield up, clean and neat, and in the same condition, order and repair in which
they are required to be kept throughout the term hereof, the Premises and all
improvements, alterations and additions thereto, and all fixtures and
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equipment servicing the Building, ordinary wear and tear (and damages from fire
or casualty not required to be repaired by Tenant hereunder) excepted.
(b) If Tenant, or any person claiming through Tenant, shall continue to
occupy the Premises after the expiration or earlier termination of the term or
any renewal thereof, such occupancy shall be deemed to be under a month-to-month
tenancy under the same terms and conditions set forth in this lease; except,
however, that the minimum annual rent during such continued occupancy shall be
one hundred fifty percent (150%) of the amount set forth in Paragraphs 5 hereof.
Anything to the contrary notwithstanding, any holding over by Tenant without
Landlord's prior written consent shall constitute a default hereunder and shall
be subject to all the remedies set forth in Article 26 hereof.
26. Defaults - Remedies.
(a) Defaults. Subject to the Section 26(d) hereof, it shall be an event
of default:
(i) If Tenant does not pay in full when due and without demand any
and all installments of minimum rent or additional rent or any other charges or
payments whether or not herein included as rent; or
(ii) If Tenant violates or fails to perform or otherwise breaches any
agreement, term, covenant or condition herein contained; or
(iii) If Tenant abandons the Premises or removes or attempts to
remove Tenant's goods or property therefrom other than in the ordinary course of
business without having first paid to Landlord in full all minimum rent,
additional rent and other charges that may have become due as well as all which
will become due thereafter; or
(iv) If Tenant becomes insolvent or bankrupt in any sense or makes an
assignment for the benefit of creditors or offers a composition or settlement to
creditors, or if a petition in bankruptcy or for reorganization or for an
arrangement with creditors under any federal or state law is filed by or against
Tenant, or a bill in equity or other proceeding for the appointment of a
receiver, trustee, liquidator, custodian, conservator or similar official for
any of Tenant's assets is commenced, or if any of the real or personal property
of Tenant shall be levied upon by any sheriff, marshal or constable; provided,
however, that any proceeding brought by anyone other than the parties to this
lease under any bankruptcy, reorganization arrangement, insolvency,
readjustment, receivership or similar law shall not constitute a default until
such proceeding, decree, judgment or order has continued unstayed for more than
sixty (60) consecutive days; or
(v) If any of the events enumerated in Paragraph (a)(iv) of this
Article shall happen to any guarantor of this lease;
(b) Remedies. Then, and in any such event, Landlord shall have the
following rights:
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(i) To charge a late payment penalty of four (4%) percent of any
amount owed to Landlord pursuant to this lease which is not paid within five (5)
business days of the date which is set forth in the lease if a date is
specified, or, if a date is not specified, within thirty (30) days of the
mailing of a bill therefor by Landlord. If Landlord incurs a penalty in
connection with any payment which Tenant has failed to make within the times
required in this lease, Tenant shall pay Landlord, in addition to such sums, the
full amount of such penalty incurred by Landlord.
(ii) To accelerate the whole or any part of the rent for the lesser of
the entire unexpired balance of the term of this lease or a period of eighteen
(18) months, as well as all other charges, payments, costs and expenses herein
agreed to be paid by Tenant, and any rent or other charges, payments, costs and
expenses if so accelerated shall, in addition to any and all installments of
rent already due and payable and in arrears, and any other charge or payment
herein reserved, included or agreed to be treated or collected as rent and any
other charge, expense or cost herein agreed to be paid by Tenant which may be
due and payable and in arrears, be deemed due and payable as if, by the terms
and provisions of this lease, such accelerated rent and other charges, payments,
costs and expenses were on that date payable in advance. Landlord and Tenant
agree that in the event Landlord seeks a remedy under this subparagraph,
Landlord shall first seek payment by drawing upon the Letter of Credit, if any,
held by Landlord as security in connection with this Lease; provided, however,
that Landlord shall be entitled to apply the proceeds of any Letter of Credit
toward the payment of any past due rent, additional rent and other charges owed
by Tenant to Landlord prior to applying any Letter of Credit proceeds towards
the remedy provided in this subparagraph. Notwithstanding the foregoing,
Landlord and Tenant agree that Landlord's remedy under this subparagraph shall
not be limited by the amount held by it in the form of a Letter of Credit or in
the form of any other security held by it in connection with this Lease.
(iii) To enter the Premises and without further demand or notice
proceed to distress and sale of the goods, chattels and personal property there
found and to levy the rent and other charges herein payable as rent, and Tenant
shall pay all costs and officers' commissions which are permitted by law,
including watchmen's wages and sums chargeable to Landlord, and further
including commission(s) charged by the constable or other person making the
levy, and in such case all costs, officers' commissions and other charges shall
immediately attach and become part of the claim of Landlord for rent, and any
tender of rent without said costs, commissions and charges made after the
issuance of a warrant of distress, shall not be sufficient to satisfy the claim
of Landlord.
(iv) To re-enter the Premises, together with all additions, alterations
and improvements, and, at the option of Landlord, remove all persons and all or
any property therefrom, either by summary dispossess proceedings or by any
suitable action or proceeding at law or by force or otherwise, without being
liable for prosecution or damages therefor, and repossess and enjoy the
Premises. Upon recovering possession of the Premises as a result of a default on
the part of Tenant, Landlord may, at Landlord's option, either terminate this
lease or make such alterations and repairs as may be necessary in order to relet
the Premises and relet the Premises or any part of parts thereof, either in
Landlord's name or otherwise, for a term or terms which may, at Landlord's
option, be less than or exceed the period which would otherwise have
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constituted the balance of the term of this lease and at such rent or rents and
upon such other terms and conditions as in Landlord's sole discretion may seem
advisable and to such person or persons as may in Landlord's discretion seem
best; upon each such reletting all rents received by Landlord from such
reletting shall be applied: first, to the payment of any costs and expenses of
such reletting, including brokerage fees and attorney's fees and all costs of
such alterations and repairs; second, to the payment of any indebtedness other
than rent due hereunder from Tenant to Landlord; third, to the payment of rent
due and unpaid hereunder; and the residue, if any, shall be held by Landlord and
applied in payment of future rent as it may become due and payable hereunder. If
such rentals received from such reletting during any month shall be less than
that to be paid during that month by Tenant, Tenant shall pay any such
deficiency to Landlord. Such deficiency shall be calculated and paid monthly. No
such re-entry or taking possession of the Premises or the making of alterations
or improvements thereto or the reletting thereof shall be construed as an
election on the part of Landlord to terminate this lease unless written notice
of such intention be given to Tenant. Landlord shall in no event be liable in
any way whatsoever for failure to relet the Premises or, in the event that the
Premises or any part or parts thereof are relet, for failure to collect the rent
under such reletting. Tenant, for Tenant and Tenant's successors and assigns,
hereby irrevocably constitutes and appoints Landlord Tenant's and their agent to
collect the rents due and to become due under all subleases of the Premises or
any parts thereof without in any way affecting Tenant's obligation to pay any
unpaid balance of rent due or to become due hereunder. Notwithstanding any such
reletting without termination, Landlord may at any time thereafter elect to
terminate this lease for such previous breach.
(v) To terminate this lease and the term hereby created without any
right on the part of Tenant to waive the forfeiture by payment of any sum due or
by other performance of any condition, term or covenant broken. Whereupon
Landlord shall be entitled to recover, in addition to any and all sums and
damages for violation of Tenant's obligations hereunder in existence at the time
of such termination, damages for Tenant's default in an amount equal to the
amount of the rent reserved for the balance of the term of this lease, as well
as all other charges, payments, costs and expenses herein agreed to be paid by
Tenant, all discounted at the rate of six percent (6%) per annum to their then
present worth, less the fair rental value of the Premises for the remainder of
said term, also discounted at the rate of six percent (6%) per annum to its then
present worth, all of which amount shall be immediately due and payable from
Tenant to Landlord.
(c) Non-Waiver. No waiver by Landlord of any breach by Tenant of any of
Tenant's obligations, agreement or covenants herein shall be a waiver of any
subsequent breach or of any obligation, agreement or covenant, nor shall any
forbearance by Landlord to seek a remedy for any breach by Tenant be a waiver by
Landlord of any rights and remedies with respect to such or any subsequent
breach.
(d) Grace Period. Notwithstanding anything hereinabove stated, except in
the case of emergency as set forth in Article 24 and except in the event of any
default enumerated in Paragraphs (a)(iii), (iv) and (v) of this Article, neither
party hereto will exercise any right or remedy provided for in this lease or
allowed by law because of any default of the other, except those remedies
contained in Paragraph (b)(i) of this Article unless such party shall have first
given ten (10) days written notice thereof to the defaulting party, and the
defaulting party shall
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have failed to cure the default within such period; provided, however, that if
the default consists of something other than the failure to pay money which
cannot reasonably be cured within ten (10) days, neither party hereto will
exercise any such right or remedy if the defaulting party begins to cure the
default within the ten (10) days and continues actively and diligently in good
faith to completely cure said default; and further provided that Landlord shall
not be required to give such ten (10) days notice in the case of any payment
default more than two (2) times during any twelve (12) month period.
(e) Rights and Remedies Cumulative. No right or remedy herein conferred
upon or reserved to Landlord is intended to be exclusive of any other right or
remedy provided herein or by law, but each shall be cumulative and in addition
to every other right or remedy given herein or now or hereafter existing at law
or in equity or by statute.
27. Condition of Title and of Premises.
(a) Landlord represents and warrants that it has good and marketable title
to the Premises, subject only to such exceptions as are set forth on Exhibit "K"
attached hereto (the "Permitted Encumbrances"). Tenant agrees to accept the
Premises subject to the title exceptions set forth in the title report. Landlord
covenants and agrees that the Building's HVAC systems and other building
systems, as set forth in the Plans and Specifications, shall be in good working
order upon the delivery of the Premises to Tenant. Except as otherwise provided
herein, Tenant represents that the Premises, the title thereto, and any surface
and sub-surface conditions thereof revealed in an environmental report delivered
to Tenant, have been examined by Tenant, and Tenant accepts them in the
condition or state in which they now are, or any of them now is, without relying
on any representation, covenant or warranty, express or implied, in fact or in
law, by Landlord and without recourse (except as expressly provided herein) to
Landlord, as to the title thereto, the encumbrances thereon, the appurtenances
thereto, the nature, condition or usability thereof or the use or uses to which
the Premises or any part thereof may be put, except as to work to be performed
by Landlord pursuant to Article 2 hereof. Tenant's occupancy of the Premises
shall constitute acceptance of the work performed by Landlord pursuant to
Article 2 hereof subject to "punch-list" items and the performance by Landlord
of its obligations contained herein.
(b) Notwithstanding the foregoing, Landlord agrees that, upon completion of
the Building, Landlord shall prepare and deliver to Tenant copies of all
warranties and guaranties relating to the construction thereof and all systems,
machinery and equipment contained therein. Landlord agrees to obtain the
warranties and guaranties set forth on Exhibit "H" attached hereto. To the
extent permitted by such warranties and guaranties, Landlord shall assign the
same to Tenant. To the extent not so permitted, Landlord shall forward to
Tenant the benefit of and right to enforce the same in Landlord's name.
Notwithstanding any previous assignment to Tenant, Landlord shall have the right
to enforce on its own behalf and with respect to its own obligations, any
warranty or guaranty relating to the Building and all systems, machinery, and
equipment contained therein.
In the event that (i) there shall be any defect(s) in workmanship,
materials, or design, with respect to any portion of Landlord's Work, (ii)
Tenant shall have attempted in good faith,
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for a period of at least three (3) months, to enforce the above described
warranties or guaranties that are applicable to the defect(s) in workmanship,
materials, or design, and (iii) the party originally providing the warranty or
guaranty shall refuse to honor or perform the warranty or guaranty, then
Landlord agrees that it shall, at its sole cost and expense and with all due
diligence, repair and correct, or cause to be repaired or corrected any
defect(s) in workmanship, materials, or design, with respect to any portion of
Landlord's Work, specified in a written notice or notices given by Tenant to
Landlord within the applicable period of such original warranty or guaranty.
Landlord shall have no obligation to Tenant under this paragraph after the
expiration of any such original warranty or guaranty.
(c) Tenant shall not suffer or permit the Premises or any portion thereof
to be used by the public without restriction or in such manner as might
reasonably tend to impair Landlord's title to the Premises or in such manner as
might reasonably make possible a claim or claims of adverse usage or adverse
possession by the public, as such, or of implied dedication of the Premises or
any portion thereof.
28. Interpretation.
(a) Captions. The captions in this lease are for convenience only and
are not a part of this lease and do not in any way define, limit, describe or
amplify the terms and provisions of this lease or the scope or intent thereof.
(b) Entire Agreement. This lease represents the entire agreement between
the parties hereto and there are no collateral or oral agreements or
understandings between Landlord and Tenant with respect to the Premises. No
rights, easements or licenses are acquired in the Premises or any land adjacent
to the Premises by Tenant by implication or otherwise except as expressly set
forth in the provisions of this lease. Tenant agrees to make such changes to
this lease as are required by any mortgagee, provided such changes do not
substantially affect Tenant's rights and obligations hereunder. This lease shall
not be modified in any manner except by an instrument in writing executed by the
parties. The masculine (or neuter) pronoun, singular number, shall include the
masculine, feminine and neuter genders and the singular and plural number.
(c) Exhibits. Each writing or plan referred to herein as being attached
hereto as an Exhibit or otherwise designated herein as an Exhibit hereto is
hereby made a part hereof.
(d) Covenants. The terms, covenants and obligations set forth herein all
constitute conditions and not covenants of this lease.
(e) Arbitration. Wherever arbitration is set forth herein as the
appropriate resolution of a dispute, issues shall be submitted for arbitration
to the American Arbitration Association in the city nearest to the Premises in
which offices of the American Arbitration Association are located. Landlord and
Tenant will comply with the rules then obtaining of the American Arbitration
Association and the determination of award rendered by the arbitrator(s) shall
be final, conclusive and binding upon the parties and not subject to appeal, and
judgment thereon may be entered in any court of competent jurisdiction.
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(f) Interest. Wherever interest is required to be paid hereunder, such
interest shall be at the highest rate permitted under law but not in excess of
the prime rate published in the Wall Street Journal plus four (4) percent
(4.00%).
(g) Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of South Carolina.
29. Definitions.
(a) "Landlord". The word "Landlord" is used herein to include the
Landlord named above as well as its heirs, successors and assigns, each of whom
shall have the same rights, remedies, powers, authorities and privileges as he
would have had had he originally signed this lease as Landlord. Any such person,
whether or not named herein, shall have no liability hereunder after he ceases
to hold title to the Premises except for obligations which may have arisen prior
to the date of transfer of title. Except for such warranties under Section 27(b)
of Landlord and claims by Tenant pertaining to any matter that would not have
come to Tenant's attention in connection with a commercially reasonable diligent
investigation of the Premises at the time of Tenant's delivery of the Acceptance
Certificate, Landlord shall not have any personal liability with respect to any
of the provisions of this Lease or the Premises. In no event shall any principal
of Landlord nor any owner of the Building or the Lot, whether disclosed or
undisclosed, have any personal liability with respect to any of the provisions
of this lease or the Premises. If Landlord is in breach or default with respect
to Landlord's obligations under this lease or otherwise, Tenant shall look
solely to the equity of Landlord in the Premises for the satisfaction of
Tenant's claims.
(b) "Tenant". The word "Tenant" is used herein to include the Tenant
named above as well as its successors and assigns, each of which shall be under
the same obligations, liabilities and disabilities and each of which shall have
the same rights, privileges and powers as it would have possessed had it
originally signed this lease as Tenant. Each and every of the persons named
above as Tenant shall be bound formally and severally by the terms, covenants
and agreements contained herein. However, no such rights, privileges or powers
shall inure to the benefit of any assignee of Tenant immediate or remote, unless
the assignment to such assignee is permitted or has been approved in writing by
Landlord. Any notice required or permitted by the terms of this lease may be
given by or to any one of the persons named above as Tenant, and shall have the
same force and effect as if given by or to all thereof.
(c) "Mortgage" and "Mortgagee". The word "mortgage" is used herein to
include any lien or encumbrance on the Premises or the Lot or on any part of or
interest in or appurtenance to the Premises, including without limitation any
ground rent or ground lease if Landlord's interest is or becomes a leasehold
estate. The word "mortgagee" is used herein to include the holder of any
mortgage, including any ground lessor if Landlord's interest is or becomes a
leasehold estate. Wherever any right is given to a mortgagee, that right may be
exercised on behalf of such mortgagee by any representative or servicing agent
of such mortgagee.
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(d) "Person". The word "person" is used herein to include a natural
person, a partnership, a corporation, an association, and any other form of
business association or entity.
(e) "Date of this Lease". The "date of this lease" shall be the date
upon which this lease has been fully executed by both parties.
(f) "Lot". The metes and bounds description of the Lot is set forth in
Exhibit "L" attached hereto.
30. Notices. All notices, demands, requests, consents, certificates and
waivers required or permitted hereunder from either party to the other shall be
in writing and sent by United States certified mail, return receipt requested,
postage prepaid. Notices to Tenant shall be addressed to: Amanda Bokman, Chief
Financial Officer, McNaughton Apparel Group Inc., 463 7th Avenue, New York, NY
10018, with a copy to: Adam Veltri, Esquire, Haythe & Curley, 237 Park Avenue,
20th Floor, New York, NY 10017, or, after the Commencement Date, to the
Premises. Notices to Landlord shall be addressed to David F. Haygood, Frank
Haygood Associates, Incorporated, P.O. Box 191, Charleston, SC 29402, with a
copy to Moore & Van Allen, PLLC, Attention: W. E. Applegate, III, Esquire, 40
Calhoun Street, Suite 300, Charleston, SC 29401, and to any mortgagee or other
party designated by Landlord. Either party may at any time, in the manner set
forth for giving notices to the other, specify a different address to which
notices to it shall be sent.
31. Security Deposit/Letter of Credit.
(a) In the event that the Landlord shall draw upon any letter of credit
held as security in connection with this Lease in accordance with the terms
hereof or if any letter of credit required hereunder shall be replaced, as
permitted by this Section 31, with a cash security deposit, Landlord shall hold
the funds so drawn or deposited as cash security for the faithful performance
and observance by Tenant of the covenants, agreements and conditions of this
lease. Notwithstanding anything to the contrary contained in any law or statute
now existing or hereafter passed (i) Tenant shall not be entitled to any
interest whatever on the cash security, (ii) Landlord shall not be obligated to
hold the cash security in trust or in a separate account, and (iii) Landlord
shall have the right to commingle the cash security with its other funds.
Landlord may use, apply or retain the whole or any part of the cash security to
the extent required for the payment of any minimum rent, any additional rent or
any other sums payable hereunder as to which Tenant is in default or to the
extent required for the reimbursement to Landlord of any sum which Landlord may
expend or may be required to expend by reason of Tenant's default in respect to
any of the covenants, agreements or conditions of this lease. If Tenant shall
fully and faithfully comply with all of the covenants, agreements and conditions
of this lease, the cash security shall be returned to Tenant after the
Expiration Date and surrender of the Premises to Landlord. If the Premises are
sold to a bona fide purchaser, Landlord shall have the right to transfer the
aforesaid cash security to such purchaser, by which transfer Landlord shall be
released from all liability, and Tenant shall look solely to the new landlord
for the return thereof. If Tenant terminates this Lease pursuant to any
termination right granted to Tenant herein, Landlord shall return to Tenant any
Letter of Credit then held by Landlord; provided, however, Landlord shall be
entitled to retain any portion of the Letter of Credit proceeds previously drawn
28
<PAGE>
upon by Landlord that Landlord, in the exercise of its reasonable discretion,
believes is necessary to remedy any existing or prior default by Tenant
hereunder.
(b) Tenant shall, upon the execution and delivery of this Lease, deliver a
transferable Standby Irrevocable Letter of Credit (together with any successor,
renewal or replacement thereof, the "Letter of Credit") to be posted initially
by Norton McNaughton of Squire, Inc. (or its successor in interest) and issued
by any of: (i) NationsBank, N. A. (or any successor banking institution); (ii)
Tenant's current lenders, namely, The CIT Group/Commercial Services, Inc.,
Nationsbanc Commercial Corporation and Fleet Bank, N.A.; or (iii) other lenders
expressly approved by Landlord, in the amount of One Million One Hundred Fifty
Five Thousand Dollars ($1,155,000.00), naming Landlord as beneficiary (the
Landlord, together with any successor landlord or other transferee of the Letter
of Credit, is referred to herein as the "Beneficiary"). The Letter of Credit
shall be issued on the date of this Lease and shall have an initial expiration
date no earlier than one (1) year from the date of this Lease. By its terms, the
Letter of Credit shall be payable upon presentation of a sight draft by the
Beneficiary, be transferable, permit partial draws, be renewable annually, and
otherwise be in form and substance satisfactory to the Landlord. Tenant shall
cause the Letter of Credit (as it may be reduced in amount in accordance with
the provisions of this Section 31) to be issued and renewed for the entire term
of this Lease. Tenant shall not be required to maintain or renew the Letter of
Credit where Tenant is permitted, by the express terms of this Section 31, to
replace the Letter of Credit with a cash security deposit and Tenant has in fact
replaced the Letter of Credit with a cash security deposit in accordance with
the terms hereof. Landlord shall have the right to absolutely assign the Letter
of Credit to any successor landlord and to collaterally assign the Letter of
Credit to any mortgagee. Landlord and Tenant agree that: (i) the original
landlord entity under this Lease will pay all letter of credit transfer fees
associated with the first assignment of this Lease to a successor landlord; and
(ii) in the event of any later assignment of this Lease, Landlord shall attempt
in good faith to cause the assignee of this Lease to pay all letter of credit
transfer fees associated with such an assignment and, in the event Landlord in
unable to cause such assignee to pay such transfer fees, such transfer fees
shall be split equally between Landlord and Tenant.
(c) The Landlord shall be permitted to draw upon the Letter of Credit upon
the occurrence of a default by Tenant under the terms and conditions of this
Lease and Tenant's failure to cure such default within the cure periods provided
for in this Lease, whether such default be monetary or non-monetary. In such
circumstances, Landlord shall be permitted to draw upon the Letter of Credit in
an amount sufficient, in the sole judgment of Landlord, to cure such default and
reimburse Landlord for all losses, damages, and expenses (including, without
limitation, reasonable attorney's fees) which are actually incurred and are
caused by such default. The amount of any drawing on the Letter of Credit shall
be consistent with the amount of damages and other remedies Landlord is entitled
to under the terms of this Lease. Nothing contained herein shall be deemed or
construed so as to limit or otherwise impair Tenant's right to challenge
Landlord's drawing under the Letter of Credit to the extent such drawing does
not represent a fair measure of damages or is otherwise inconsistent with this
Lease.
(d) Tenant shall be entitled to replace the original Letter of Credit
issued in favor of the Beneficiary in the amount of One Million One Hundred
Fifty Five Thousand Dollars ($1,155,000.00) with a replacement letter of credit
in the amount of Five Hundred Seventy Seven
29
<PAGE>
Thousand Five Hundred Dollars ($577,500.00) (the "First Reduced Letter of
Credit"), and the Beneficiary agrees to provide Tenant with all documents
necessary to facilitate such replacement, upon the satisfaction of the following
conditions (the "First Letter of Credit Reduction Conditions"), such
determination of the satisfaction of conditions to be made on a quarterly basis:
(i) Tenant shall have physically continuously occupied the Premises
and fully performed all of its obligations under this Lease, including,
without limitation, the payment of Minimum Annual Rent and all additional
rent required by the terms of this Lease, for a period of six (6)
consecutive calendar months;
(ii) at the time condition (i) is satisfied, none of the following
events or conditions shall exist with respect to the Tenant or Norton
McNaughton, Inc. (the "Parent") or any entity owned or controlled by Parent
or Tenant (an "Affiliate"): (A) the Tenant (or the Parent or an Affiliate)
has made a general assignment for the benefit of creditors or generally is
not paying, or is unable to pay, or admits in writing its inability to pay,
its debts as they become due; or (B) the Tenant (or the Parent or an
Affiliate) or any other party has commenced any proceeding (I) relating to
bankruptcy, insolvency, reorganization, conservatorship or relief of
debtors, in each instance with respect to the Tenant (or the Parent or an
Affiliate); (II) seeking to have an order for relief entered with respect
to the Tenant (or the Parent or an Affiliate); (III) seeking attachment,
distraint or execution of a judgment with respect to the Tenant (or the
Parent or an Affiliate); (IV) seeking to adjudicate the Tenant (or the
Parent or an Affiliate) as bankrupt or insolvent; (V) seeking
reorganization, arrangement, adjustment, winding-up, liquidation,
dissolution, composition or other relief with respect to the Tenant's (or
the Parent's or an Affiliate's) debts; or (VI) seeking appointment of a
receiver, trustee, custodian, conservator or other similar official for the
Tenant (or the Parent or an Affiliate) or for all or any substantial part
of the Tenant's (or the Parent's or an Affiliate's) assets; and
(iii) the Parent's unaudited quarterly financial statements shall
reflect net income of Four Million Dollars ($4,000,000.00) or greater in
the aggregate for the most recently ended four (4) consecutive fiscal
quarters.
(e) Tenant shall be entitled to replace the original Letter of Credit (or
the First Reduced Letter of Credit) with either (i) a replacement letter of
credit in the amount of One Hundred Twenty Three Thousand Two Hundred Dollars
($123,200.00) (the "Second Reduced Letter of Credit"), in which event the
Beneficiary agrees to provide Tenant with all documents necessary to facilitate
such replacement, or (ii) a cash security deposit in the amount of One Hundred
Twenty Three Thousand Two Hundred Dollars ($123,200.00), upon the satisfaction
of either of the following conditions (the "Second Reduced Letter of Credit
Conditions"), it being agreed that the determination of the satisfaction of the
Second Reduced Letter of Credit Conditions will be made annually at each lease
anniversary date:
(A) Parent's credit rating published by Standard & Poor's or Moody's
Investor's Services shall become "investment grade", it being agreed that
the current definition of
30
<PAGE>
"investment grade" shall mean a credit rating published by Standard &
Poor's or Moody's Investor's Services of BBB- or A-, respectively, or
better; or
(B) both: (i) all First Letter of Credit Reduction Conditions (as
defined above) shall have been satisfied; and (ii) the Parent's unaudited
quarterly financial statements shall reflect a maximum debt to net worth
ratio of 2.0 to 1.0 for each of the most recently ended four (4)
consecutive fiscal quarters.
In the event that Tenant shall be obligated to renew the Letter of Credit
(or any successor letter of credit) and shall fail to renew the Letter of Credit
(or any successor letter of credit) prior to the date that is thirty (30) days
prior to the expiration of the Letter of Credit (or any successor letter of
credit), the Beneficiary shall be entitled to draw upon the entire amount of the
Letter of Credit and hold such funds as additional security for the performance
of Tenant's obligations under this Lease in accordance with this Section 31.
31
<PAGE>
IN WITNESS WHEREOF, and in consideration of the mutual entry into this
lease and for other good and valuable consideration, and intending to be legally
bound, each party hereto has caused this agreement to be duly executed under
seal.
Landlord:
NORTH POINT PARK, LLC
By: /s/ David F. Haygood
--------------------
Name: David F. Haygood
Title: Member
Tenant:
------
MCNAUGHTON APPAREL HOLDINGS INC.
By: /s/ Amanda Bokman
-----------------
Name: Amanda Bokman
Title: VP, CFO, Secretary &
Treasurer
Corporate Resolution and Authorization of Agency
It is hereby certified that a meeting of a quorum of the directors of
the corporation which is the Tenant herein was held on May 14, 1999, and that it
was resolved to enter into this lease and further that the officers of the
corporation, and ______________________ as agent of the corporation, have been
authorized, empowered and directed in the corporate name and with the corporate
seal to execute and deliver any or all documents and to pay all fees and charges
necessary to carry out the entry into and compliance with this lease.
/s/ Amanda Bokman
Secretary
32
<PAGE>
Exhibit "A"
Graphical Depiction of Lot
(see attached depiction of Tract A-2)
<PAGE>
Exhibit "B"
Plans
(see attached)
<PAGE>
Exhibit "C"
Specifications
(see attached)
<PAGE>
Exhibit "D"
Description of Tenant's Work
(see attached)
<PAGE>
Exhibit "E"
Construction Lender Form of Nondisturbance, Attornment
and Subordination Agreement
(see attached)
<PAGE>
Exhibit "F"
Form of Memorandum of Lease
Drawn by and mail to:
Moore & Van Allen, PLLC
Attention: Christopher T. Cunniffe
40 Calhoun Street, Suite 300
Charleston, SC 29401
MEMORANDUM OF LEASE
NORTH POINT PARK, LLC, a South Carolina limited liability company
("Landlord"), whose address is c/o Frank Haygood Associates, 342 East Bay
Street, Charleston, SC 29401, hereby acknowledges the existence of a lease to
MCNAUGHTON APPAREL HOLDINGS INC., a Delaware corporation, ("Tenant"), whose
principal address is: 463 7th Avenue, New York, NY 10018, for a term beginning
_____________, 19___ and ending not later than ______________, ____ including
extensions and renewals, if any, of the property described on Exhibit A attached
hereto and made a part hereof, located in the City of Hanahan, County of
Berkeley, South Carolina.
The provisions set forth in a written Agreement of Lease, dated as of March
__, 1999, by and between Landlord and Tenant are hereby incorporated in this
Memorandum.
TENANT:
MCNAUGTON GROUP HOLDINGS INC.
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
LANDLORD:
--------
NORTH POINT PARK, LLC
By:
-------------------------------
Name: David F. Haygood
Title: Member
<PAGE>
STATE OF SOUTH CAROLINA
COUNTY OF _________________
The foregoing instrument was acknowledged before me this ___ day of
______________, 1999 by _______________, the _________________ of __________.
------------------------
Notary Public
[SEAL]
My commission expires:
STATE OF SOUTH CAROLINA
COUNTY OF _________________
The foregoing instrument was acknowledged before me this ___ day of
______________, 1999 by David F. Haygood, a Member of North Point Park, LLC.
------------------------
Notary Public
[SEAL]
My commission expires:
<PAGE>
Exhibit A to Memorandum of Lease
Description of Property
-----------------------
<PAGE>
Exhibit "G"
Form of Tenant Estoppel Certificate
TENANT ESTOPPEL CERTIFICATE
---------------------------
Please refer to the documents described in Exhibit A hereto (the "Lease
Documents") including the "Lease" therein described. The undersigned (the
"Tenant"), hereby certifies that it is the lessee under the Lease. Tenant hereby
further acknowledges that it has been advised that the Lease may be assigned to
a purchaser of, and/or collaterally assigned in connection with a proposed
financing secured by, the property on which the demised premises under the Lease
are located, and certifies both to the landlord under the lease (the "Landlord")
and to any and all prospective purchasers (the "Purchasers") and mortgagees of
such property, including any trustee on behalf of any holders of notes or other
similar instruments, and any holders from time to time of such notes or other
instruments, and their respective successors and assigns (collectively the
"Mortgagees") that as of the date hereof:
1. The information set forth in Exhibit A hereto is true and correct;
2. Tenant is in occupancy of the demised premises and the Lease is in
full force and effect and except by such writings as are identified on Exhibit A
hereto, has not been modified, assigned, supplemented or amended since its
original execution, nor are there any other agreements between Landlord and
Tenant concerning the space rented under the Lease, whether oral or written;
3. All conditions and agreements under the Lease to be satisfied or
performed by Landlord have been satisfied and performed including but not
limited to Substantial Completion of the demised premises in accordance with the
plans and specifications approved by Tenant;
4. Tenant is not in default under the Lease Documents, Tenant has not
received any notice of default under the Lease Documents, and, to Tenant's
knowledge, there are no events which have occurred that with the giving of
notice or the passage of time or both, would result in a default by Tenant under
the Lease Documents;
5. Tenant has not paid any rents or sums due under the Lease more than 30
days in advance of the date due under the Lease and Tenant has no rights of
setoff, counterclaim, concession or other rights of diminution of any rent or
sums due and payable under the Lease except as set forth in Exhibit A hereto;
6. To Tenant's knowledge, there are no uncured defaults on the part of
the Landlord under the Lease Documents, Tenant has not sent any notice of
default under the Lease Documents to the Landlord, and, to Tenant's knowledge,
there are no events which have occurred that, with the giving of notice or the
passage of time or both, would result in a default
<PAGE>
by Landlord thereunder, and at the present time Tenant has no claim against
Landlord under the Lease Documents;
7. Except as expressly set forth in the Lease, there are no provisions
for, and Tenant has no rights with respect to, renewal or extension of the
initial term of the Lease; terminating the term, leasing or occupying additional
space or purchasing the premises;
8. If Tenant has the right to obtain leasehold financing, then Tenant
represents that it has no right to obtain fee subordination or otherwise to
encumber the estate of the Landlord in the demised premises;
9. Tenant is in compliance with the covenants set forth in the Lease
Documents obligating Tenant to comply with all applicable law;
10. Tenant is in compliance with all insurance requirements set forth in
the Lease Documents. Tenant covenants and agrees that after receipt of notice of
the sale of the Property it will promptly cause a new Certificate of Insurance
to be issued naming the new landlord and its managing agent as additional
insureds.
11. Except as set forth on Part M of Exhibit A, no action, voluntary or
involuntary, is pending against Tenant under federal of state bankruptcy or
insolvency laws;
12. Tenant covenants and agrees promptly to notify Landlord in writing if
any certification by Tenant contained herein shall be or become untrue in any
material respect at any time prior to __________________________;
13. The undersigned has the authority to execute and deliver this
Certificate on behalf of the Tenant and acknowledges that all Purchasers will
rely on this estoppel certificate in purchasing the property and all Mortgagees
will rely upon this estoppel certificate in extending credit to Landlord or
Landlord's successors in interest; and
14. This Tenant Estoppel Certificate shall be binding upon the successors,
assigns and representatives of the undersigned and any party claiming through or
under the undersigned and shall inure to the benefit of all Purchasers and
Mortgagees.
<PAGE>
IN WITNESS WHEREOF, Tenant has duly executed this Certificate this ______
day of __________, 199__.
[ ]
By:
---------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
<PAGE>
Exhibit "H"
Construction Lender Form of Pre-construction Estoppel
(see attached)
<PAGE>
Exhibit "I"
Construction Lender Form of Post-construction Estoppel
(see attached)
<PAGE>
Exhibit "J"
List of Warranties
(see attached)
<PAGE>
Exhibit "K"
Permitted Encumbrances
1. Declaration of Restrictive Covenants filed November 10, 1998 in Book 1479 at
page 0227 in the RMC Office for Berkeley County.
2. Survey prepared by Trico Engineering Consultants, Inc. dated April 7, 1999
shows the following:
a. Wetlands and Wetlands Buffer
3. Easement for stormwater drainage and retention to be granted by Landlord and
to be located along the easterly line of the property that connects the main
portion of the property with the stormwater retention pond; provided, however,
that such easement shall not impair Tenant's use or operation of the property.
4. Restrictive covenants to be adopted by Landlord restricting the use of the
property provided that such restrictions shall permit the use of the property as
a warehouse and distribution facility and provided that Tenant shall have the
right to approve such restrictive covenants, such approval not to be
unreasonably withheld and such approval to be deemed given if Tenant fails to
respond to a request for approval within ten (10) business days.
<PAGE>
Exhibit "L"
Legal Description of Lot
<PAGE>
Exhibit 10.1a
FIRST AMENDMENT TO AGREEMENT OF LEASE
THIS FIRST AMENDMENT TO AGREEMENT OF LEASE, dated as of May 27, 1999, by
and between NORTH POINT PARK, LLC, organized and existing under the laws of the
State of South Carolina (together with its heirs, successors and permitted
assigns, the "Landlord") and McNAUGHTON APPAREL HOLDINGS INC., organized and
existing under the laws of the State of South Carolina (together with its heirs,
successors and permitted assigns the "Tenant")
WITNESSETH:
WHEREAS, Landlord and Tenant entered into that certain Agreement of Lease
dated as of May 14, 1999 for the rental of the Premises described therein upon
the terms and conditions set forth therein; and
WHEREAS, Landlord and Tenant desire to amend the Agreement as provided in
this Amendment.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of
which is hereby acknowledged along with the mutual covenants and agreement
contained herein, the parties covenant and agree as follows:
1. Incorporation of Recitals. The parties acknowledge that the foregoing
-------------------------
recitals are true and correct and are incorporated into this Agreement as if
fully set forth herein.
2. Amendment to Paragraph 23 (a) of the Lease. Landlord and Tenant agree
------------------------------------------
that the following language shall be added at the end of Paragraph 23 (a) of the
Lease:
Tenant agrees to execute, acknowledge and deliver to Landlord all necessary
documentation promptly upon any expiration or termination of the Lease to
cancel the memorandum of lease on the public records of Berkeley County.
If Tenant fails to do so within five (5) business days of the expiration or
termination of the Lease, Tenant hereby appoints Landlord as its attorney -
in-fact to execute, acknowledge and deliver the cancellation for recording,
such appointment being coupled with an interest and irrevocable.
3. Amendment to Exhibit "F" of the Lease. Landlord and Tenant agree that
--------------------------------------
the form of Exhibit "F" attached hereto shall be substituted for Exhibit "F"
attached to the Lease.
<PAGE>
4. Amendment to Paragraph 31 (d) of the Lease. Landlord and Tenant
-------------------------------------------
agree that Paragraph 31 (d) (ii) shall be amended by substituting "McNaughton
Apparel Group, Inc. " for "Norton McNaughton, Inc" in the second line.
5. Governing Law. The terms of this Agreement shall be construed in
-------------
accordance with and governed by the laws of the State of South Carolina.
6. Counterparts. This Agreement may be executed in one or more
------------
counterparts, all of which taken together shall constitute one Agreement.
ALL other terms and conditions of the Lease shall remain in full force and
effect except as expressly modified herein.
IN WITNESS WHEREOF, intending to be legally bound, the parties have caused
this Amendment to be duly executed as of the day and year first written above
Landlord:
---------
NORTH POINT PARK, LLC
By: /s/ David F. Haygood
--------------------
Name: David F. Haygood
Title: Member
Tenant:
------
MCNAUGHTON APPAREL HOLDINGS INC.
By: /s/ Amanda Bokman
-----------------
Name: Amanda Bokman
Title: VP, CFO, Secretary &
Treasurer
<PAGE>
Exhibit "F"
Form of Memorandum of Lease
Drawn by and mail to:
Moore & Van Allen, PLLC
Attention: Christopher T. Cunniffe
40 Calhoun Street, Suite 300
Charleston, SC 29401
MEMORANDUM OF LEASE
NORTH POINT PARK, LLC, a South Carolina limited liability company
("landlord"), whose address is c/o Frank Haygood Associates, 342 East Bay
Street, Charleston, SC 29401, hereby acknowledges the existence of a lease to
MCNAUGHTON APPAREL HOLDINGS INC., a Delaware corporation, ("Tenant'), whose
principal address is 463 7th Avenue, New York, NY 10018, for a term beginning
______________, 19__ and ending ______________, of the property described on
Exhibit A attached hereto and made a part hereof, located in the City of
- ----------
Hanahan, County of Berkeley, South Carolina.
The provisions set forth in a written Agreement of Lease, dated as of May
14, 1999, by and between Landlord and Tenant are hereby incorporated in this
Memorandum.
Landlord:
---------
NORTH POINT PARK, LLC
By:
--------------------
Name: David F. Haygood
Title: Member
Tenant:
------
MCNAUGHTON APPAREL HOLDINGS INC.
By:
--------------------
Name: Amanda Bokman
Title: VP, CFO, Secretary &
Treasurer
<PAGE>
STATE OF SOUTH CAROLINA )
) GUARANTY
COUNTY OF CHARLESTON )
THIS GUARANTY is made this 14th day of May, 1999, by McNAUGHTON APPAREL
GROUP INC., a Delaware corporation (the "Guarantor") having an address at 463
7th Avenue, New York, NY 10018, in favor of NORTH POINT PARK, LLC, a South
Carolina limited liability company ("Landlord"), having an address c/o Frank
Haygood Associates Incorporated, Post Office Box 191, Charleston, South Carolina
29402.
BACKGROUND:
A. Landlord has or is about to enter into a certain lease with
McNaughton Apparel Holdings Inc. ("Tenant") dated the date hereof (the "Lease")
for Landlord's building located on a road to be constructed and dedicated to
access North Rhett Avenue in the City of Hanahan, South Carolina (the
"Premises").
B. Guarantor is the legal and beneficial owner of one hundred percent
(100%) of the stock of Tenant and therefore benefits directly from the Lease.
C. Landlord has agreed to grant, execute and deliver the Lease to Tenant
in consideration, among other things, of the covenants and obligations made and
assumed by Guarantor as herein set forth.
AGREEMENT:
In order to induce Landlord to execute the Lease and in further
consideration of the sum of Ten Dollars ($10.00) and other good and valuable
consideration paid by Landlord to Guarantor, intending to be legally bound
hereby, Guarantor irrevocably and unconditionally agrees as follows:
1. Guarantor hereby guarantees, without the necessity of prior notice, the
full and prompt payment of all rent and additional rent and any and all other
payables by Tenant under the Lease, and the due and punctual performance of all
of Tenant's other obligations thereunder.
2. Guarantor hereby guarantees, without the necessity of prior notice, the
due and punctual payment in full of any and all loss, damages or expenses
incurred by Landlord and arising out of any default by Tenant in performing any
of its obligations under the Lease (after expiration of any notice or grace
periods provided for in the Lease), including but not limited to, all reasonable
attorneys' fees which Landlord incurs as the result of the default of Tenant or
the enforcement of this Guaranty (in each case, only to the extent recoverable
by Landlord under the Lease).
3. Landlord may, in its sole discretion, without notice to Guarantor and
without in any way affecting or terminating any of Guarantor's obligations and
liabilities hereunder, from time to time, (a) waive compliance with the terms of
the Lease or any default thereunder; (b) modify or supplement any of the
provisions of the Lease; (c) grant any extension or renewal of the terms of the
Lease; (d) effect any release, compromise or settlement in connection therewith;
(e) assign or otherwise transfer any or all of Landlord's interest in the Lease;
or (f) accept or discharge any other person as a guarantor of any or all of
Tenant's obligations under the provisions of the Lease. Notwithstanding the
foregoing, Guarantor shall be entitled to assert any defense that Tenant is
entitled to assert against Landlord arising from the failure of Landlord to
perform any of its obligations under the Lease; provided, however, that in no
event shall Guarantor be entitled to assert any defense arising from the
bankruptcy, insolvency or other inability of the Tenant to perform its
obligations under the Lease.
4. Guarantor's obligations hereunder (a) shall be unconditional
irrespective of the enforceability of the Lease or any other circumstance which
might otherwise constitute a discharge of a guarantor or Tenant at law or in
equity; (b) shall be primary; (c) shall not be conditioned upon Landlord's
pursuit of any remedy which it has
1
<PAGE>
against Tenant or any other person; and (d) shall survive and shall not be
diminished, impaired or delayed in connection with (i) any bankruptcy,
insolvency, reorganization, liquidation or proceeding relating to Tenant, its
properties or creditors or (ii) any transfer, assignment or termination of
Tenant's interest under the Lease.
5. Guarantor agrees to deliver for the benefit of Landlord or any
purchaser or mortgagee designated by Landlord an estoppel certificate similar in
form to that required to be delivered by Tenant under the terms and conditions
of the Lease including, without limitation, the Acceptance Certificate (as
defined in the Lease).
6. All rights and remedies of Landlord under this Guaranty, the Lease, or
by law are separate and cumulative, and the exercise of one shall not limit or
prejudice the exercise of any other such rights or remedies. Any waivers or
consents by Guarantor as set forth in this Guaranty shall not be deemed
excessive of any additional waivers or consents by Guarantor which may exist in
law or equity.
7. Guarantor hereby waives trial by jury in any action brought by Landlord
under or by virtue of this Guaranty. This covenant is made by Guarantor as a
further inducement to Landlord to enter into the Lease.
8. Guarantor agrees to deliver to Landlord a written instrument, duly
executed and acknowledged, certifying that this Guaranty is in full force and
effect, Guarantor has not received written notice that Landlord is not in
default in the performance of any of its obligations under the Lease and, to
Guarantor's actual knowledge, stating any other fact or certifying any other
condition reasonably requested by Landlord or its assignees or by any mortgagee
or prospective mortgagee or their assignees or by any purchaser of the property
which is the subject of the Lease or any interest in such property including,
but not limited to, stating that it is understood that such written instrument
may be relied upon by any of the foregoing parties. The foregoing instrument
shall be furnished within ten (10) days after receipt of Landlord's written
request which may be made at any time and from time to time and shall be
addressed to Landlord and any mortgagee, prospective mortgagee, purchaser or
other party specified by Landlord.
9. Guarantor, at any time and from time to time after Landlord's written
request, agrees to promptly furnish reasonable financial information to
Landlord's mortgagee, prospective mortgagee, assignee or purchaser.
10. In the event Guarantor pays any sum to or for the benefit of Landlord
pursuant to this Guaranty, for so long as the Lease is in effect, and until the
Lease is terminated and all amounts due thereunder to Landlord have been paid
and satisfied in full, and a period of one year has expired following the date
of the last payment to Landlord thereunder, Guarantor hereby agrees that any and
all right of contribution, indemnification, exoneration, reimbursement,
subrogation or other right or remedy against or with respect to Tenant, any
other guarantor, or any collateral, whether real, personal, or mixed, securing
the obligations of Tenant to Landlord, which Guarantor may now or hereafter
have, shall be under, subject and subordinate, both in lien and payment, to the
obligations of Tenant to Landlord, and Guarantor hereby agrees that if it
asserts or receives any payment or property from tenant pursuant to such claims
or rights of contribution, indemnification, exoneration, reimbursement,
subrogation or otherwise, it shall hold the same in trust for and pay over and
deliver the same to Landlord upon any default by Tenant under the Lease.
11. If Guarantor advances any sums to Tenant or its successors or assigns
or if Tenant or its successors or assigns shall hereafter become indebted to
Guarantor, such sums and indebtedness shall be subordinate in all respects to
the amounts then or thereafter due and owing to Landlord by Tenant.
12. This Guaranty shall be binding upon Guarantor, and Guarantor's
successors and assigns, and shall inure to the benefit of Landlord and its
successors and assigns. Without limiting the generality of the preceding
sentence, Guarantor specifically agrees that this Guaranty may be (a) freely
assigned by Landlord and (b) enforced by Landlord's mortgagee.
13. The liability of the Guarantor hereunder, if more than one, shall be
joint and several. For purposes of this instrument the singular shall be deemed
to include the plural, and the neuter shall be deemed to include the masculine
and feminine, as the context may require.
2
<PAGE>
14. If any provision of this Guaranty is held to be invalid or
unenforceable by a court of competent jurisdiction, the other provisions of this
Guaranty shall remain in full force and effect and shall be liberally construed
in favor of Landlord in order to effect the provisions of this Guaranty.
15. Guarantor agrees that this Guaranty shall be governed by and construed
according to the laws of the State of South Carolina and that Guarantor is
subject to the jurisdiction of the Court or the County or relevant political
subdivision in which the Premises are located.
3
<PAGE>
IN WITNESS WHEREOF, Guarantor has caused this Guaranty to be duly executed,
under seal as of the day and year first above written.
GUARANTOR
ATTEST: ---------
MCNAUGHTON APPAREL GROUP INC.
____________________________ By: /s/ Amanda Bokman
------------------------------------
Name: Amanda Bokman
____________________________ Title: VP, CFO, Secretary & Treasurer
4
<PAGE>
Exhibit 10.3
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
--------------------
AMENDED AND RESTATED EMPLOYMENT AGREEMENT dated as of the 7th day of
June, 1999, by and between NORTON MCNAUGHTON OF SQUIRE, INC., a New York
corporation (the "Company"), and SANFORD GREENBERG (the "Employee").
W I T N E S W E T H:
- - - - - - - - - - -
WHEREAS, the Company and the Employee are parties to the Amended and
Restated Employment Agreement dated as of November 4, 1995 (the "1995
Agreement") and desire to amend and restate the 1995 Agreement in its
entirety as set forth herein; and
WHEREAS, the Employee and the Company are parties to the Agreement
dated as of November 16, 1998 (the "1998 Agreement") and desire to amend
and restate the 1998 Agreement in its entirety as set forth herein.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements hereinafter set forth, the parties hereto hereby agree as
follows:
1. Employment, Term.
----------------
1.1 The Company agrees to employ the Employee, and the Employee
agrees to serve in the employ of the Company, for the term set forth in
Section 1.2, in the position and with the responsibilities, duties and
authority set forth in Section 2 and on the other terms and conditions set
forth in this Agreement.
1.2 Unless sooner terminated in accordance with this Agreement, the
term of the Employee's employment under this Agreement (the "Term") shall
commence on the date hereof and shall terminate on November 2, 2001,
provided that (i) the Term automatically shall be extended until November
3, 2002 in the event that, after the date hereof and on or before November
2, 2001, the Employee shall not have sold 195,000 (as such number shall be
adjusted to reflect stock dividends, stock splits or similar events) or
more shares of common stock, par value $0.01 (the "Common Stock"), of
McNaughton Apparel Group Inc., a Delaware corporation (the "Parent') (a
"Sale") and (ii) the Term may be extended until November 3, 2002 by the
Company upon written notice to that effect to the Employee given, if at
all, at least 90 days prior to November 2, 2001.
2. Position, Duties. The Employee shall serve in the position of
----------------
Chairman of the Board of the Company in the New York City metropolitan
area. The Employee shall perform, faithfully and diligently, such duties,
and shall have such responsibilities, appropriate to said position, as
shall be assigned to him from time to time by the Board of Directors of the
Company. The Employee shall report to the Board of Directors of the
Company. During the Term, the Employee also agrees to serve in the New
York City metropolitan area, if elected, as an officer and/or director of
any parent, subsidiary or affiliate of the Company. The Employee shall
devote his complete and undivided attention to the performance of his
duties and responsibilities hereunder during the normal working hours of
executive employees of the Company.
3. Compensation.
------------
3.1 Salary. During the Term, in consideration of the performance by
------
the Employee of the services set forth in Section 2 and his observance of
the other covenants set forth herein, the Company shall pay the Employee,
and the Employee shall accept, a base salary at a rate of $754,000 per
annum, payable in accordance with the standard payroll practices of the
Company.
<PAGE>
3.2 Bonus. During the Term, in addition to the salary provided for
-----
in Section 3.1, the Employee shall be eligible to participate in any bonus
plan for executives of the Company in effect during the Term.
4. Expense Reimbursement. During the Term of this Agreement, the
---------------------
Company shall reimburse the Employee for all reasonable and necessary out-
of-pocket expenses incurred by him in connection with the performance of
his duties hereunder, upon the presentation of proper accounts therefor in
accordance with the Company's policies (in any case, as such policies are
adopted from time to time by the Compensation Committee of the Board of
Directors).
5. Benefits.
--------
5.1 Benefit Plans. During the Term of this Agreement, the Employee
-------------
will be eligible to participate in all employee benefit plans and programs
offered by the Company (and, to the extent required by applicable law or
this Agreement, approved by the Compensation Committee of the Board of
Directors) from time to time to its employees of comparable seniority,
subject to the provisions of such plans and programs as in effect from time
to time.
5.2 Vacation. During the Term, the Employee shall be entitled to
--------
paid vacation in accordance with Company policy for its executive
employees.
5.3 Life Insurance. During the Term, subject to the continued
--------------
availability on commercially reasonable terms, the Company will provide the
Employee with $2 million term life insurance coverage. The beneficiary of
such policy shall be the Employee's estate or other beneficiary designated
by the Employee
5.4 Disability. During the Term, subject to its continued
----------
availability on commercially reasonable terms, the Company shall provide
the Employee with disability insurance providing the same monthly
disability benefit as in effect for the Employee immediately prior to the
date hereof. The Company's obligations under Section 6.2 of this Agreement
shall be subject to appropriate reduction for amounts paid to the Employee
under disability insurance during the Disability Salary Continuation Period
(as hereinafter defined), taking into account the tax treatment of such
disability insurance payments.
6. Termination of Employment.
-------------------------
6.1 Death. In the event of the death of the Employee during the
-----
Term, the Company shall pay to the estate or other legal representative of
the Employee the salary provided for in Section 3.1 accrued to the date of
the Employee's death and not theretofore paid to the Employee. Rights and
benefits of the estate or other legal representative of the Employee under
the benefit plans and programs of the Company shall be determined in
accordance with the provisions of such plans and programs. Neither the
estate or other legal representative of the Employee nor the Company shall
have any further rights or obligations under this Agreement, except as
provided in Section 7 hereof.
6.2 Disability. If during the Term the Employee shall become
----------
incapacitated by reason of physical or mental disability and shall be
unable to perform his normal duties hereunder for a cumulative period of
six (6) months in any period of twelve (12) consecutive months, the
employment of the Employee hereunder may be terminated by the Company or
the Employee upon notice to the other. In the event of such termination,
subject to Section 5.4 of this Agreement, the Company shall pay to the
Employee the salary provided for in Section 3.1 for the remainder of the
Term (the period of time during which the Company shall be required to
continue to pay such salary, the "Disability Salary Continuation Period").
Rights and benefits of the Employee under the benefit plans and programs of
the Company shall be determined in accordance with the provisions of such
plans and programs. Neither the Employee nor the Company shall have any
further rights or obligations under this Agreement, except as provided in
Sections 7, 8, 9, 10 and 11 hereof.
2
<PAGE>
6.3 Due Cause. The employment of the Employee hereunder may be
---------
terminated by the Company at any time during the Term for Due Cause (as
hereinafter defined). In the event of such termination, the Company shall
pay to the Employee the salary provided for in Section 3.1 accrued to the
date of such termination and not theretofore paid to the Employee. Rights
and benefits of the Employee under the benefit plans and programs of the
Company shall be determined in accordance with the provisions of such plans
and programs. After the satisfaction of any claim of the Company against
the Employee incidental to such Due Cause, neither the Employee nor the
Company shall have any further rights or obligations under this Agreement,
except as provided in Sections 8, 9, 10 and 11 hereof. For purposes of
this Agreement, "Due Cause" shall mean (a) the Employee's gross neglect or
willful misconduct in the discharge of his duties and responsibilities to
any member of the Company Group (as defined in Section 10 below), as
determined by the Board of Directors of the Company (other than the
Employee if he is a member of such Board at the time), (b) the Employee's
material failure to obey appropriate directions from the Board of Directors
of the Company, (c) any act of the Employee against any member of the
Company Group intended to enrich him in derogation of his duties to such
member and at the expense of such member, (d) any willful or purposeful act
(or any act or omission taken in bad faith) of the Employee having the
effect of materially injuring the business or business relationships of any
member of the Company Group, (e) the Employee's commission of (1) a felony
or (2) any crime or offense involving moral turpitude, fraud or
misrepresentation, (f) the Employee's willful and material breach of this
Agreement, (g) the Employee's breach of his duty of loyalty to the members
of the Company Group or (h) the entry of a plea of nolo contendre by the
Employee to a felony; provided, however, that the Employee shall be given
written notice by a majority of the Board of Directors of the Company that
it intends to terminate the Employee's employment for Due Cause under this
Section, which written notice shall specify the act or acts upon the basis
of which the majority of the Board of Directors of the Company intends so
to terminate the Employee's employment, and the Employee shall then be
given the opportunity, within fifteen (15) days of his receipt of such
notice, to have a meeting with the Board of Directors of the Company to
discuss such act or acts.
6.4 Other Termination by the Company. The Company may terminate the
--------------------------------
Employee's employment at any time during the Term for whatever reason it
deems appropriate or without reason; provided, however, that in the event
that such termination is not pursuant to Section 6.1, 6.2 or 6.3 the
Company shall continue to pay to the Employee the salary provided for in
Section 3.1 until the first to occur of (i) the expiration of the Term of
this Agreement in effect immediately prior to such termination or (ii) the
death of the Employee, (the period of time during which the Company shall
be required to continue to pay such salary, the "Salary Continuation
Period"). The Employee shall be under no obligation to seek subsequent
employment and upon obtaining subsequent employment shall be under no
obligation to offset any amounts earned from such subsequent employment
(whether as an employee, a consultant or otherwise) against such payment.
Rights and benefits of the Employee under the benefit plans and programs of
the Company shall be determined in accordance with the provisions of such
plans and programs. Neither the Employee nor the Company shall have any
further rights or obligations under this Agreement, except as provided in
Sections 7, 8, 9, 10 and 11 hereof.
7. Consulting Agreement.
--------------------
7.1 In the event that (1) (i) a Sale shall not have occurred, (ii)
the Employee shall remain in the employ of the Company on November 3, 2002
and (iii) on or prior to November 3, 2002 the Company shall have not
offered to the Employee to extend the Term for at least one year and
otherwise on the terms and conditions set forth herein, (2) (i) a Sale
shall have occurred, (ii) the Employee shall remain in the employ of the
Company on November 2, 2001 and (iii) on or prior to November 2, 2001 the
Company shall not have elected to extend the Term until November 3, 2002
pursuant to Section 1.2(ii) hereof, or (3) the Employee's employment
hereunder has been terminated pursuant to Sections 6.1 or 6.2 hereof or by
the Company pursuant to Section 6.4 hereof, in any case before the end of
the Term, then, subject to Section 7.9 hereof, the Company hereby agrees to
retain the Employee to provide consulting and advisory services on a
project-by-project basis to the Company (I) in the case of the
circumstances set forth in clause (1) above, during the period commencing
on November 4, 2002 and terminating on November 4, 2004, (II) in the case
of the circumstances set forth in clause (2) above, during the period
commencing on November 3, 2001 and terminating on November 3, 2003 or (III)
in the case of the circumstances set forth in clause (3)
3
<PAGE>
above, during the two-year period following the date of termination of
employment pursuant to Sections 6.1, 6.2 or 6.4 hereof (the applicable two-
year period contemplated by clauses (I), (II) or (III) hereof, the
"Consulting Term"). During the Consulting Term, the Employee shall provide
such consulting and advisory services to the Company as may be agreed to
between the Employee and the Board of Directors of the Company. Unless a
greater amount of time is agreed to by the Employee, the Employee shall
devote up to 15 hours per week to the mutually agreed upon consulting and
advisory services, if any, hereunder, provided that, to the extent
feasible, such services may be conducted telephonically outside of the
Company's offices and the Employee's performance of such duties and
responsibilities does not materially interfere with any obligations of the
Employee to provide services to any activity or business venture which is
not in violation of Section 10 hereof. Subject to Section 7.2 hereof,
during the Consulting Term, in consideration of the performance by the
Employee of services set forth herein, the Company shall pay the Employee,
and the Employee shall accept, a consulting fee (the "Fee") (payable on the
15th day of each month for the month in which the payment occurs) in an
amount per month equal to either (a) in the event that this Agreement is
not amended after the date hereof to adjust the salary set forth in Section
3.1 hereof, $75,000 or (b) in the event that this Agreement is amended by
the Company and the Employee after the date hereof to adjust the salary,
the aggregate monthly consideration payable to the Employee by the Company
under Section 3.1 of this Agreement as so amended.
7.2 In the event of the death of the Employee during the Consulting
Term, the Company shall continue to pay the Fee to the estate or other
legal representative of the Employee in accordance with the terms hereof,
all notwithstanding the death of the Employee. Rights and benefits of the
estate or other legal representative of the Employee under the benefit
plans and programs of the Company, if applicable to the Employee, shall be
continued subject to the provisions of such plans and programs. Except as
aforesaid, in the event of the death of the Employee during the Consulting
Term, neither the estate or other legal representative of the Employee nor
the Company shall have any further rights or obligations under this
Agreement.
7.3 The Employee shall perform his duties and responsibilities during
the Consulting Term as an independent contractor. Nothing in this Section 7
shall be deemed to create a partnership, joint venture or employment
relationship between the Employee and the Company during the Consulting
Term or thereafter. Anything to the contrary herein notwithstanding, all
payments required to be made by the Company during the Consulting Term
shall be subject to Section 20 hereof.
7.4 Subject to Section 7.9 hereof, for the period commencing on the
termination of the Employee's employment under this Agreement (for reasons
other than Due Cause) until the death of the Employee, the Company agrees,
at its expense, to provide the Employee and the Employee's wife and his
children under age 20 or under age 24 if such children are full-time
students with coverage under the medical plans of the Company on the same
terms and conditions (including the same Company-paid portions) that
coverage is generally available to employees of the Company. In the event
that the Company is unable to provide the coverage set forth in the
preceding sentence during any month as a result of (a) a change of law or
regulation which restricts the provision of coverage for persons who are
not employees of the Company, (b) the failure by the Company's insurance
carrier or plan to provide coverage for persons who are not employees of
the Company or (c) a change in the cost of such coverage such that the cost
to the Company to provide such coverage for any monthly period exceeds the
amount set forth on Exhibit A hereto under the column labeled "Monthly
Premium", the Company shall not be obligated to provide such coverage under
its medical plans and shall reimburse the Employee for any premiums paid by
the Employee for comparable medical coverage. Such reimbursement shall not
exceed the amount set forth on Exhibit A hereto under the column labeled
"Monthly Premium" for any monthly period.
7.5 Notwithstanding Section 8 of the Split Dollar Agreement (the
"Split Dollar Agreement") dated as of March 8, 1994 by and among the
Company, the Employee and Jay Greenberg, as trustee of a trust established
under a trust agreement between Sanford Greenberg, as settlor, and Jay
Greenberg, as trustee, subject to Section 7.9 hereof and except in the
event that the Employee's employment under this Agreement is terminated for
Due Cause, until the death of the Employee, the Company agrees to continue
to pay premiums on the Policy (as defined in the Split Dollar Agreement)
until payment of the twentieth annual Policy premium, subject to the other
terms and provisions of the Split Dollar Agreement.
4
<PAGE>
7.6 As set forth in Section 5.3 hereof, the Company is currently
providing the Employee with the benefits of a $2 million term life
insurance policy. Subject to Section 7.9 hereof, and subject to the
continued availability of such coverage on commercially reasonable terms,
for the period commencing on the termination of the Employee's employment
under this Agreement (for reasons other than Due Cause) until the death of
the Employee, the Company agrees, at its expense, to continue to provide to
the Employee such life insurance benefits.
7.7 In the event that the Company agrees to forgive certain loans
made to each of Jay Greenberg, Howard Greenberg, Norton Sperling and Andrew
Miller pursuant to each of their respective Third Amended and Restated Non-
Negotiable Limited Recourse Promissory Notes dated March 27, 1995 and
payable to the Company, subject to Section 7.9 hereof and except in the
event that the Employee's employment under this Agreement is terminated for
Due Cause, the Company shall forgive the loan (the "Loan") made to the
Employee pursuant to his Third Amended and Restated Non-Negotiable Limited
Recourse Promissory Note dated March 27, 1995 (the "Note") and payable to
the Company.
7.8 Subject to Section 7.9 hereof, in the event that, at any time or
from time to time, except in the event that the Employee's employment under
this Agreement is terminated for Due Cause, Parent proposes to register any
shares of Common Stock, under the Securities Act of 1933 (the "Securities
Act") other than pursuant to a registration statement on Forms S-4 or S-8,
or any successor to such Forms, for the purpose of the sale or other
transfer of such shares of Common Stock by either Jay Greenberg or Norton
Sperling or both (the "Registration Shares"), the Parent shall deliver to
the Employee at least twenty (20) days prior to the filing of the
registration statement with respect to the Registration Shares, a written
notice (a "Registration Notice") of its intention so to register the
Registration Shares. In the event that a Registration Notice shall have
been so delivered, the Employee, at his election, may deliver to the Parent
a written notice (a "Response") (i) specifying the number of shares of
Common Stock (together with the Registration Shares, the "Supplemental
Registration Shares") proposed to be sold or otherwise transferred by the
Employee, (ii) describing the proposed manner of sale or other transfer
thereof and (iii) requesting the registration thereof under the Securities
Act; provided, however, that a Response shall be so delivered by the
Employee, if at all, not more than fifteen (15) days after the date of
delivery to the Employee of a Registration Notice. From and after receipt
of a Response, the Parent shall use its reasonable best efforts to cause
the Supplemental Registration Shares specified in such Response to be
registered under the Securities Act and to effect and to comply with all
such qualifications, compliances and requirements as may be necessary to
permit the sale or other transfer of such Supplemental Registration Shares,
in the manner described in such Response, without limitation,
qualifications under the applicable Blue Sky or other state securities laws
(provided that the Parent shall not be required in connection therewith to
qualify as a foreign corporation or to execute general consent to service
of process in any state); provided, however, that if (i) in the case of an
underwritten public offering of securities, the managing underwriter shall
advise the Parent in writing that the inclusion of some or all of such
Supplemental Registration Shares would, in such managing underwriter's
opinion, materially interfere with the proposed distribution of any
securities to be issued by the Parent in respect of which registration was
originally to be effected or would materially interfere with the proposed
distribution of all the Supplemental Registration Shares, then the Parent
may, upon written notice to the Employee, allocate the Supplemental
Registration Shares to be included in the registration statement (if and to
the extent such allocation is certified by the managing underwriter as
necessary to eliminate such interference) pro rata among the holders
thereof (including the Employee) on the basis of the number of shares of
Common Stock at the time owned by such holders or (ii) any firm of counsel
representing the Parent in connection with such registration shall advise
the Parent and the Employee in writing that in its opinion one or more of
the steps contemplated hereby is not necessary to permit the sale of the
Registration Shares in a transaction constituting a public offering within
the meaning of the Securities Act, then the Parent shall not be required to
take any action with respect to such step or steps.
7.9 (a) Notwithstanding anything to the contrary contained herein,
the agreements and obligations of the Company set forth in this Section 7
may be terminated at any time during the Consulting Term or thereafter for
Due Cause by notice from the Company to the Employee (the "Due Cause
Notice"). In the event of such termination, the Company shall pay to the
Employee the Fee, if any, accrued to the date of termination and not
theretofore paid to the Employee. Rights and benefits of the Employee under
5
<PAGE>
the benefit plans and programs of the Company, if applicable to the
Employee, shall be continued subject to the provisions of such plans and
programs. After satisfaction of any claim of the Company against the
Employee arising from such Due Cause, following the date of the Due Cause
Notice, neither the Employee nor the Company shall have any rights or
obligations under this Agreement, except as provided in Sections 8, 9, 10
and 11 hereof.
(b) Notwithstanding anything to the contrary contained herein,
the agreements and obligations of the Company set forth in this Section 7
may be suspended (but not terminated; any termination to be governed by
Section 7.9(a) hereof) at any time during the Consulting Term (during which
suspension the Fee otherwise payable shall accrue, but not past the end of
the Consulting Term) or thereafter for Good Reason (as defined below) by
notice to the Employee by the Company (the "Good Reason Notice"). In the
event of such suspension, the Company shall pay to the Employee the Fee, if
any, accrued to the date of the suspension and not theretofore paid to the
Employee. Rights and benefits to the Employee under the benefit plans and
programs of the Company, if applicable to the Employee, shall thereafter be
determined in accordance with the provisions of such plans and programs.
Following the date of the Good Reason Notice, neither the Employee nor the
Company shall have any rights or obligations under this Agreement until
such time as the Good Reason shall cease to exist, except as provided in
Sections 8, 9, 10 and 11 hereof, and nothing herein shall limit or
otherwise affect the Company's rights under Section 7.9(a) hereof.
Notwithstanding the foregoing, in the event that a Good Reason Notice shall
have been given as a result of an Investigation (as defined below) and
within 18 months from the date of such Good Reason Notice neither an
Indictment (as defined below) nor Due Cause shall exist, then any Fee which
shall have accrued during the suspension period pursuant to this Section
7.9(b) (but not past the end of the Consulting Term) shall be paid at the
end of such suspension period. For purposes hereof, "Good Reason" shall
mean the conduct by a Federal, state or local governmental agency, court or
other judicial body of a criminal investigation of the activities of the
Employee (an "Investigation") or the indictment of the Employee for a
felony ("Indictment").
8. Confidential Information.
------------------------
8.1 The Employee shall, during the Term and at all times thereafter,
treat as confidential and, except as required in the performance of his
duties and responsibilities under this Agreement, not disclose, publish or
otherwise make available to the public or to any individual, firm or
corporation any confidential material (as hereinafter defined). the
Employee agrees that all confidential material, together with all notes and
records of the Employee relating thereto, and all copies or facsimiles
thereof in the possession of the Employee, are the exclusive property of
the Company and the Employee agrees to return such material to the Company
promptly upon the termination of the Employee's employment with the
Company.
8.2 For the purposes hereof, the term "confidential material" shall
mean all information acquired by the Employee in the course of the
Employee's employment with the Company in any way concerning the products,
projects, activities, business or affairs of the Company or any member of
the Company Group or the customers of the Company or any member of the
Company Group, including, without limitation, all information concerning
trade secrets and the preparation of raw material for, manufacture of,
and/or finishing processes utilized in the production of, the products or
projects of the Company or any member of the Company Group and/or any
improvements therein, all sales and financial information concerning the
Company or any member of the Company Group, all customer and supplier
lists, all information concerning projects in research and development or
marketing plans for any such products or projects, and all information in
any way concerning the products, projects, activities, business or affairs
of customers of the Company or any member of the Company Group which is
furnished to the Employee by the Company or any member of the Company Group
or any of their respective employees (current or former), agents or
customers, as such; provided, however, that the term "confidential
material" shall not include information which (a) becomes generally
available to the public other than as a result of a disclosure by the
Employee, (b) was available to the Employee on a non-confidential basis
prior to his employment with the Company or (c) becomes available to the
Employee on a non-confidential basis from a source other than the Company
or any of its agents, franchisees, creditors, suppliers, lessors, lessees
or
6
<PAGE>
customers provided that such source is not bound by a confidentiality
agreement with the Company or any of such agents or customers.
9. Inventions. Any and all inventions, innovations or improvements
----------
("inventions") made, developed or created by the Employee (whether at the
request or suggestion of the Company or otherwise, whether alone or in
conjunction with others, and whether during regular hours of work or
otherwise) during the period of his employment with the Company which may
be directly or indirectly useful in, or relate to, the business of the
Company, shall be promptly and fully disclosed by the Employee to the Board
of Directors of the Company and shall be the Company's exclusive property
as against the Employee, and the Employee shall promptly deliver to an
appropriate representative of the Company as designated by the Board of
Directors all papers, drawings, models, data and other material relating to
any inventions made, developed or created by him as aforesaid. the
Employee shall, at the request of the Company and without any payment
therefor, execute any documents necessary or advisable in the opinion of
the Company's counsel to direct issuance of patents or copyrights to the
Company with respect to such inventions as are to be the Company's
exclusive property as against the Employee or to vest in the Company title
to such inventions as against the Employee. The expense of securing any
such patent or copyright shall be borne by the Company.
10. Non-Competition. the Employee acknowledges that the services to
---------------
be rendered by him to the Company are of a special and unique character.
In consideration of his employment hereunder, the Employee agrees, for the
benefit of the Company and members of the Company Group, that he will not,
during the period of employment with the Company and thereafter for the
Applicable Period (as hereinafter defined) commencing on the date of
termination of his employment with the Company, (a) engage, directly or
indirectly, whether as principal, agent, distributor, representative,
consultant, employee, partner, stockholder, limited partner or other
investor (other than an investment of not more than (i) one percent (1%) of
the stock or equity of any corporation the capital stock of which is
publicly traded or (ii) five percent (5%) of the ownership interest of any
limited partnership or other entity) or otherwise, anywhere in the United
States, in any activity or business venture which is in competition with
the business then conducted by the Company, any of its subsidiaries or any
of its corporate parents or affiliates (including, without limitation,
McNaughton Apparel Group Inc., Miss Erika, Inc. and Jerri-Jo Knitwear,
Inc., each a Delaware corporation, and McNaughton Apparel Holdings Inc., a
South Carolina corporation) (collectively, the "Company Group"), (b)
solicit or entice or endeavor to solicit or entice away from any member of
the Company Group any person who is (as the applicable time) an officer,
employee or consultant of any member of the Company Group, either for his
own account or for any individual, firm or corporation, whether or not such
person would commit any breach of his contract of employment by reason of
leaving the service of a member of the Company Group, and the Employee
agrees not to employ, directly or indirectly, any person who was an officer
or employee of any member of the Company Group or who by reason of such
position at any time is or may be likely to be in possession of any
confidential information or trade secrets relating to the businesses or
products of any member of the Company Group, or (c) solicit or entice or
endeavor to solicit or entice away from any member of the Company Group any
customer or prospective customer of any member of the Company Group, either
for his own account or for any individual, firm or corporation. As used
herein, the term "Applicable Period" shall mean (i) in the case of
termination of employment pursuant to Section 6.4 of this Agreement, the
Salary Continuation Period and (ii) in the case of any other termination of
employment with the Company hereunder or otherwise, three (3) years.
11. Equitable Relief, Etc.
---------------------
11.1 In the event of a breach or threatened breach by the Employee of
any of the provisions of Sections 8, 9, or 10 of this Agreement, the
Employee hereby consents and agrees that the Company shall be entitled to
an injunction or similar equitable relief from any court of competent
jurisdiction restraining the Employee from committing or continuing any
such breach or threatened breach or granting specific performance of any
act required to be performed by the Employee under any of such provisions,
without the necessity of showing any actual damage or that money damages
would not afford an adequate remedy and without the necessity of posting
any bond or other security. Nothing herein shall be construed as
7
<PAGE>
prohibiting the Company from pursuing any other remedies at law or in
equity which it may have with respect to any such breach or threatened
breach.
11.2 The Company and the Employee understand and agree that in any
lawsuit or other proceeding between any of them with respect to Sections 8,
9, or 10 hereof, the prevailing party in such lawsuit or proceeding shall
be entitled to recover from the other party in such lawsuit or proceeding,
and such other party hereby agrees to pay such prevailing party, for all
costs and expenses, including attorneys' fees, incurred by such prevailing
party in the defense, prosecution or investigation of the matters which are
the subject of such lawsuit or proceeding.
12. Successors and Assigns.
----------------------
12.1 Assignment by the Company. The Company shall require any
-------------------------
successors (whether direct or indirect, by purchase, merger, consolidation
or otherwise) to all or substantially all of the business and/or assets of
the Company to assume and agree to perform this Agreement in the same
manner and to the same extent that the Company would be required to perform
if no such succession had taken place. As used in this Section, the
"Company" shall mean the Company as hereinbefore defined and any successor
to its business and/or assets as aforesaid which otherwise becomes bound by
all the terms and provisions of this Agreement by operation of law and this
Agreement shall be binding upon, and inure to the benefit of, the Company,
as so defined.
12.2 Assignment by the Employee. The Employee may not assign this
--------------------------
Agreement or any part thereof without the prior written consent of a
majority of the Board of Directors of the Company (other than the Employee
if he is a member of such Board at the time); provided, however, that
nothing herein shall preclude one or more beneficiaries of the Employee
from receiving any amount that may be payable following the occurrence of
his legal incompetency or his death and shall not preclude the legal
representative of his estate from receiving such amount or from assigning
any right hereunder to the person or persons entitled thereto under his
will or, in the case of intestacy, to the person or persons entitled
thereto under the laws of intestacy applicable to his estate. The term
"beneficiaries", as used in this Agreement, shall mean a beneficiary or
beneficiaries so designated to receive any such amount or, if no
beneficiary has been so designated, the legal representative of the
Employee (in the event of his incompetency) or the Employee's estate.
13. Governing Law. This Agreement shall be deemed a contract made
-------------
under, and for all purposes shall be construed in accordance with, the laws
of the State of New York applicable to contracts to be performed entirely
within such State.
14. Entire Agreement. This Agreement contains all the understandings
----------------
and representations between the parties hereto pertaining to the subject
matter hereof. This Agreement supersedes (or in the case of the 1995
Agreement and the 1998 Agreement, amends and restates those Agreements in
their entirety as set forth herein) all understandings and agreements,
whether oral or in writing, if any, previously entered into by the Company
or any other member of the Company Group with the Employee in any way
relating to the employment of the Employee by the Company or any other
member of the Company Group, all of which agreements and understandings are
hereby terminated (or in the case of the 1995 Agreement and the 1998
Agreement, amended and restated in their entirety as set forth herein) and
all rights and entitlements thereunder are hereby waived and released.
15. Amendment, Modification, Waiver. No provision of this Agreement
-------------------------------
may be amended or modified unless such amendment or modification is agreed
to in writing and signed by the Employee and by representatives of the
Company (other than the Employee) who have been duly authorized by the
Board of Directors of the Company to do so (other than the Employee if he
is a member of such Board at the time). Except as otherwise specifically
provided in this Agreement, no waiver by either party hereto of any breach
by the other party hereto of any condition or provision of this Agreement
to be performed by such other party shall be deemed a waiver of a similar
or dissimilar provision or condition at the same or any prior or subsequent
time, nor shall the failure of or delay by either party hereto in
exercising any right,
8
<PAGE>
power or privilege hereunder operate as a waiver thereof to preclude any
other or further exercise thereof or the exercise of any other such right,
power or privilege.
16. Notices. Any notice to be given hereunder shall be in writing
-------
and delivered personally or sent by certified mail, postage prepaid, return
receipt requested, addressed to the party concerned at the address
indicated below or at such other address as such party may subsequently
designate by like notice:
If to the Company:
c/o McNaughton Apparel Group Inc.
463 Seventh Avenue
New York, New York 10018
Attention: Compensation Committee and Secretary
If to the Employee:
Sanford Greenberg
21 Koenig Drive
Oyster Bay Cove, New York 11771
17. Arbitration. Any controversy or claim arising out of or relating
-----------
to this Agreement, or any breach thereof, shall, except as provided in
Section 10, be settled by binding arbitration in accordance with the rules
of the American Arbitration Association then in effect and judgment upon
such award rendered by the arbitrator may be entered in any court having
jurisdiction thereof. The arbitration shall be held in New York, New York.
The arbitration award shall include an award of attorneys' fees and costs
to the prevailing party as determined by the arbitrator.
18. Severability. Should any provision of this Agreement be held by
------------
a court or arbitration panel of competent jurisdiction to be enforceable
only if modified, such holding shall not affect the validity of the
remainder of this Agreement, the balance of which shall continue to be
binding upon the parties hereto with any such modification to become a part
hereof and treated as though originally set forth in this Agreement. The
parties further agree that any such court or arbitration panel is expressly
authorized to modify any such unenforceable provision of this Agreement in
lieu of severing such unenforceable provision from this Agreement in its
entirety, whether by rewriting the offending provision, deleting any or all
of the offending provision, adding additional language to this Agreement,
or by making such other modifications as it deems warranted to carry out
the intent and agreement of the parties as embodied herein to the maximum
extent permitted by law. The parties expressly agree that this Agreement
as so modified by the court or arbitration panel shall be binding upon and
enforceable against each of them. In any event, should one or more of the
provisions of this Agreement be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provisions hereof, and if such
provision or provisions are not modified as provided above, this Agreement
shall be construed as if such invalid, illegal or unenforceable provisions
had never been set forth herein.
19. Authority. The Company represents and warrants to the Employee
---------
that the execution and delivery of this Agreement by the Company and the
performance by the Company of its covenants and agreements hereunder have
been duly authorized by all necessary corporate action and that this
Agreement has been duly executed and delivered on behalf of the Company.
20. Withholding. Anything to the contrary notwithstanding, all
-----------
payments required to be made by the Company hereunder to the Employee or
his beneficiaries, including his estate, shall be subject to withholding of
such amounts relating to taxes as the Company may reasonably determine it
should withhold pursuant to any applicable law or regulation. In lieu of
withholding such amounts, in whole or in part, the Company, may, in its
sole discretion, accept other provision for payment of taxes as permitted
by law, provided it is satisfied in its sole discretion that all
requirements of law affecting its responsibilities to withhold such taxes
have been satisfied.
9
<PAGE>
21. Subsidiaries, etc. The Employee shall be deemed to resign as an
------------------
officer and director of the Company and of any parent, subsidiary or
affiliate of the Company upon termination of his employment with the
Company under this Agreement or otherwise.
22. Survivorship. The respective rights and obligations of the
------------
Employee and the Company hereunder shall survive any termination of the
Term or of this Agreement to the extent necessary to the intended
preservation of such rights and obligations.
23. Titles. Titles of the sections of this Agreement are intended
------
solely for convenience and no provision of this Agreement is to be
construed by reference to the title of any section.
24. Counterparts. This Agreement may be executed in two or more
------------
counterpart copies, each of which shall be deemed to be an original and all
of which taken together shall be deemed one document.
* * *
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
NORTON MCNAUGHTON OF SQUIRE, INC.
By:/s/ Peter Boneparth
------------------------------
Title: President
EMPLOYEE:
/s/ Sanford Greenberg
---------------------------------
Sanford Greenberg
For good and valuable consideration,
the receipt and sufficiency of which are
hereby acknowledged, the undersigned
hereby agrees to cause the Company to
perform, and hereby guarantees to the
Employee that the Company will
perform, all of the Company's
agreements and covenants contained
herein.
MCNAUGHTON APPAREL GROUP INC.
By:/s/ Peter Boneparth
--------------------------
Title: President
10
<PAGE>
EXHIBIT A
---------
MEDICAL INSURANCE PREMIUMS TO
SANFORD GREENBERG IF COMPANY IS UNABLE TO PROVIDE COVERAGE
----------------------------------------------------------
Fiscal Period
- ------------------------------------
Beginning Ended Annual Monthly
Nov. 1: Oct. 31: Premium Premium
- --------------------------------------------------------------------------------
1999 2000 $ 7,200.00 $ 600.00
2000 2001 7,560.00 630.00
2001 2002 7,938.00 661.50
2002 2003 8,334.90 694.58
2003 2004 8,751.64 729.30
2004 2005 9,189.23 765.77
2005 2006 9,648.69 804.06
2006 2007 10,131.12 844.26
2007 2008 10,637.68 886.47
2008 2009 11,169.56 930.80
2009 2010 11,728.04 977.34
2010 2011 12,314.44 1,026.20
2011 2012 12,930.17 1,077.51
2012 2013 13,576.67 1,131.39
2013 2014 14,255.51 1,187.96
2014 2015 14,968.28 1,247.36
2015 2016 15,716.70 1,309.72
2016 2017 15,502.53 1,375.21
2017 2018 17,327.66 1,443.97
2018 2019 18,194.04 1,516.17
2019 2020 19,103.74 1,591.98
2020 2021 20,058.93 1,671.58
2021 2022 21,061.88 1,755.16
2022 2023 22,114.97 1,842.91
2023 2024 23,220.72 1,935.06
2024 2025 24,381.76 2,031.81
2025 2026 25,600.84 2,133.40
2026 2027 26,880.89 2,240.07
2027 2028 28,224.93 2,352.08
2028 2029 29,636.18 2,469.68
2029 2030 31,117.99 2,593.17
2030 2031 32,673.88 2,722.82
2031 2032 34,307.58 2,858.96
2032 2033 36,022.96 3,001.91
2033 2034 37,824.11 3,152.01
2034 2035 39,715.31 3,309.61
A-1
<PAGE>
Fiscal Period
- ------------------------------------
Beginning Ended Annual Monthly
Nov. 1: Oct. 31: Premium Premium
- --------------------------------------------------------------------------------
2035 2036 41,701.08 3,475.09
2036 2037 43,786.13 3,648.84
2037 2038 45,975.44 3,831.29
2038 2039 48,274.21 4,022.85
2039 2040 50,687.92 4,223.99
2040 2041 53,222.31 4,435.19
2041 2042 55,883.43 4,656.95
2042 2043 58,677.60 4,889.80
2043 2044 61,611.48 5,134.29
2044 2045 64,692.06 5,391.00
2045 2046 67,926.66 5,660.55
2046 2047 71,322.99 5,943.58
2047 2048 74,889.14 6,240.76
2048 2049 78,633.60 6,552.80
2049 2050 82,565.28 6,880.44
2050 2051 86,693.54 7,224.46
A-2
<PAGE>
Exhibit 10.4
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
--------------------
AMENDED AND RESTATED EMPLOYMENT AGREEMENT dated as of the 7th day of
June, 1999 by and between NORTON MCNAUGHTON OF SQUIRE, INC., a New York
corporation (the "Company"), and PETER BONEPARTH (the "Employee").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Company and the Employee are parties to the Employment
Agreement dated as of April 30, 1997 (the "1997 Agreement") and desire to amend
and restate the 1997 Agreement in its entirety as set forth herein.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements hereinafter set forth, the parties hereto hereby agree as follows:
1. Employment, Term.
----------------
1.1 The Company agrees to employ the Employee, and the Employee
agrees to serve in the employ of the Company, for the term set forth in Section
1.2, in the positions and with the responsibilities, duties and authority set
forth in Section 2 and on the other terms and conditions set forth in this
Agreement.
1.2 The term of the Employee's employment under this Agreement (the
"Term") shall commence on the date hereof and shall terminate on November 1,
2003, unless sooner terminated in accordance with this Agreement.
2. Positions, Duties. The Employee shall serve in the positions of
-----------------
Chief Executive Officer, President and Chief Operating Officer of the Company in
the New York City metropolitan area. The Employee shall perform, faithfully and
diligently, such duties, and shall have such responsibilities, appropriate to
said positions, as shall be assigned to him from time to time by the Board of
Directors of the Company. The Employee shall report to the Board of Directors
of the Company. During the Term, the Employee also agrees to serve in the New
York City metropolitan area, if elected, as an officer and/or director of any
parent, subsidiary or affiliate of the Company. The Employee shall devote his
complete and undivided attention to the performance of his duties and
responsibilities hereunder during the normal working hours of executive
employees of the Company. During the Term, the Company shall cause the Employee
to be recommended for election to the Board of Directors of McNaughton Apparel
Group Inc., a Delaware corporation (the "Parent"). Subject to the prior consent
of the Board of Directors of the Parent, the Employee shall be permitted to sit
on the boards of directors of other corporations not involving any conflict of
interest with the Company or any member of the Company Group (as hereinafter
defined).
3. Compensation.
------------
3.1 Salary. During the Term, in consideration of the performance by
------
the Employee of the services set forth in Section 2 and his observance of the
other covenants set forth herein, the Company shall pay the Employee, and the
Employee shall accept, a salary at a rate of $754,000 per annum, payable in
accordance with the standard payroll practices of the Company.
3.2 Bonus. During the Term, in addition to the salary provided for
-----
in Section 3.1, the Employee shall be eligible to participate in any bonus plan
for executives of the Company in effect during the Term.
4. Expense Reimbursement. During the Term, the Company shall
---------------------
reimburse the Employee for all reasonable and necessary out-of-pocket expenses
incurred by him in connection with the performance of his duties hereunder, upon
the presentation of proper accounts therefor in accordance with the Company's
policies (in any case, as such policies are adopted from time to time by the
Compensation Committee of the Board of Directors).
<PAGE>
2
5. Benefits.
--------
5.1 Benefit Plans. During the Term, the Employee will be entitled to
-------------
participate in all employee benefit plans and programs offered by the Company
(and, to the extent required by applicable law or this Agreement, approved by
the Compensation Committee of the Board of Directors) from time to time to its
employees of comparable seniority, subject to the provisions of such plans and
programs as in effect from time to time.
5.2 Vacation. During the Term, the Employee shall be entitled to
--------
paid vacation in accordance with Company policy for its executive employees.
5.3 Life Insurance. During the Term, subject to the continued
--------------
availability on commercially reasonable terms, the Company will provide the
Employee with $5 million term life insurance coverage. The beneficiary of such
policy shall be the Employee's estate or other beneficiary so designated by the
Employee.
5.4 Disability. During the Term, subject to the continued
----------
availability on commercially reasonable terms, the Company shall provide the
Employee with disability insurance providing the same monthly disability benefit
as in effect for the Employee immediately prior to the date hereof. The
Company's obligations under Section 6.2 of this Agreement shall be subject to
appropriate reduction for amounts paid to the Employee under disability
insurance during the Disability Salary Continuation Period (as hereinafter
defined), taking into account the tax treatment of such disability insurance
payments.
6. Termination of Employment.
-------------------------
6.1 Death. In the event of the death of the Employee during the
-----
Term, the Company shall pay to the estate or other legal representative of the
Employee the salary provided for in Section 3.1 accrued to the date of the
Employee's death and not theretofore paid to the Employee. Rights and benefits
of the estate or other legal representative of the Employee under the benefit
plans and programs of the Company shall be determined in accordance with the
provisions of such plans and programs. Neither the estate or other legal
representative of the Employee nor the Company shall have any further rights or
obligations under this Agreement, except as provided in Section 3.4 of the 1997
Agreement.
6.2 Disability. If during the Term the Employee shall become
----------
incapacitated by reason of physical or mental disability and shall be unable to
perform his normal duties hereunder for a cumulative period of six (6) months in
any period of twelve (12) consecutive months, the employment of the Employee
hereunder may be terminated by the Company or the Employee upon notice to the
other. In the event of such termination, subject to Section 5.4 of this
Agreement, the Company shall continue to pay to the Employee the salary provided
for in Section 3.1 for the remainder of the Term (the period of time during
which the Company shall be required to continue to pay such salary, the
"Disability Salary Continuation Period"). Rights and benefits of the Employee
under the benefit plans and programs of the Company shall be determined in
accordance with the provisions of such plans and programs. Neither the Employee
nor the Company shall have any further rights or obligations under this
Agreement, except as provided in Section 3.4 of the 1997 Agreement and in
Sections 8, 9, 10 and 11 hereof.
6.3 Due Cause. The employment of the Employee hereunder may be
---------
terminated by the Company at any time during the Term for Due Cause (as
hereinafter defined). In the event of such termination, the Company shall pay
to the Employee the salary provided for in Section 3.1 accrued to the date of
such termination and not theretofore paid to the Employee. Rights and benefits
of the Employee under the benefit plans and programs of the Company shall be
determined in accordance with the provisions of such plans and programs. After
the satisfaction of any claim of the Company against the Employee incidental to
such Due Cause, neither the Employee nor the Company shall have any further
rights or obligations under this Agreement, except as provided in Section 3.4 of
the 1997 Agreement and in Sections 8, 9, 10 and 11 hereof. For purposes of this
Agreement, "Due Cause" shall mean (a) the Employee's gross negligence or willful
misconduct in bad faith in the discharge of his duties and responsibilities to
any member of the Company Group (as defined in Section 10 below), as determined
by the Board of Directors of the Company (other than the Employee if he is a
member of such at the time), (b) the Employee's material and repeated failure to
obey appropriate directions from the Board of Directors of the Company, (c) any
willful or purposeful act or omission of the Employee taken or omitted in bad
faith and intended to materially injure, and which had the effect of materially
injuring, the business or business relationships of any member of the Company
Group or (d) the Employee's conviction or other adjudication of (1) a felony or
(2) any crime or offense involving fraud; provided, however, that the Employee
shall be given written notice by a majority of the Board of Directors of the
Company that it intends to
<PAGE>
3
terminate the Employee's employment for Due Cause under this Section, which
written notice shall specify the act or acts upon the basis of which the
majority of the Board of Directors of the Company intends so to terminate the
Employee's employment, and the Employee shall then be given the opportunity,
within fifteen (15) days of his receipt of such notice, to have a meeting with
the Board of Directors of the Company to discuss such act or acts.
6.4 Other Termination by the Company. The Company may terminate the
--------------------------------
Employee's employment at any time during the Term for whatever reason it deems
appropriate or without reason; provided, however, that in the event that such
termination is not pursuant to Section 6.1, 6.2 or 6.3, the Company shall
continue to pay to the Employee the salary provided for in Section 3.1 for the
remainder of the Term (the period of time during which the Company shall be
required to continue to pay such salary, the "Salary Continuation Period"). In
either case, the Employee shall be required to seek subsequent employment in
good faith and upon obtaining subsequent employment shall inform the Company
that he obtained such employment and to offset any amounts earned from such
subsequent employment (whether as an employee, a consultant or otherwise)
against such salary continuation by the Company. Rights and benefits of the
Employee under the benefit plans and programs of the Company shall be determined
in accordance with the provisions of such plans and programs. Neither the
Employee nor the Company shall have any further rights or obligations under this
Agreement, except as provided in Section 3.4 of the 1997 Agreement and in
Sections 7, 8, 9, 10 and 11 hereof.
7. Consulting Agreement.
--------------------
7.1 In the event that (1) (i) the Employee shall remain in the employ
of the Company on November 1, 2003 and (ii) on or prior to November 1, 2003 the
Company shall have not offered to the Employee to extend the Term for at least
one year and otherwise on the terms and conditions set forth herein, or (2) the
Employee's employment hereunder shall have been terminated by the Company
pursuant to Section 6.4 hereof before the end of the Term, then, subject to
Section 7.4 hereof, the Company hereby agrees to retain the Employee to provide
consulting and advisory services on a project-by-project basis to the Company
(I) in the case of the circumstances set forth in clause (1) above, during the
period commencing on November 2, 2003 and terminating on November 2, 2004 or
(II) in the use of the circumstances set forth in clause (2) above, during the
one-year period following the date of a termination of employment by the Company
pursuant to Section 6.4 hereof (the applicable one-year period contemplated by
clauses (I) or (II), the "Consulting Term"). During the Consulting Term, the
Employee shall provide such consulting and advisory services to the Company as
may be agreed to between the Employee and the Board of Directors of the Company.
Unless a greater amount of time is agreed to by the Employee, the Employee shall
devote up to 15 hours per week to the mutually agreed upon consulting and
advisory services, if any, hereunder, provided that, to the extent feasible,
such services may be conducted telephonically outside of the Company's offices
and the Employee's performance of such duties and responsibilities does not
materially interfere with any obligations of the Employee to provide services to
any activity or business venture which is not in violation of Section 10 hereof.
Subject to Section 7.2 hereof, during the Consulting Term, in consideration of
the performance by the Employee of services set forth in this Section 7.1, the
Company shall pay the Employee, and the Employee shall accept, a consulting fee
(the "Fee") (payable on the 15th day of each month for the month in which the
payment occurs) in an amount per month equal to either (a) in the event that
this Agreement is not amended after the date hereof to adjust the salary set
forth in Section 3.1 hereof payable thereunder, $62,500 or (b) in the event that
this Agreement is amended by the Company and the Employee after the date hereof
to adjust the salary set forth in Section 3.1 hereof, the aggregate monthly
consideration payable to the Employee by the Company under Section 3.1 of this
Agreement as so amended.
7.2 In the event of the death of the Employee during the Consulting
Term, the Company shall continue to pay the Fee to the estate or other legal
representative of the Employee in accordance with the terms hereof, all
notwithstanding the death of the Employee. Rights and benefits of the estate or
other legal representative of the Employee under the benefit plans and programs
of the Company, if applicable to the Employee, shall be continued subject to the
provisions of such plans and programs. Except as aforesaid, in the event of the
death of the Employee during the Consulting Term, neither the estate or other
legal representative of the Employee nor the Company shall have any further
rights or obligations under this Agreement other than pursuant to Section 3.4 of
the 1997 Agreement.
7.3 The Employee shall perform his duties and responsibilities during
the Consulting Term as an independent contractor. Nothing in this Section 7
shall be deemed to create a partnership, joint venture or employment
relationship between the Employee and the Company during the Consulting Term or
thereafter. Anything to the contrary herein notwithstanding, all payments
required to be made by the Company during the Consulting Term shall be subject
to Section 20 hereof.
<PAGE>
4
7.4 Notwithstanding anything to the contrary contained herein, the
agreements and obligations of the Company set forth in this Section 7 may be
terminated at any time during the Consulting Term for Due Cause by notice from
the Company to the Employee (the "Due Cause Notice"). In the event of such
termination, the Company shall pay to the Employee the Fee, if any, accrued to
the date of termination and not theretofore paid to the Employee. Rights and
benefits of the Employee under the benefit plans and programs of the Company, if
applicable to the Employee, shall be continued subject to the provisions of such
plans and programs. After satisfaction of any claim of the Company against the
Employee arising from such Due Cause, following the date of the Due Cause
Notice, neither the Employee nor the Company shall have any rights or
obligations under this Agreement, except as provided in Section 3.4 of the 1997
Agreement and in Sections 8, 9, 10 and 11 hereof.
8. Confidential Information.
------------------------
8.1 The Employee shall, during the Term and at all times thereafter,
treat as confidential and, except as required in the performance of his duties
and responsibilities under this Agreement, not disclose, publish or otherwise
make available to the public or to any individual, firm or corporation any
confidential material (as hereinafter defined). The Employee agrees that all
confidential material, together with all notes and records of the Employee
relating thereto, and all copies or facsimiles thereof in the possession of the
Employee, are the exclusive property of the Company and the Employee agrees to
return such material to the Company promptly upon the termination of the
Employee's employment with the Company.
8.2 For the purposes hereof, the term "confidential material" shall
mean all information acquired by the Employee in the course of the Employee's
employment with the Company in any way concerning the products, projects,
activities, business or affairs of the Company or any member of the Company
Group or the customers of the Company or any member of the Company Group,
including, without limitation, all information concerning trade secrets and the
preparation of raw material for, manufacture of, and/or finishing processes
utilized in the production of, the products or projects of the Company or any
member of the Company Group and/or any improvements therein, all sales and
financial information concerning the Company or any member of the Company Group,
all customer and supplier lists, all information concerning projects in research
and development or marketing plans for any such products or projects, and all
information in any way concerning the products, projects, activities, business
or affairs of customers of the Company or any member of the Company Group which
is furnished to the Employee by the Company or any member of the Company Group
or any of their respective employees (current or former), agents or customers,
as such; provided, however, that the term "confidential material" shall not
include information which (a) becomes generally available to the public other
than as a result of a disclosure by the Employee, (b) was available to the
Employee on a non-confidential basis prior to his employment with the Company or
(c) becomes available to the Employee on a non-confidential basis from a source
other than the Company or any of its agents, franchisees, creditors, suppliers,
lessors, lessees or customers provided that such source is not bound by a
confidentiality agreement with the Company or any of such agents or customers.
9. Inventions. Any and all inventions, innovations or improvements
----------
("inventions") made, developed or created by the Employee (whether at the
request or suggestion of the Company or otherwise, whether alone or in
conjunction with others, and whether during regular hours of work or otherwise)
during the period of his employment with the Company which may be directly or
indirectly useful in, or relate to, the business of the Company, shall be
promptly and fully disclosed by the Employee to the Board of Directors of the
Company and shall be the Company's exclusive property as against the Employee,
and the Employee shall promptly deliver to an appropriate representative of the
Company as designated by the Board of Directors all papers, drawings, models,
data and other material relating to any inventions made, developed or created by
him as aforesaid. The Employee shall, at the request of the Company and without
any payment therefor, execute any documents necessary or advisable in the
opinion of the Company's counsel to direct issuance of patents or copyrights to
the Company with respect to such inventions as are to be the Company's exclusive
property as against the Employee or to vest in the Company title to such
inventions as against the Employee. The expense of securing any such patent or
copyright shall be borne by the Company.
10. Non-Competition. The Employee acknowledges that the services to
---------------
be rendered by him to the Company are of a special and unique character. In
consideration of his employment hereunder, the Employee agrees, for the benefit
of the Company and members of the Company Group, that he will not, during the
period of his employment with the Company and thereafter for the Applicable
Period (as hereinafter defined) commencing on the date of termination of his
employment with the Company, (a) engage, directly or indirectly, whether as
principal, agent, distributor, representative, consultant, employee, partner,
stockholder, limited partner or other investor (other than an investment of not
more than (i) one
<PAGE>
5
percent (1%) of the stock or equity of any corporation the capital stock of
which is publicly traded or (ii) five percent (5%) of the ownership interest of
any limited partnership or other entity) or otherwise, anywhere in the United
States, in any activity or business venture which is in competition with the
business then conducted by the Company (presently, the manufacture,
merchandising, distribution and sale of women's clothing), any of its
subsidiaries or any of its corporate parents or affiliates (including, without
limitation, McNaughton Apparel Group Inc., Miss Erika, Inc. and Jeri-Jo
Knitwear, Inc., each a Delaware corporation, and McNaughton Apparel Holdings
Inc., a South Carolina corporation) (collectively, the "Company Group"), (b)
solicit or entice or endeavor to solicit or entice away from any member of the
Company Group any person who is (at the applicable time) an officer, employee or
consultant of any member of the Company Group, either for his own account or for
any individual, firm or corporation, whether or not such person would commit any
breach of his contract of employment by reason of leaving the service of a
member of the Company Group, and the Employee agrees not to employ, directly or
indirectly, any person who was an officer or employee of any member of the
Company Group or who by reason of such position at any time is or may be likely
to be in possession of any confidential information or trade secrets relating to
the businesses or products of any member of the Company Group, or (c) solicit or
entice or endeavor to solicit or entice away from any member of the Company
Group any customer or prospective customer of any member of the Company Group,
either for his own account or for any individual, firm or corporation. As used
herein, the term "Applicable Period" shall mean, (i) in the case of termination
of employment pursuant to Section 6.4 of the Agreement, the Salary Continuation
Period (determined without regard to the Employee's duty to offset as specified
in such Section 6.4), and (ii) in the case of any other termination of
employment with the Company hereunder or otherwise, three (3) years.
11. Equitable Relief, Etc.
---------------------
11.1 In the event of a breach or threatened breach by the Employee of
any of the provisions of Sections 8, 9 or 10 of this Agreement, the Employee
hereby consents and agrees that the Company shall be entitled to an injunction
or similar equitable relief from any court of competent jurisdiction restraining
the Employee from committing or continuing any such breach or threatened breach
or granting specific performance of any act required to be performed by the
Employee under any of such provisions, without the necessity of showing any
actual damage or that money damages would not afford an adequate remedy and
without the necessity of posting any bond or other security. Nothing herein
shall be construed as prohibiting the Company from pursuing any other remedies
at law or in equity which it may have with respect to any such breach or
threatened breach.
11.2 The Company and the Employee understand and agree that in any
lawsuit or other proceeding between any of them with respect to Sections 8, 9 or
10 hereof, the prevailing party in such lawsuit or proceeding shall be entitled
to recover from the other party in such lawsuit or proceeding, and such other
party hereby agrees to pay such prevailing party, for all costs and expenses,
including attorneys' fees, incurred by such prevailing party in the defense,
prosecution or investigation of the matters which are the subject of such
lawsuit or proceeding.
12. Successors and Assigns.
----------------------
12.1 Assignment by the Company. The Company shall require any
-------------------------
successors (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company to assume and agree to perform this Agreement in the same manner and to
the same extent that the Company would be required to perform if no such
succession had taken place. As used in this Section, the "Company" shall mean
the Company as hereinbefore defined and any successor to its business and/or
assets as aforesaid which otherwise becomes bound by all the terms and
provisions of this Agreement by operation of law and this Agreement shall be
binding upon, and inure to the benefit of, the Company, as so defined.
12.2 Assignment by the Employee. The Employee may not assign this
--------------------------
Agreement or any part thereof without the prior written consent of a majority of
the Board of Directors of the Company (other than the Employee if he is a member
of such Board at the time); provided, however, that nothing herein shall
preclude one or more beneficiaries of the Employee from receiving any amount
that may be payable following the occurrence of his legal incompetency or his
death and shall not preclude the legal representative of his estate from
receiving such amount or from assigning any right hereunder to the person or
persons entitled thereto under his will or, in the case of intestacy, to the
person or persons entitled thereto under the laws of intestacy applicable to his
estate. The term "beneficiaries", as used in this Agreement, shall mean a
beneficiary or beneficiaries so designated to receive any such amount or, if no
beneficiary has been so designated, the legal representative of the Employee (in
the event of his incompetency) or the Employee's estate.
<PAGE>
6
13. Governing Law. This Agreement shall be deemed a contract made
-------------
under, and for all purposes shall be construed in accordance with, the laws of
the State of New York applicable to contracts to be performed entirely within
such State.
14. Entire Agreement. This Agreement contains all the understandings
----------------
and representations between the parties hereto pertaining to the subject matter
hereof. Except for Section 3.4 of the 1997 Agreement which shall remain in full
force and effect (it being agreed that references in Section 3.4 (d) of the 1997
Agreement to "this Agreement" shall mean and refer to this Agreement and to
"Term" shall mean and refer to the Term under this Agreement), this Agreement
supersedes (or in the case of the 1997 Agreement, amends and restates the 1997
Agreement in its entirety as set forth herein) all understandings and
agreements, whether oral or in writing, if any, previously entered into by the
Company or any other member of the Company Group with the Employee in any way
relating to the employment of the Employee by the Company or any other member of
the Company Group, all of which agreements and understandings are hereby
terminated (or in the case of the 1997 Agreement, amended and restated in its
entirety as set forth herein) and all rights and entitlements thereunder are
hereby waived and released.
15. Amendment, Modification, Waiver. No provision of this Agreement
-------------------------------
may be amended or modified unless such amendment or modification is agreed to in
writing and signed by the Employee and by representatives of the Company (other
than the Employee) who have been duly authorized by the Board of Directors of
the Company to do so (other than the Employee if he is a member of such Board at
the time). Except as otherwise specifically provided in this Agreement, no
waiver by either party hereto of any breach by the other party hereto of any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of a similar or dissimilar provision or condition at
the same or any prior or subsequent time, nor shall the failure of or delay by
either party hereto in exercising any right, power or privilege hereunder
operate as a waiver thereof to preclude any other or further exercise thereof or
the exercise of any other such right, power or privilege.
16. Notices. Any notice to be given hereunder shall be in writing
-------
and delivered personally or sent by certified mail, postage prepaid, return
receipt requested, addressed to the party concerned at the address indicated
below or at such other address as such party may subsequently designate by like
notice:
If to the Company:
c/o McNaughton Apparel Group Inc.
463 Seventh Avenue
New York, New York 10018
Attention: Compensation Committee and
Secretary
If to the Employee:
Peter Boneparth
250 Briarwood Crossing
Lawrence, New York 11559
With a copy to:
Richard E. Haftel, Esq.
Modlin Haftel & Nathan LLP
777 Third Avenue
New York, New York 10017
17. Arbitration. Any controversy or claim arising out of or relating
-----------
to this Agreement, or any breach thereof, shall, except as provided in Section
10, be settled by binding arbitration in accordance with the rules of the
American Arbitration Association then in effect and judgment upon such award
rendered by the arbitrator may be entered in any court having jurisdiction
thereof. The arbitration shall be held in New York, New York. The arbitration
award shall include an award of attorneys' fees and costs to the prevailing
party as determined by the arbitrator.
18. Severability. Should any provision of this Agreement be held by
------------
a court or arbitration panel of competent jurisdiction to be enforceable only if
modified, such holding shall not affect the validity of the remainder of this
<PAGE>
7
Agreement, the balance of which shall continue to be binding upon the parties
hereto with any such modification to become a part hereof and treated as though
originally set forth in this Agreement. The parties further agree that any such
court or arbitration panel is expressly authorized to modify any such
unenforceable provision of this Agreement in lieu of severing such unenforceable
provision from this Agreement in its entirety, whether by rewriting the
offending provision, deleting any or all of the offending provision, adding
additional language to this Agreement, or by making such other modifications as
it deems warranted to carry out the intent and agreement of the parties as
embodied herein to the maximum extent permitted by law. The parties expressly
agree that this Agreement as so modified by the court or arbitration panel shall
be binding upon and enforceable against each of them. In any event, should one
or more of the provisions of this Agreement be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provisions hereof, and if such provision or
provisions are not modified as provided above, this Agreement shall be construed
as if such invalid, illegal or unenforceable provisions had never been set forth
herein.
19. Authority. The Company represents and warrants to the Employee
---------
that the execution and delivery of this Agreement by the Company and the
performance by the Company of its covenants and agreements hereunder have been
duly authorized by all necessary corporate action and that this Agreement has
been duly executed and delivered on behalf of the Company.
20. Withholding. Anything to the contrary notwithstanding, all
-----------
payments required to be made by the Company hereunder to the Employee or his
beneficiaries, including his estate, shall be subject to withholding of such
amounts relating to taxes as the Company may reasonably determine it should
withhold pursuant to any applicable law or regulation. In lieu of withholding
such amounts, in whole or in part, the Company, may, in its sole discretion,
accept other provision for payment of taxes as permitted by law, provided it is
satisfied in its sole discretion that all requirements of law affecting its
responsibilities to withhold such taxes have been satisfied.
21. Subsidiaries, etc. The Employee shall be deemed to resign as an
------------------
officer and director of the Company and of any parent, subsidiary or affiliate
of the Company upon termination of his employment with the Company under this
Agreement or otherwise.
22. Survivorship. The respective rights and obligations of the
------------
Employee and the Company hereunder shall survive any termination of the Term or
of this Agreement to the extent necessary to the intended preservation of such
rights and obligations.
23. Titles. Titles of the sections of this Agreement are intended
------
solely for convenience and no provision of this Agreement is to be construed by
reference to the title of any section.
24. Counterparts. This Agreement may be executed in two or more
------------
counterpart copies, each of which shall be deemed to be an original and all of
which taken together shall be deemed one document.
* * *
<PAGE>
8
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
NORTON MCNAUGHTON OF SQUIRE, INC.
By: /s/ Sanford Greenberg
---------------------
Title: Chairman of the Board
EMPLOYEE:
/s/ Peter Boneparth
-------------------
Peter Boneparth
For good and valuable consideration,
the receipt and sufficiency of which are
hereby acknowledged, the undersigned
hereby agrees to cause the Company to
perform, and hereby guarantees to the
Employee that the Company will
perform, all of the Company's
agreements and covenants contained
herein.
MCNAUGHTON APPAREL GROUP INC.
By /s/ Sanford Greenberg
---------------------------
Title: Chairman of the Board
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from SEC Form
10-Q and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-06-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> MAY-01-1999
<CASH> 4,184
<SECURITIES> 0
<RECEIVABLES> 79,242
<ALLOWANCES> 0
<INVENTORY> 39,075
<CURRENT-ASSETS> 126,984
<PP&E> 13,608
<DEPRECIATION> 4,656
<TOTAL-ASSETS> 190,336
<CURRENT-LIABILITIES> 21,067
<BONDS> 125,000
0
0
<COMMON> 81
<OTHER-SE> 42,500
<TOTAL-LIABILITY-AND-EQUITY> 190,336
<SALES> 190,591
<TOTAL-REVENUES> 190,591
<CGS> 146,636
<TOTAL-COSTS> 146,636
<OTHER-EXPENSES> 32,846
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,286
<INCOME-PRETAX> 1,970
<INCOME-TAX> 887
<INCOME-CONTINUING> 1,083
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,083
<EPS-BASIC> 0.15
<EPS-DILUTED> 0.15
</TABLE>
