-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WsMCA7ONdbU5MwzcL7b84Lj9Yy6eOGMgKE/k6T0nvCAbMx3FIQAQavqOsXi5F0UI WMQvsQOn3ptNztcpBiwFxw== 0000950112-96-003708.txt : 19961015 0000950112-96-003708.hdr.sgml : 19961015 ACCESSION NUMBER: 0000950112-96-003708 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19961011 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: LOEHMANNS INC CENTRAL INDEX KEY: 0000060064 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-WOMEN'S CLOTHING STORES [5621] IRS NUMBER: 222341356 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-12881 FILM NUMBER: 96642498 BUSINESS ADDRESS: STREET 1: 2500 HALSEY STREET CITY: BRONX STATE: NY ZIP: 10461 BUSINESS PHONE: 0000000000 MAIL ADDRESS: STREET 1: 2500 HALSEY STREET STREET 2: 2500 HALSEY STREET CITY: BRONX STATE: NY ZIP: 10401 S-1/A 1 LOEHMANN'S, INC. AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 11, 1996 REGISTRATION NO. 333-12881 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------- AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------- LOEHMANN'S, INC. (Exact name of registrant as specified in its charter) DELAWARE 5621 22-2341356 (State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Incorporation or Organization) Classification Code Number) Identification No.)
------------------- 2500 HALSEY STREET BRONX, NEW YORK 10461 (718) 409-2000 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ------------------- PHILIP KAPLAN PRESIDENT AND CHIEF OPERATING OFFICER LOEHMANN'S, INC. 2500 HALSEY STREET BRONX, NY 10461 (718) 409-2000 (Name, address, including zip code, and telephone number, including area code, of agent for service of process) ------------------- COPIES TO: ROBERT B. SCHUMER, ESQ. EDWARD S. ROSENTHAL, ESQ. PAUL, WEISS, RIFKIND, WHARTON & GARRISON FRIED, FRANK, HARRIS, SHRIVER & JACOBSON 1285 AVENUE OF THE AMERICAS 725 SOUTH FIGUEROA STREET, SUITE 3890 NEW YORK, NY 10019-6064 LOS ANGELES, CALIFORNIA 90017-5438 (212) 373-3000 (213) 689-5800
------------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, please check the following box and list the registration statement number of the earlier effective registration statement for the same offering. / / _________ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, check the following box and list the registration statement number of the earlier effective registration statement for the same offering. / / _________ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / ------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SUBJECT TO COMPLETION, DATED OCTOBER 11, 1996 1,970,000 SHARES [LOEHMANN'S LOGO] COMMON STOCK All of the shares of Common Stock offered hereby are being offered by certain of the Company's stockholders (the "Selling Stockholders"). See "Principal and Selling Stockholders." The Company will not receive any of the proceeds from the sale of the shares by the Selling Stockholders. The Common Stock is quoted on the Nasdaq National Market under the symbol "LOEH." The last sale price of the Common Stock as reported on the Nasdaq National Market on October 10, 1996 was $27.38. See "Price Range of the Common Stock." The Company has two classes of authorized common stock, Common Stock, which is offered hereby, and Class B Common Stock, par value $0.01 per share (the "Class B Common Stock"). Holders of Common Stock are entitled to one vote per share and holders of Class B Common Stock are not entitled to vote, but each share of Class B Common Stock is convertible into one share of Common Stock after November 6, 1996. See "Description of Capital Stock." SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. ------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Proceeds to Price to Underwriting Selling Public Discount (1) Stockholders (2) Per Share......................... $ $ $ Total (3)......................... $ $ $
(1) See "Underwriting" for information concerning indemnification of the Underwriters and other matters. (2) Before deducting estimated offering expenses of $525,000, which will be payable by the Selling Stockholders. (3) Certain of the Selling Stockholders have granted to the Underwriters a 30-day option to purchase up to 295,500 additional shares of Common Stock solely to cover over-allotments, if any. If the Underwriters exercise this option in full, the Price to Public will total $ , the Underwriting Discount will total $ and the Proceeds to Selling Stockholders will total $ . See "Principal and Selling Stockholders" and "Underwriting." The shares of Common Stock are offered by the several Underwriters named herein when, as and if delivered to and accepted by the Underwriters and subject to their right to reject any orders in whole or in part. It is expected that delivery of the certificates representing the shares will be made against payment therefor at the office of Montgomery Securities on or about , 1996. ------------------- MONTGOMERY SECURITIES SALOMON BROTHERS INC ROBERTSON, STEPHENS & COMPANY , 1996 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. [pictures] The inside front cover of the prospectus contains an artist's rendering of the Manhattan store scheduled to open October 1996, three photographs depicting different views of the interior of the Company's stores, a photograph of a woman wearing designer clothing and a photograph of the exterior of one of the Company's stores. The inside back cover of the prospectus contains two photographs depicting different views of the interior of the Company's stores and one photograph of a woman wearing designer clothing. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE NASDAQ NATIONAL MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING." 2 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and consolidated financial statements appearing elsewhere in this Prospectus. Unless otherwise indicated, all information in this Prospectus, including the share and per share information, (i) gives effect to the Recapitalization Transactions as defined under "The Company" and (ii) assumes no exercise of the Underwriters' over-allotment option. As used in this Prospectus, references to a fiscal year refer to Loehmann's, Inc.'s fiscal year ended or ending on the Saturday closest to January 31 of the following year. Certain statements in this Prospectus (including this Prospectus Summary) constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). See "Special Note Regarding Forward-Looking Statements." THE COMPANY Loehmann's, Inc. ("Loehmann's" or the "Company"), founded in 1921 as the "Original Designer Outlet," is a leading specialty retailer of well known designer and brand name women's fashion apparel, accessories and shoes offered at prices that are typically 25% to 50% below department store prices. The Company believes it has developed a unique franchise as the largest national upscale off-price specialty retailer--one that differentiates itself from finer department stores by offering similar merchandise at significantly lower prices, and from other off-price apparel retailers by offering a broad range of designer and bridge merchandise. The Company currently operates 73 stores in major metropolitan markets located in 23 states. The Company has embarked on an expansion strategy to capitalize on the strength of its franchise and well-recognized name. The following factors serve as the Company's key strengths and distinguishing characteristics: . The Company, like finer department stores, is known for carrying designer and bridge labels by prominent designers such as Donna Karan, Calvin Klein, Ralph Lauren, Adrienne Vittadini, Tahari, Dana Buchman, Andrea Jovine and Emanuel Ungaro, among others. However, unlike finer department stores, the Company offers such merchandise for sale at a substantial discount. . Loehmann's high quality image and affluent customer base uniquely position the Company as a principal choice for well known designers who believe their prestige will be preserved by having their merchandise offered by Loehmann's as opposed to other off-price retailers. . The Company provides in-season high quality merchandise to its stores on a daily basis as a result of its flexible purchasing strategy, low-price, cyclical markdown policy and efficient inventory management systems. . The Company has a low-cost operating structure as a result of its no-frills store format, lean corporate overhead and disciplined real estate strategy. In recent years, the Company has sought to broaden its appeal and to increase margins through the addition of new product categories such as shoes and a broader range of accessories and intimate apparel. Since the introduction or expansion of these categories starting in fiscal 1992, gross margins have increased from 26.4% for fiscal 1992 to 31.1% for fiscal 1995 and to 31.7% for the first six months of fiscal 1996. In addition, to prepare for its store expansion program, the Company has made significant investments in merchandising, planning, allocation and MIS infrastructure and has continued to refine its store format. To capitalize on its unique franchise, the Company has embarked on a new store expansion program under which it intends to open seven stores in fiscal 1996 and seven to ten stores in each of the next two fiscal years. Four of the seven stores planned for fiscal 1996 already have been opened. Based on its historical operating experience, the Company believes that its larger stores typically experience 3 enhanced operating performance with increased inventory turns, higher margins and increased profitability. The Company's eight stores which exceed 23,000 square feet averaged $11.7 million in net sales in fiscal 1995 as compared to $4.7 million for the balance of the Company's stores which were open for the entire year in fiscal 1995. These eight stores generated store contribution as a percentage of net sales of 15.1% as compared to 13.3% for the balance of the Company's stores. To take advantage of the favorable economics associated with its larger stores, the Company's prototype for its new stores is 25,000 to 35,000 square feet compared to the Company-wide average of approximately 16,000 square feet. The Company's planned store openings for fiscal 1996 will be located in existing markets where the Loehmann's franchise is well established and in central business districts which have appealing demographics, such as New York and Boston. As part of its store opening program, the Company intends to open a new 60,000 square foot flagship store in downtown Manhattan at the site that recently housed Barneys' Seventh Avenue Men's Store in October 1996. RECENT DEVELOPMENTS Since February 1996, the Company has opened four of the seven stores planned for fiscal 1996, one each in Merrick, New York, Houston, Texas, San Diego, California and Paramus, New Jersey. These new stores reflect the Company's new, larger store format and average approximately 26,000 square feet compared to the Company-wide average of approximately 16,000 square feet. Two of the new stores being opened in fiscal 1996 are replacing existing, smaller format stores. The Company has signed leases for its three remaining stores planned for fiscal 1996. Two of these stores are scheduled to open during the third quarter, including the Company's new 60,000 square foot flagship store in downtown Manhattan and a new central business district store in Boston, Massachusetts. The third store, a replacement store in Brooklyn, New York, is scheduled to open in November 1996. These new stores, other than the Company's Manhattan store, will each be approximately 30,000 square feet. The Company has also signed four leases associated with stores to be opened in fiscal 1997 including locations in Seattle, Washington, Ft. Lauderdale, Florida, Tustin, California, and Westbury, New York. The Company is currently in lease negotiations for several other store locations for fiscal 1997 openings. Combined sales of the Company for the months of August and September 1996 rose 12.0% to $73.2 million from $65.4 million in the comparable period in 1995, and combined comparable store sales of the Company for August and September 1996 were up 3.4% from the comparable period in 1995. THE OFFERING
Common Stock offered by the Selling Stockholders..... 1,970,000 shares Common Stock to be outstanding after the Offering.... 8,385,638 shares (1) Nasdaq National Market symbol........................ LOEH
- ------------ (1) Excludes (i) 958,664 shares of Common Stock, par value $0.01 per share, of the Company (the "Common Stock") which, upon consummation of the Offering, will be issuable upon the exercise of outstanding stock options at a weighted average exercise price of approximately $7.08 per share, 365,963 of which will be exercisable immediately and (ii) 469,237 shares of Class B Common Stock, which are convertible after November 6, 1996 into 469,237 shares of Common Stock. 4 SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA (IN THOUSANDS, EXCEPT OPERATING AND PER SHARE DATA)
FISCAL YEAR SIX MONTHS ENDED ------------------------------------------------ ----------------------------- JULY 29, AUGUST 3, 1991 1992 1993 1994 1995 1995 1996 -------- -------- -------- -------- -------- ------------- -------------- STATEMENT OF OPERATIONS DATA: ]Net sales........................ $389,183 $389,330 $373,443 $392,606 $386,090 $ 186,932 $194,772 Gross profit...................... 92,310 102,691 98,452 114,208 120,201 57,705 61,834 Store contribution (1)............ 39,384 45,948 39,180 49,192 52,159 25,240 28,402 Depreciation and amortization..... 12,462 11,492 14,334 11,955 12,120 6,062 6,046 Charge for store closings and impairment of assets (2)......... -- -- -- -- 15,300 15,300 -- Operating income (loss)........... 11,146 16,233 8,654 16,613 3,296 (6,116) 11,101 Interest expense, net............. 17,663 16,889 17,299 18,085 18,153 8,955 7,990 Income (loss) before extraordinary items............................. (6,472) (783) (8,724) (1,506) (14,963) (15,179) 3,051 Extraordinary items (3)........... -- -- 3,507 -- -- -- 7,101 Net loss (4)...................... (6,472) (783) (12,231) (1,506) (14,963) (15,179) (4,050) Stock dividends on and normal and accelerated accretion of preferred stock (5).............. 1,181 1,335 1,496 1,802 2,056 922 5,668 Net loss applicable to common stock (4)......................... (7,653) (2,118) (13,727) (3,308) (17,019) (16,101) (9,718) Net loss per share applicable to common stock before extraordinary items............................. $(1.78) $(0.49) $(2.18) $(0.63) $(3.12) $(3.07) $(0.38) Net loss per share applicable to common stock after extraordinary items............................. (1.78) (0.49) (2.93) (0.63) (3.12) (3.07) (1.40) Weighted average common shares outstanding (6)................... 4,297 4,299 4,680 5,228 5,463 5,247 6,934
SIX MONTHS ENDED ------------------------------- JULY 29, AUGUST 3, 1995 1996 ------------- -------------- PRO FORMA STATEMENT OF OPERATIONS DATA (7): Net sales........................................................... $ 186,932 $194,772 Store contribution (1).............................................. 25,240 28,402 Depreciation and amortization....................................... 5,722 5,895 Operating income (loss)............................................. (5,776)* 11,253 Interest expense, net............................................... 5,800 5,499 Net income (loss)................................................... (7,061)* 3,510 Earnings (loss) per share........................................... $ (0.79)* $ 0.37 Weighted average common shares and common share equivalents outstanding......................................................... 8,946 9,503
- ------------ * Includes a charge to operating income (loss) and net income (loss) of $15.3 million, related to the closure of 11 stores in August 1995 and the impairment of certain primarily intangible assets, which had a negative impact of $1.03 per share (after tax effect) on earnings per share.
FISCAL YEAR SIX MONTHS ENDED ------------------------------------------------ ----------------------------- JULY 29, AUGUST 3, 1991 1992 1993 1994 1995 1995 1996 -------- -------- -------- -------- -------- ------------- -------------- SELECTED OPERATING DATA: Number of stores open at end of period............................ 81 85 81 80 69 69 71 Average net sales per gross square foot (8).......................... $350 $333 $320 $337 $327 -- -- Inventory turnover (9)............ 5.4x 5.4x 5.1x 5.7x 5.4x -- --
AUGUST 3, 1996 --------- BALANCE SHEET DATA: Working capital.................................................................... $ 12,985 Total assets....................................................................... 155,667 Total debt......................................................................... 100,543 Common stockholders' equity........................................................ 16,721
5 - ------------ (1) Computed as gross profit less store operating expenses and pre-opening costs. (2) In fiscal 1995, the Company recorded charges related to the closure of 11 stores in August and the impairment of certain primarily intangible assets of $10.35 million and $4.95 million, respectively. Of the total $15.3 million charge, $10.45 million represents non-cash items. See Notes 5 and 6 to the Consolidated Financial Statements of the Company. (3) The extraordinary loss recorded in the first six months of fiscal 1996 related to the prepayment of the Company's 10 1/2% Senior Secured Notes ($52.5 million face amount), 13 3/4% Senior Subordinated Notes ($77.6 million face amount), 11 7/8% Senior Notes ($5.0 million face amount) along with the write-off of related deferred financing amounts of $2.2 million. The extraordinary loss in fiscal 1993 related to the repurchase of $30.0 million principal amount 13 3/4% Senior Subordinated Notes and the payment of $12.0 million on the remaining balance of a term loan in October 1993. The loss includes a $2.0 million premium paid on the repurchase of the 13 3/4% Senior Subordinated Notes and a $1.5 million write-off of the deferred financing costs attributed to the term loan. (4) At February 3, 1996, the Company had a net operating loss carryforward of $27.0 million which is available to reduce taxes payable on future taxable income. The Company's ability to utilize its net operating loss carryforward will be dependent on the Company generating taxable income in future years and will be subject to certain limitations on its ability to use all of the net operating loss carryforward in any single fiscal year pursuant to Section 382 of the Internal Revenue Code. (5) Represents stock dividends on and normal and accelerated accretion of the Company's Series A Preferred Stock to its liquidation price of $0.56 per share. All shares of Series A Preferred Stock were redeemed in connection with the Company's debt and equity offerings completed in May 1996 (see "The Company"). (6) Excludes for fiscal years 1991 to 1995 and for the six months ended July 29, 1995, 453,317 shares of Common Stock issuable as of August 3, 1996 upon the exercise of outstanding stock options at a weighted average exercise price of approximately $1.60 per share, 416,587 of which are exercisable within 60 days following such date, as inclusion of such options in weighted average shares would have been antidilutive. Excludes for the six months ended August 3, 1996, 877,884 shares of Common Stock issuable as of August 3, 1996 upon the exercise of outstanding stock options at a weighted average exercise price of approximately $3.77 per share, 416,587 of which are exercisable within 60 days following such date, as inclusion of such options in weighted average shares would have been antidilutive. Includes 469,237 shares of Class B Common Stock, convertible after November 6, 1996 into 469,237 shares of Common Stock. (7) Pro forma to reflect the effects of the Company's debt and equity offerings completed in May 1996 (see "The Company") and an assumed effective tax rate of 39%, as if such transactions had been completed immediately prior to the commencement of the respective periods. (8) Average net sales per gross square foot is determined by dividing total net sales by the weighted average gross square footage of stores open during the period indicated. (9) Inventory turnover is determined by dividing cost of sales by monthly average inventory valued at cost. 6 RISK FACTORS In addition to the other information contained in this Prospectus, the following risk factors should be considered carefully in evaluating the Company and its business before purchasing any of the shares of Common Stock offered hereby. Certain statements in "Risk Factors" constitute "forward-looking statements" within the meaning of the Reform Act. See "Special Note Regarding Forward-Looking Statements." AGGRESSIVE EXPANSION STRATEGY The Company intends to pursue an expansion strategy involving opening many more stores than it has in recent years, and its future operating results will depend to a substantial extent upon its ability to open and operate new stores successfully. The new stores are expected to be significantly larger than most of the Company's existing stores and several of the new stores, unlike all but one of the Company's existing stores, will be located in central business districts. The Company may also enter certain new markets in various regions in the United States. Operating larger format stores as well as expanding into new markets and central business districts may present competitive and merchandising challenges that are different than those currently encountered by the Company in its existing markets. In addition, the Company's ability to open new stores on a timely basis will depend upon a number of factors, including the ability to properly identify and enter new markets, locate suitable store sites, negotiate acceptable lease terms, construct or refurbish sites, hire, train and retain skilled managers and personnel, and other factors, some of which may be beyond the Company's control. There can be no assurance that the Company's new stores will be profitable or achieve sales and profitability levels comparable to the Company's larger stores or its existing stores generally. In addition, because of the nature of the Company's business, the Company's new store openings will be clustered during the Company's significant spring or fall selling seasons and thus any delay in such openings could materially adversely affect the Company's financial performance in the relevant fiscal year or period. See "Business--Expansion Strategy." Furthermore, the Company believes that its expansion within existing markets will adversely affect the financial performance of the Company's existing stores within those markets. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." To manage its expansion, the Company continually will need to evaluate the adequacy of its existing systems and procedures, including financial controls, management information systems and store management, as well as its existing distribution center which will be used to supply new stores. There can be no assurance that the Company will anticipate all of the changing demands that its expanding operations will impose on its existing infrastructure. The failure of the Company's infrastructure to handle its expansion program could adversely affect its future operating results. In addition, the Company intends to finance its store expansion program primarily through its own operating cash flow. The Company anticipates that its capital expenditures related to store expansion will total approximately $10.0 million in fiscal 1996 and approximately $6.0 million to $8.0 million in fiscal 1997. If the Company does not generate sufficient operating cash flow to support its store expansion program, the Company may not be able to achieve its targets for opening new stores. See "Business--Expansion Strategy." ADEQUATE SOURCES OF MERCHANDISE SUPPLY The Company's business is dependent to a significant degree upon its ability to purchase designer and other brand name merchandise at substantially below normal wholesale prices. The Company does not have any long-term supply contracts with its suppliers. The loss of certain key vendors or the failure to establish and maintain relationships with popular vendors could have a material adverse effect on the Company's business. The Company believes it currently has adequate sources of designer and brand 7 name merchandise; however, there can be no assurance, especially given the Company's expansion plans, that the Company will be able to acquire sufficient quantities and an appropriate mix of such merchandise at acceptable prices. COMPARABLE STORE SALES The Company's comparable store sales results have experienced significant fluctuations in the past. In addition, the Company anticipates that opening new stores in existing markets will generally result in decreases in comparable store sales for existing stores in such markets. The Company believes that this negative impact on existing store sales, coupled with the maturity of the Company's existing stores, will make it difficult to achieve increases in comparable store sales until a significant number of new stores are included in the comparable store base. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." SUBSTANTIAL LEVERAGE AND RESTRICTIVE COVENANTS The Company has substantial indebtedness and, as a result, significant debt service obligations. As of August 3, 1996, the Company had approximately $100.5 million of outstanding indebtedness. The degree to which the Company is leveraged could have several material adverse effects, including, but not limited to the following: (i) the Company's ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes may be impaired; (ii) the Company's substantial leverage could make it more vulnerable to a downturn in general economic conditions; (iii) the Company may be more highly leveraged than other companies with which it competes, which may place it at a competitive disadvantage; and (iv) a substantial portion of the Company's cash flow from operations may be dedicated to the payment of interest on its indebtedness, thereby reducing the funds available to the Company for its operations. The Company's indebtedness contains financial and operating covenants including, but not limited to, restrictions on the Company's ability to incur additional indebtedness and issue preferred stock, pay dividends or make other distributions, create liens, sell assets, enter into certain transactions with affiliates and enter into certain mergers and consolidations. Failure by the Company to comply with such covenants may result in an event of default, which, if not cured or waived, could have a material adverse effect on the Company. In addition, upon the occurrence of a Change of Control (as defined in the indenture pursuant to which the Company's 11 7/8% Senior Notes due May 15, 2003 (the "Senior Notes") were issued (the "Senior Note Indenture")), the Company will be obligated to repurchase the Senior Notes at 101% of their principal amount. In such event, there is no assurance that the Company will be able to obtain the necessary financing to repurchase the Senior Notes. See "Description of Certain Indebtedness." HISTORY OF LOSSES The Company has incurred net losses in each fiscal year since the Acquisition including fiscal 1995. There can be no assurance that such losses will not continue in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." MERCHANDISE TRENDS The Company's success depends in part on its ability to anticipate and respond to changing merchandise trends and consumer preferences in a timely manner. Accordingly, any failure by the Company to anticipate, identify and respond to changing fashion trends could adversely affect consumer acceptance of the merchandise in the Company's stores, which in turn could adversely affect the Company's business and its image with its customers. If the Company miscalculates either the market for its merchandise or its customers' purchasing habits, it may be required to sell a significant amount of 8 unsold inventory at below average markups over the Company's cost, or below cost, which would have an adverse effect on the Company's financial condition and results of operations. IMPACT OF ECONOMIC CONDITIONS ON INDUSTRY RESULTS The Company's business is sensitive to customers' spending patterns, which in turn are subject to prevailing economic conditions. There can be no assurance that consumer spending will not be affected by economic conditions, thereby impacting the Company's growth, net sales and profitability. A decline in economic conditions in one or more of the markets in which the Company's stores are concentrated could have an adverse effect on the Company's financial condition and results of operations. CONCENTRATION OF OPERATIONS IN CALIFORNIA AND THE NORTHEAST As of August 3, 1996, 22 of the Company's stores were located in the northeastern United States (New York, New Jersey, Connecticut and Massachusetts) and generated 35% of the Company's net sales for the first six months of fiscal 1996 and 13 of the Company's stores were located in California and generated 23% of the Company's net sales for the first six months of fiscal 1996. Of the stores in the Northeast, 19 were located in New York, New Jersey and Connecticut and generated 32% of the Company's net sales for the first six months of fiscal 1996. Although the Company has opened stores in other areas in the United States, a significant percentage of the Company's net sales is likely to remain concentrated in the Northeast and California for the foreseeable future. Consequently, the Company's results of operations and financial condition are heavily dependent upon general consumer trends and other general economic conditions in those regions. COMPETITION All aspects of the women's apparel industry, including the off-price retail segment, are highly competitive. The Company competes primarily with department stores, other off-price retailers, specialty stores, discount stores and mass merchandisers, many of which have substantially greater financial and marketing resources than the Company. Finer department stores, which constitute the Company's principal competitors, offer a broader selection of merchandise and higher quality service. In addition, many department stores have become more promotional and have reduced their price points, and certain finer department stores and certain of the Company's vendors have opened outlet stores which offer off-priced merchandise in competition with the Company. Accordingly, the Company may face periods of intense competition in the future which could have an adverse effect on its financial results. See "Business--Competition." QUARTERLY RESULTS AND SEASONALITY The Company's quarterly results of operations may fluctuate materially depending on, among other things, the timing of new store openings and related pre-opening expenses, net sales contributed by new stores, increases or decreases in comparable store sales, adverse weather conditions, shifts in timing of certain holidays and changes in the Company's merchandise mix. The Company's business is also subject to seasonal influences with higher margins in its first and third quarters and lower margins in its second and fourth quarters. Because of fluctuations in net sales and net income, the results of operations for any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year or any future quarter. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Quarterly Results and Seasonality." DEPENDENCE ON KEY PERSONNEL The Company's success depends to a significant extent upon the performance of its senior management team, particularly Robert N. Friedman, Chairman and Chief Executive Officer, and 9 Philip Kaplan, President and Chief Operating Officer. The loss of services of any of the Company's executive officers could have a material adverse impact on the Company. The Company maintains key man life insurance on the life of Mr. Kaplan in the amount of $5.0 million and Mr. Friedman in the amount of $8.0 million. The Company's success will depend on its ability to motivate and retain its key employees and to attract and retain qualified personnel in the future. See "Management." VOLATILITY OF STOCK PRICE The Common Stock is currently quoted on the Nasdaq National Market System, which has experienced and is likely to experience in the future significant price and volume fluctuations which could adversely affect the market price of the Common Stock without regard to the operating performance of the Company. In addition, the Company believes that factors such as quarterly fluctuations in the financial results of the Company, the Company's comparable store sales results, announcements by other apparel retailers, the overall economy and the condition of the financial markets could cause the price of the Common Stock to fluctuate substantially. SHARES ELIGIBLE FOR FUTURE SALE There will be 8,385,638 shares of Common Stock outstanding upon the consummation of the Offering. Of such shares, 4,107,800 shares of Common Stock sold in the Initial Public Offering are freely tradeable and, upon completion of this Offering, an additional 1,970,000 shares will be freely tradeable. Of the 2,307,838 remaining shares, 1,908,687 shares are held by executive officers, directors and certain shareholders who, together with the Company, have agreed not to sell, contract to sell, or otherwise dispose of, any shares of Common Stock without the consent of Montgomery Securities for a period of 120 days after the date of this Prospectus. Upon expiration of such agreements, such shares will be eligible for sale in the public markets in accordance with Rule 144 ("Rule 144") promulgated under the Securities Act of 1933, as amended (the "Securities Act"). All other shares will be eligible for sale in the public markets in accordance with Rule 144 after November 3, 1996. In addition, upon consummation of the Offering, there will be outstanding options to purchase a total of 958,664 shares of Common Stock. Except as limited by the agreements described above and by Rule 144 volume limitations applicable to affiliates, shares issued upon the exercise of stock options generally are available for sale in the open market. The Company also has issued and outstanding 469,237 shares of Class B Common Stock which may, after November 6, 1996, be converted into shares of Common Stock on a one-to-one basis. Future sales of substantial amounts of Common Stock in the open market, or the availability of such shares for sale following this Offering, could adversely affect the prevailing market price of the Common Stock. See "Description of Capital Stock," "Shares Eligible for Future Sale," "Principal and Selling Stockholders," "Management" and "Underwriting." ANTI-TAKEOVER PROVISIONS The Company's Certificate of Incorporation and By-laws contain certain provisions that may discourage other persons from attempting to acquire control of the Company. These provisions include, without limitation, (i) classification of the Company's Board of Directors, (ii) prohibitions on stockholder action by written consent and (iii) procedural requirements in connection with stockholder proposals or director nominations. In addition, the Board of Directors, without further action of the stockholders, has the authority to issue preferred stock in one or more series. In certain circumstances, the fact that provisions are in place which inhibit or discourage takeover attempts could reduce the market value of the Common Stock. See "Description of Capital Stock." 10 THE COMPANY Loehmann's is a leading national specialty retailer of well known designer and brand name women's fashion apparel, accessories and shoes offered at prices that are typically 25% to 50% below department store prices. Frieda Loehmann founded the original Loehmann's business in 1921. She acquired the overruns and samples from designers who supplied major department stores and sold these goods at discount prices at her store in Brooklyn, New York. With the success of the original Brooklyn store, her son Charles began expanding the business, first in the northeastern United States and then nationally. Loehmann's remained privately held until 1964. After 17 years as a public company, Loehmann's was acquired in 1981 by AEA Investors ("AEA") in a leveraged buyout transaction. AEA then sold the Company in 1983 to Associated Dry Goods Corporation ("ADG"), owners of the Lord & Taylor and other retail chains. Loehmann's ownership changed again in October 1986 when the May Department Stores purchased ADG. On September 19, 1988 Loehmann's was acquired in a leveraged buyout transaction (the "Acquisition") led by Sefinco Ltd., an affiliate of Entrecanales y Tavora, S.A., the Sprout Group, a venture capital affiliate of Donaldson, Lufkin & Jenrette, Inc., Desai Capital Management, Inc. and certain of its affiliates and members of senior management. On May 10, 1996, the Company issued and sold 3,572,000 shares of Common Stock in an initial public offering (the "Initial Public Offering") and issued and sold $100 million principal amount of the Senior Notes in a concurrent debt offering (the "Debt Offering"). The net proceeds of approximately $155 million from the Initial Public Offering and the Debt Offering were used to redeem certain indebtedness of the Company and all of the outstanding shares of the Company's Series A Preferred Stock (the "Series A Preferred Stock"). See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview." Prior to consummation of the Initial Public Offering in May 1996, Loehmann's Holdings, Inc. ("Holdings"), the former parent of the Company, whose only material assets consisted of all of the outstanding stock of the Company and an intercompany note with the Company, was merged with and into a new wholly-owned Delaware subsidiary formed for the purpose of reincorporating Holdings from Maryland to Delaware. Subsequently, but prior to consummation of the Initial Public Offering, the surviving corporation of such merger was merged with and into the Company with the Company being the ultimate surviving corporation (together, the two mergers are herein referred to as the "Holdings Merger"). Each share of common stock of Holdings ("Holdings Common Stock") and Class B common stock of Holdings ("Holdings Class B Common Stock") was converted in the Holdings Merger into approximately 0.22 shares of Common Stock and Class B Common Stock, respectively. The transactions described above are referred to collectively as the "Recapitalization Transactions." Accordingly, the historical financial information appearing in the Registration Statement of which this Prospectus is a part (the "Registration Statement") reflects the retroactive application of, and all share and per share data has been restated to reflect, the Recapitalization Transactions. The Company is a Delaware corporation whose executive offices are located at 2500 Halsey Street, Bronx, New York 10461 and its telephone number is (718) 409-2000. 11 USE OF PROCEEDS The Company will not receive any of the proceeds from the sale of the Common Stock offered hereby, and none of such proceeds will be available otherwise for use by the Company or for the Company's benefit. PRICE RANGE OF COMMON STOCK The Common Stock is quoted on the Nasdaq National Market under the symbol "LOEH." The Common Stock was initially offered to the public on May 7, 1996 at $17.00 per share. The following table sets forth for the periods indicated the high and low reported sales prices per share for the Common Stock as reported by the Nasdaq National Market. There is no established trading market for the Company's Class B Common Stock.
HIGH LOW ----- ----- FISCAL 1996 $28 Second Quarter (commencing May 7)........................................... 3/8 $18 20 Third Quarter (through October 10).......................................... 29 1/2
On September 20, 1996, the number of stockholders of record of Common Stock was 74 and the number of stockholders of record of the Class B Common Stock was 10. The Company estimates that the number of beneficial owners of its Common Stock is significantly more than the number of record owners of its Common Stock. On October 10, 1996, the last reported sale price of the Common Stock as reported by the Nasdaq National Market was $27.38 per share. DIVIDEND POLICY The Company has not paid any dividends on its Common Stock or its Class B Common Stock since its inception. The Company intends to retain its earnings, if any, to finance the growth and development of its business including its store expansion program and does not anticipate paying cash dividends on its Common Stock or Class B Common Stock in the foreseeable future. The payment of any future dividends will be at the discretion of the Company's Board of Directors and will depend upon, among other things, the future earnings, operations, capital requirements and financial condition of the Company. In addition, the Company's $35.0 million revolving credit facility (the "Credit Facility") and the Senior Note Indenture contain various covenants which may restrict the Company's ability to pay dividends. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and "Description of Certain Indebtedness." 12 CAPITALIZATION The following table sets forth the capitalization of the Company as of August 3, 1996.
AUGUST 3, 1996 --------------- (IN THOUSANDS) Long-term debt: 11 7/8% Senior Notes......................................................... $ 95,000 Credit Facility (1).......................................................... 2,791 Revenue bonds and notes...................................................... 2,686 --------------- Total long-term debt..................................................... 100,477 Common stockholders' equity Common stock, 25,000,000 shares authorized, 8,322,186 issued and outstanding (2)............................................................................ 83 Class B convertible common stock, 469,237 shares authorized, issued and outstanding..................................................... 2,352 Additional paid-in-capital................................................... 79,340 Accumulated deficit.......................................................... (65,054) --------------- Total common stockholders' equity........................................ 16,721 --------------- Total capitalization....................................... $ 117,198 --------------- ---------------
- ------------ (1) The total commitment under the Credit Facility is $35.0 million. (2) Excludes 1,022,116 shares of Common Stock issuable as of October 10, 1996 upon the exercise of outstanding stock options at a weighted average exercise price of approximately $6.64 per share, 429,415 of which are exercisable within 60 days following such date. 13 SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA (IN THOUSANDS, EXCEPT OPERATING AND PER SHARE DATA) The statement of operations and balance sheet data set forth below for fiscal years 1991 through 1995 and as of the end of each such fiscal year are derived from the audited consolidated financial statements of the Company. The statement of operations data set forth below for the six months ended July 29, 1995 and August 3, 1996 and the balance sheet data set forth below as of August 3, 1996 have been derived from, and should be read in conjunction with, the unaudited consolidated financial statements of the Company. In the opinion of the Company, such unaudited financial statements reflect all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the results for such periods. Results for the six months ended August 3, 1996 are not necessarily indicative of results for the full year. The following financial data should be read in conjunction with the consolidated financial statements, related notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this Prospectus. All fiscal years for which financial information is set forth below had 52 weeks except fiscal 1995, which had 53 weeks. The following unaudited pro forma statement of operations data for the six months ended August 3, 1996 and July 29, 1995 give effect to the completion of the various transactions contemplated by the Initial Public Offering and the Debt Offering as if the same had been completed immediately prior to the commencement of the respective periods. The pro forma financial information and notes thereto do not purport to represent what the Company's results of operations would actually have been if such transactions had in fact been completed immediately prior to such dates or project the results of operations for any future period. 14
SIX MONTHS ENDED ]FISCAL YEAR --------------------- -------------------------------------------------------- JULY 29, AUGUST 3, 1991 1992 1993 1994 1995 1995 1996 -------- -------- -------- -------- -------- -------- --------- STATEMENT OF OPERATIONS DATA: Net sales................. $389,183 $389,330 $373,443 $392,606 $386,090 $186,932 $ 194,772 Cost of sales............. 296,873 286,639 274,991 278,398 265,889 129,227 132,938 -------- -------- -------- -------- -------- -------- --------- Gross profit.............. 92,310 102,691 98,452 114,208 120,201 57,705 61,834 Operating Expenses: Store operating expenses.................. 51,888 56,108 59,059 64,869 68,042 32,465 33,056 Pre-opening costs........ 1,038 635 213 147 -- -- 376 General and administrative expenses.................. 15,776 18,223 16,192 20,624 21,443 9,994 11,255 Depreciation and amortization.............. 12,462 11,492 14,334 11,955 12,120 6,062 6,046 Charge for store closings and impairment of assets (1)....................... -- -- -- -- 15,300 15,300 -- -------- -------- -------- -------- -------- -------- --------- Operating income (loss)... 11,146 16,233 8,654 16,613 3,296 (6,116) 11,101 Interest expense, net..... 17,663 16,889 17,299 18,085 18,153 8,955 7,990 -------- -------- -------- -------- -------- -------- --------- Income (loss) before income taxes............. (6,517) (656) (8,645) (1,472) (14,857) (15,071) 3,111 (Benefit) provision for income taxes............. (45) 127 79 34 106 108 60 -------- -------- -------- -------- -------- -------- --------- Income (loss) before extraordinary items....... (6,472) (783) (8,724) (1,506) (14,963) (15,179) 3,051 Extraordinary items (2)... -- -- 3,507 -- -- -- 7,101 -------- -------- -------- -------- -------- -------- --------- Net loss (3).............. (6,472) (783) (12,231) (1,506) (14,963) (15,179) (4,050) Stock dividends on and normal and accelerated accretion of preferred stock (4)................. 1,181 1,335 1,496 1,802 2,056 922 5,668 -------- -------- -------- -------- -------- -------- --------- Net loss applicable to common stock (3)......... $ (7,653) $ (2,118) $(13,727) $ (3,308) $(17,019) $(16,101) $ (9,718) -------- -------- -------- -------- -------- -------- --------- -------- -------- -------- -------- -------- -------- --------- Net loss per share applicable to common stock before extraordinary items....... $ (1.78) $ (0.49) $ (2.18) $ (0.63) $ (3.12) $ (3.07) $ (0.38) -------- -------- -------- -------- -------- -------- --------- -------- -------- -------- -------- -------- -------- --------- Net loss per share applicable to common stock after extraordinary items..................... $ (1.78) $ (0.49) $ (2.93) $ (0.63) $ (3.12) $ (3.07) $ (1.40) -------- -------- -------- -------- -------- -------- --------- -------- -------- -------- -------- -------- -------- --------- Weighted average common shares outstanding (5).... 4,297 4,299 4,680 5,228 5,463 5,247 6,934
SIX MONTHS ENDED --------------------- JULY 29, AUGUST 3, 1995 1996 -------- --------- PRO FORMA STATEMENT OF OPERATIONS DATA (6): Net sales................................................................ $186,932 $ 194,772 Store contribution (7)................................................... 25,240 28,402 Depreciation and amortization............................................ 5,722 5,895 Operating income (loss).................................................. (5,776)* 11,253 Interest expense, net.................................................... 5,800 5,499 Net income (loss)........................................................ (7,061)* 3,510 Earnings (loss) per share................................................ $ (0.79)* $ 0.37 Weighted average common shares and common share equivalents outstanding.............................................................. 8,946 9,503
- ------------ * Includes a charge to operating income (loss) and net income (loss) of $15.3 million, related to the closure of 11 stores in August 1995 and the impairment of certain primarily intangible assets, which had a negative impact of $1.03 per share (after tax effect) on earnings per share.
SIX MONTHS ENDED ]FISCAL YEAR --------------------- ------------------------------------ JULY 29, AUGUST 3, 1991 1992 1993 1994 1995 1995 1996 ---- ---- ---- ---- ---- -------- --------- SELECTED OPERATING DATA: Number of stores open at end of period...... 81 85 81 80 69 69 71 Average net sales per gross square foot (8)........................................ $350 $333 $320 $337 $327 -- -- Inventory turnover (9)...................... 5.4x 5.4x 5.1x 5.7x 5.4x -- --
15
FEB. 1, JAN. 30, JAN. 29, JAN. 28, FEB. 3, AUGUST 3, 1992 1993 1994 1995 1996 1996 ------- -------- -------- -------- --------- ------------ BALANCE SHEET DATA: Working capital........................... $ 2,743 $ 16 $ 8,288 $ 14,049 $12,669 $ 12,985 Total assets.............................. 186,466 184,189 177,666 178,612 163,611 155,667 Total debt................................ 134,088 127,931 130,886 132,029 131,799 100,543 Common stockholders' equity (deficit)..... 3,187 1,607 (9,475) (12,282) (29,080) 16,721
------------- (1) In fiscal 1995, the Company recorded charges related to the closings of 11 stores in August and the impairment of certain primarily intangible assets of $10.35 million and $4.95 million, respectively. Of the total $15.3 million charge, $10.45 million represents non-cash items. See Notes 5 and 6 to the Consolidated Financial Statements of the Company. (2) The extraordinary loss recorded in the first six months of 1996 related to the prepayment of the Company's 10 1/2% Senior Secured Notes ($52.5 million face amount), 13 3/4% Senior Subordinated Notes ($77.6 million face amount), 11 1/8% Senior Notes ($5.0 million face amount), along with the write-off of related deferred financing costs of $2.2 million. The extraordinary loss in fiscal 1993 related to the repurchase of $30.0 million principal amount 13 3/4% Senior Subordinated Notes and the payment of $12.0 million on the remaining balance of a term loan in October 1993. The loss includes a $2.0 million premium paid on the repurchase of the 13 3/4% Senior Subordinated Notes and a $1.5 million write-off of the deferred financing costs attributed to the term loan. (3) At February 3, 1996, the Company had a net operating loss carryforward of $27.0 million which is available to reduce taxes payable on future taxable income. The Company's ability to utilize its net operating loss carryforward will be dependent on the Company generating taxable income in future years and will be subject to certain limitations on its ability to use all of the net operating loss carryforward in any single fiscal year pursuant to Section 382 of the Internal Revenue Code. (4) Represents stock dividends and normal and accelerated accretion of the Company's Series A Preferred Stock to its liquidation price of $0.56 per share. All shares of Series A Preferred Stock were redeemed in connection with the Initial Public Offering and the Debt Offering completed in May 1996 (see "The Company"). (5) Excludes for fiscal years 1991 to 1995 and for the six months ended July 29, 1995, 453,317 shares of Common Stock issuable as of August 3, 1996 upon the exercise of outstanding stock options at a weighted average exercise price of approximately $1.60 per share, 416,587 of which are exercisable within 60 days following such date, as inclusion of such options in weighted average shares would have been antidilutive. Excludes for the six months ended August 3, 1996, 877,884 shares of common stock issuable as of August 3, 1996 upon the exercise of outstanding stock options at a weighted average exercise price of approximately $3.77 per share, 416,587 of which are exercisable within 60 days following such date, as inclusion of such options in weighted average shares would have been antidilutive. Includes 469,237 shares of Class B Common Stock, convertible after November 6, 1996 into 469,237 shares of Common Stock. (6) Pro forma to reflect the effects of the Initial Public Offering and the Debt Offering completed in May 1996 (see "The Company") and an assumed effective tax rate of 39%, as if such transactions had been completed immediately prior to the commencement of the respective periods. (7) Computed as gross profit less store operating expenses and pre-opening costs. (8) Average net sales per gross square foot is determined by dividing total net sales by the weighted average gross square footage of stores open during the period indicated. (9) Inventory turnover is determined by dividing cost of sales by the monthly average inventory valued at cost. 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements in "Management's Discussion and Analysis of Financial Condition and Results of Operations" constitute "forward-looking statements" within the meaning of the Reform Act. See "Special Note Regarding Forward-Looking Statements." OVERVIEW Loehmann's, founded in 1921, currently operates 73 stores in major metropolitan markets located in 23 states. The Company continues to refine its store format and has sought to broaden its appeal and increase margins through the addition of new product categories such as shoes and a broader range of accessories and intimate apparel. Since the introduction or expansion of these categories starting in fiscal 1992, gross margins have increased from 26.4% for fiscal 1992 to 31.1% for fiscal 1995 and to 31.7% for the first six months of fiscal 1996. In addition, the Company has found that its larger stores, those in excess of 23,000 square feet, typically experience enhanced operating performance with increased inventory turns, lower markdowns and thus higher profitability on a higher sales basis. Accordingly, the Company's new prototype store is 25,000 to 35,000 square feet as opposed to an average of approximately 16,000 square feet for the Company's existing stores. The Company has embarked on a store expansion program focused on opening large stores both in existing markets where the Loehmann's franchise is well established and in central business districts which have appealing demographics. As part of its expansion program, the Company intends to open seven such stores in fiscal 1996 and seven to ten stores in each of the next two fiscal years. Four of the seven stores planned for fiscal 1996 already have been opened. The Company also will continue to expand the selling space of existing stores where possible. In fiscal 1995 and in fiscal 1996 to date, the Company added an aggregate of approximately 35,000 square feet to eight existing stores and approximately 9,000 square feet to two existing stores, respectively. There can be no assurance that future stores will achieve sales or profitability levels comparable to the Company's current larger stores. See "Business--Expansion Strategy." In anticipation of its expansion program, the Company expanded or replaced selected stores and closed certain of its underperforming stores, including 11 stores in August 1995, which represented approximately 4.7% and 2.1% of net sales in fiscal 1994 and fiscal 1995, respectively, and did not significantly contribute to the Company's operating income. The Company believes that closure of these stores will allow it to improve overall profitability and achieve a more competitive cost structure, although on a short-term basis, these closings may result in reduced net sales. In connection with such closings, the Company incurred a charge of $10.35 million during fiscal 1995. The Company also recorded an unrelated charge of $4.95 million reflecting the write-down of certain primarily intangible assets deemed to have been impaired. As a result of this $15.3 million charge (of which $10.45 million is non-cash), future depreciation and amortization relating to the Company's existing asset base will be reduced. The amount of such reduction in fiscal 1996 is expected to be approximately $800,000. The Company estimates that its average net cash requirement to open a typical new store will be approximately $1.7 million, consisting of approximately $1.0 million of capital expenditures for store fixtures and equipment and leasehold improvements, approximately $0.5 million for net working capital and approximately $0.2 million for pre-opening expenses. Actual costs will vary from store to store based upon, among other things, geographic location, the size of the store and the extent of the build-out required at the selected site. The Company anticipates that the cost of its expansion program, approximately $10.0 million in fiscal 1996 and approximately $6.0 million to $8.0 million in fiscal 1997, will be principally funded from operating cash flow. Based on its historical experience, the Company believes that its new stores will generate a positive store contribution in the first full year of operation and are generally expected to recoup their investment within two years. Expenses incurred in connection 17 with the opening of new stores are expensed in the fiscal quarter in which the stores open. The Company anticipates opening four stores in the third quarter of fiscal 1996 and thus expects to incur significant pre-opening expenses in that quarter. The aggregate charge for pre-opening expense may vary substantially from quarter to quarter depending upon the timing of the opening of new stores. The Company selects new locations in existing markets based on anticipated profitable incremental sales volume for that market. Opening new stores in existing markets generally results in decreases in the comparable sales for existing stores in such markets. The Company believes that this negative impact on existing store sales coupled with the maturity of the Company's existing stores will make it more difficult to achieve increases in comparable store sales until a significant number of new stores are included in the comparable store base. Inherent in the Company's expansion strategy is an ongoing increase in occupancy costs as the Company opens larger stores in more desirable locations. This will have a negative impact on store expenses as a percentage of net sales. This negative impact should be at least partially offset by leveraging general and administrative expenses as net sales from new stores are added to the net sales base. The net proceeds received from the Initial Public Offering and Debt Offering were used (i) to redeem in full $52.5 million face amount of the Company's 10 1/2% Senior Secured Notes due 1997 (the "10 1/2% Secured Notes") at a redemption price of 103.5% of the face amount of such notes plus accrued and unpaid interest, (ii) to redeem in full $77.6 million face amount of the Company's 13 3/4% Senior Subordinated Notes due 1999 (the "13 3/4% Subordinated Notes") at a redemption price of 101.0% of the face amount of such notes, plus accrued and unpaid interest and (iii) to redeem all issued and outstanding shares of the Company's Series A Preferred Stock (the "Series A Preferred Stock") at its liquidation price of $0.56 per share totaling $20.9 million. As a result of these transactions, in the second quarter of fiscal 1996 the Company incurred extraordinary losses of approximately $4.7 million on the early extinguishment of debt and $2.0 million from the write-off of related deferred financing costs associated with such indebtedness, and a $5.1 million charge to accumulated deficit from the accelerated accretion of the Series A Preferred Stock to its liquidation price of $0.56 per share. At February 3, 1996, the Company had a net operating loss carryforward of approximately $27.0 million to reduce taxes payable on future taxable income. The Company's ability to utilize its net operating loss carryforward will be dependent on the Company generating taxable income in future years and will be subject to certain limitations on its ability to use all of the net operating loss carryforward in any single fiscal year pursuant to Section 382 of the Internal Revenue Code. 18 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, statement of operations data expressed as a percentage of net sales.
FISCAL YEAR (1) SIX MONTHS ENDED ----------------------- --------------------- JULY 29, AUGUST 3, 1993 1994 1995 1995 1996 ----- ----- ----- -------- --------- Net sales (2)........................................ 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales........................................ 73.6 70.9 68.9 69.1 68.3 ----- ----- ----- -------- --------- Gross margin......................................... 26.4 29.1 31.1 30.9 31.7 Operating expenses: Store operating expenses........................... 15.8 16.5 17.6 17.4 17.0 Pre-opening costs.................................. 0.1 -- -- -- 0.2 General and administrative expenses................ 4.3 5.3 5.6 5.3 5.8 Depreciation and amortization...................... 3.8 3.0 3.1 3.2 3.1 Charge for store closings and impairment of assets............................................... -- -- 4.0 8.2 -- ----- ----- ----- -------- --------- Operating income (loss).............................. 2.3 4.2 0.9 (3.3) 5.7 Interest expense, net................................ 4.6 4.6 4.7 4.8 4.1 ----- ----- ----- -------- --------- Income (loss) before income taxes.................... (2.3)% (0.4)% (3.8)% (8.1)% 1.6% ----- ----- ----- -------- --------- ----- ----- ----- -------- ---------
- ------------ (1) Fiscal 1993 and 1994 had 52 weeks, and fiscal 1995 had 53 weeks. (2) Numbers may not total due to rounding. Six Months Ended August 3, 1996 Compared to Six Months Ended July 29, 1995 Net sales increased by approximately $7.9 million, or 4.2%, to $194.8 million for the six months ended August 3, 1996 as compared to $186.9 million for the six months ended July 29, 1995. Comparable store sales (sales at stores that were in operation for both periods) increased by 4.7%. The increase in net sales was due to the improved comparable store sales results, plus the opening of two new stores (Merrick and Houston) opened in the first quarter of fiscal 1996 partially offset by the impact of the eleven stores closed in August 1995. Gross profit increased by approximately $4.1 million to $61.8 million for the six months ended August 3, 1996 as compared to $57.7 million for the six months ended July 29, 1995. Gross margin increased to 31.7% from 30.9% in the prior year period. The improvement in margin was primarily a result of the continuing shift in the Company's sales mix towards merchandise categories with higher average gross margins coupled with a reduction of markdowns and inventory shortage. Store operating expenses increased by approximately $0.6 million to $33.1 million for the six months ended August 3, 1996 as compared to $32.5 million for the six months ended July 29, 1995. As a percentage of net sales, store operating expenses decreased to 17.0% from 17.4% in the comparable prior year period. The dollar increase in store operating expenses was primarily due to an increase in variable expenses associated with the sales increase of $7.9 million. Pre-opening costs totaled $376,000 during the six months ended August 3, 1996. These costs were associated with the opening of two new stores in Merrick, New York and Houston, Texas. The Company charges the costs associated with the new store openings to operations in the fiscal quarter of the store's opening. Since August 3, 1996, the Company has opened two new stores, one each in San Diego, California and Paramus, New Jersey. The Company anticipates opening three additional stores in fiscal 1996. There were no store openings in the first six months of fiscal 1995. General and administrative expenses increased by approximately $1.3 million to $11.3 million for the six months ended August 3, 1996 as compared to $10.0 million for the six months ended July 29, 19 1995. As a percent of net sales, general and administrative expenses increased to 5.8% as compared to 5.3% for the same period in the prior year. Depreciation and amortization for the six months ended August 3, 1996, was essentially unchanged from the same period in the prior year. Operating income increased $17.2 million to $11.1 million for the six months ended August 3, 1996 from an operating loss of $6.1 million for the six months ended July 29, 1996. Before the charges for store closings and impairment of assets, operating income increased by approximately $1.9 million to $11.1 million for the first six months of fiscal 1996 from $9.2 million for the comparable period in fiscal 1995. As a percentage of net sales, operating income before the charges for store closings and impairment of assets increased to 5.7% from 4.9%. Interest expense, net for the six months ended August 3, 1996 was $8.0 million versus $9.0 million for the comparable period in fiscal 1995, a decrease of $1.0 million, or 10.8%. The reduction in net interest expense resulted from the Company's net reduction of long-term debt of approximately $30.0 million and a reduction of the average interest rate paid on the long-term debt by approximately 60 basis points. In May 1996, the Company redeemed the 10 1/2% Secured Notes and the 13 3/4% Subordinated Notes totalling $130.0 million face value and issued $100.0 million face value of the 11 7/8% Senior Notes. For the six months ended July 29, 1995, the Company recorded a $10.35 million charge related to the implementation of a plan to close eleven underperforming stores. The Company believes that these closures will improve overall chain profitability and allow the Company to achieve a more competitive cost structure. Additionally, the Company recorded a $4.95 million charge to continuing operations in connection with the write-down to fair value of certain primarily intangible assets that were determined to have been impaired in accordance with FAS No. 121. Of this combined $15.3 million charge, $10.45 million represents a non-cash charge. See Notes 5 and 6 to the Consolidated Financial Statements. Fiscal 1995 Compared to Fiscal 1994 Net sales decreased by approximately $6.5 million, or 1.7%, to $386.1 million during fiscal 1995 as compared to $392.6 million during fiscal 1994. Comparable store sales decreased by 0.4% during fiscal 1995 as compared to fiscal 1994 due to a relatively weak retail environment. The remaining decrease in total sales was attributable to the closure of 11 stores in August 1995 which represented approximately 4.7% and 2.1% of net sales in fiscal 1994 and fiscal 1995, respectively. Sportswear, dresses and suits represented an aggregate of $284.2 million of net sales in fiscal 1995, as compared to $295.6 million in fiscal 1994, while accessories, intimate apparel and shoes represented an aggregate of $77.2 million of net sales in fiscal 1995 as compared to $64.4 million in fiscal 1994. These changes reflect the Company's efforts in recent years to expand its merchandise mix to include shoes and a broader range of accessories and intimate apparel, which typically have higher gross margins than the Company's traditional apparel offerings. Gross profit increased by approximately $6.0 million to $120.2 million during fiscal 1995 as compared to $114.2 million for fiscal 1994. Gross margin increased to 31.1% for fiscal 1995 from 29.1% in the prior fiscal year. The increase in margin was primarily a result of a continuing shift in the Company's sales mix towards merchandise with a higher average gross margin coupled with a reduction of markdowns and shrinkage. Store operating expenses increased by approximately $3.1 million to $68.0 million during fiscal 1995 as compared to $64.9 million during fiscal 1994. As a percentage of net sales, store operating expenses increased to 17.6% for fiscal 1995 from 16.5% in the prior fiscal year. Direct mail and advertising expenditures increased by $2.8 million to $13.0 million in fiscal 1995 from $10.2 million in 20 fiscal 1994, primarily as a result of the growth of the Company's Insider Club membership list for direct mail sale announcements. The remaining increase was attributable to higher occupancy costs due to the addition of square footage at eight of the Company's existing stores partially offset by the closing of 11 stores in August 1995. General and administrative expenses increased by approximately $0.8 million to $21.4 million during fiscal 1995 as compared to $20.6 million for fiscal 1994. As a percentage of net sales, general and administrative expenses increased to 5.5% for fiscal 1995 from 5.2% in the prior fiscal year. The increase in general and administrative expenses was primarily due to the Company's continued investment in corporate infrastructure to support the Company's planned new store expansion program. Depreciation and amortization for fiscal 1995 remained essentially unchanged as compared to the prior fiscal year. The reduction in depreciation and amortization attributable to the closing of 11 stores in fiscal 1995 was offset by additional depreciation associated with capital expenditures in fiscal 1995. Charge for store closings for fiscal 1995 includes a $10.35 million charge related to the closure of 11 underperforming stores in August 1995. Reserved amounts at February 3, 1996 related to long-term lease commitments were not material. The Company believes the store closings will improve overall profitability and enable the Company to achieve a more competitive cost structure. See Note 5 to the Consolidated Financial Statements. Charge for impairment of assets for fiscal 1995 includes a $4.95 million write-down to fair value of certain assets, primarily intangible favorable leasehold rights, that were determined to be impaired. As discussed in Note 6 to the Consolidated Financial Statements, the Company completed certain market analyses as part of an overall strategic plan in the second quarter of fiscal 1995. As an outcome of these analyses, the Company shortened the period of time in which it intended to occupy certain stores and as a consequence, the undiscounted cash flows estimated to be generated from the revised intended use were not sufficient to recover the assets' carrying amount. Fair value was based on appraisal value. Operating income decreased by $13.3 million to $3.3 million for fiscal 1995 as compared to $16.6 million for fiscal 1994. Before the charges for store closings and impairment of assets, operating income increased by approximately $2.0 million to $18.6 million for fiscal 1995 from $16.6 million for fiscal 1994. As a percentage of net sales, operating income before the charges for store closings and impairment of assets increased to 4.8% from 4.2%. Interest expense, net for fiscal 1995 was essentially unchanged as compared to fiscal 1994. Fiscal 1994 Compared to Fiscal 1993 Net sales increased by approximately $19.2 million to $392.6 million, or 5.1%, during fiscal 1994 as compared to $373.4 million during fiscal 1993. Comparable store sales increased by 4.9% during fiscal 1994 as compared to fiscal 1993. Management believes that the principal factors contributing to this increase in net sales were the introduction of shoes, expansion of accessories and intimate apparel and the general upgrading of store interiors and merchandise presentation. Sportswear, dresses and suits represented an aggregate of $295.6 million of net sales in fiscal 1994, as compared to $292.0 million in fiscal 1993, while accessories, intimate apparel and shoes represented an aggregate of $64.4 million of net sales in fiscal 1994 as compared to $50.0 million in fiscal 1993. Gross profit increased by approximately $15.7 million to $114.2 million during fiscal 1994 as compared to $98.5 million during fiscal 1993. Gross margin increased to 29.1% for fiscal 1994 from 26.4% in the prior fiscal year. The improvement in margin was the result of a reduction in markdowns of 2.7% coupled with an improvement in initial markup of 0.4% of net sales partially offset by an increase in shrinkage. 21 Store operating expenses increased by approximately $5.8 million to $64.9 million during fiscal 1994 as compared to $59.1 million during fiscal 1993. As a percentage of net sales, store operating expenses increased to 16.5% for fiscal 1994 from 15.8% in the prior fiscal year. Direct mail and advertising expenses increased to $10.2 million in fiscal 1994 from $7.7 million in fiscal 1993. This increase of $2.5 million was primarily due to the growth of the Company's Insider Club membership list for direct mail sale announcements. Store operating expenses also increased $1.0 million as a result of the opening of a new larger store during fiscal year 1994 partially offset by the closing of two smaller stores, increases resulting from bonus and profit sharing costs for store-level employees associated with the earnings increase in fiscal 1994 over fiscal 1993 and certain increased variable expenses. General and administrative expenses increased by approximately $4.4 million to $20.6 million during fiscal 1994 as compared to $16.2 million during fiscal 1993. As a percentage of net sales, general and administrative expenses increased to 5.3% for fiscal 1994 from 4.3% in the prior fiscal year. This increase resulted from an increase in bonus and profit sharing costs for corporate-level employees, one-time fees associated with the development of a corporate long-range plan and real estate expansion strategy and costs associated with the Company's investment in corporate infrastructure. In addition, fiscal 1993 general and administrative expenses were partially offset by approximately $2.0 million of income from one-time landlord settlements and an insurance claim related to the Reseda, California location which was damaged in an earthquake which reduced general and administrative expenses for that fiscal year. Depreciation and amortization decreased by $2.3 million to $12.0 million during fiscal 1994 as compared to $14.3 million during fiscal 1993. The decrease was primarily due to the absence of prior year write-offs of assets associated with closed and relocated stores and the decrease in amortization of stock option compensation. Operating income increased by $7.9 million to $16.6 million during fiscal 1994 as compared to $8.7 million during fiscal 1993. As a percentage of net sales, operating income increased to 4.2% for fiscal 1994 from 2.3% in the prior fiscal year. Interest expense, net increased by $0.8 million in fiscal 1994 from the prior fiscal year. This increase was primarily due to a full year of non-cash accretion expense associated with the 10 1/2% Secured Notes which were issued in October 1993, at a discount. QUARTERLY RESULTS AND SEASONALITY While the Company's net sales do not show significant seasonal variation, the Company's operating income has traditionally been significantly higher in its first and third fiscal quarters. The Company believes that its merchandise is purchased primarily by women who are buying for their own wardrobes rather than as gifts. As a result, unlike many other retailers, the Company does not experience increases in net sales during the Christmas shopping season. In addition, the Company's quarterly results of operations may fluctuate materially depending on, among other things, the timing of new store openings and related pre-opening expenses, net sales contributed by new stores, increases or decreases in comparable store sales, adverse weather conditions, shifts in timing of certain holidays and changes in the Company's merchandise mix. Results of operations during the second and fourth quarters are traditionally impacted by end of season clearance events. In addition, fourth quarter operations can be affected by employee performance bonuses. 22 The following table sets forth certain unaudited operating data for the Company's ten fiscal quarters ended August 3, 1996. The unaudited quarterly information includes all normal recurring adjustments which management considers necessary for a fair presentation of the information shown.
FISCAL 1994 ---------------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER(1) -------- -------- -------- ---------- (IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Net sales......................................... $ 96,170 $ 90,798 $105,762 $ 99,876 Gross profit...................................... 28,248 26,419 32,322 27,219 Store contribution (2)............................ 12,968 11,669 15,053 9,502 Operating income (loss)........................... 5,448 3,334 6,776 1,055 AS A PERCENTAGE OF NET SALES: Gross margin...................................... 29.4% 29.1% 30.6% 27.3% Store contribution (2)............................ 13.5% 12.9% 14.2% 9.5% Operating income (loss)........................... 5.7% 3.7% 6.4% 1.1% FISCAL 1995 ---------------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER(1) -------- -------- -------- ---------- (IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Net sales......................................... $ 97,506 $ 89,426 $ 99,362 $ 99,796 Gross profit...................................... 30,823 26,882 32,694 29,802 Store contribution (2)............................ 13,906 11,334 15,433 11,486 Operating income (loss)........................... 5,818 (11,934)(3) 7,364 2,048 AS A PERCENTAGE OF NET SALES: Gross margin...................................... 31.6% 30.1% 32.9% 29.9% Store contribution (2)............................ 14.3% 12.7% 15.5% 11.5% Operating income (loss)........................... 6.0% (13.3)%(3) 7.4% 2.1% FISCAL 1996 -------------------- FIRST SECOND QUARTER QUARTER -------- -------- (IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Net sales......................................... $104,120 $ 90,652 Gross profit...................................... 33,734 28,100 Store contribution (2)............................ 15,508 12,894 Operating income (loss)........................... 6,702 4,399 AS A PERCENTAGE OF NET SALES: Gross margin...................................... 32.4% 31.0% Store contribution (2)............................ 14.9% 14.2% Operating income (loss)........................... 6.4% 4.9%
- ------------ (1) For the 14 weeks ended February 3, 1996 and the 13 weeks ended January 28, 1995. (2) Reflects total gross profit less store operating expenses and pre-opening costs. (3) In the second quarter of fiscal 1995, the Company incurred a charge for store closings and impairment of assets of $15.3 million. 23 LIQUIDITY AND CAPITAL RESOURCES During fiscal 1995 and the first six months of fiscal 1996, the Company's primary uses of cash (other than the use of the net proceeds from the Initial Public Offering and the Debt Offering as described below) were to service its debt and fund capital expenditures. The Company has satisfied its cash requirements principally from cash flow from operations and from the net proceeds of the Initial Public Offering and the Debt Offering. On May 10, 1996, the Company issued and sold 3,572,000 shares of Common Stock in the Initial Public Offering and $100.0 million aggregate principal amount of the Senior Notes in the Debt Offering. The approximate $155 million in net proceeds received from the Initial Public Offering and Debt Offering were used to redeem the 10 1/2% Secured Notes, the 13 3/4% Subordinated Notes and the Series A Preferred Stock. During the first six months of fiscal 1996, net cash used as a result of operating activities totaled $4.7 million. During such period, cash of $9.6 million was provided from operations after adding back non-cash charges offset by the use of net working capital of $11.0 million related to new store openings and a reduction in accrued interest expense. In addition, $3.4 million cash was used for new debt issuance costs. For the first six months of fiscal 1996, the Company also used cash of approximately $3.7 million to fund capital expenditures and approximately $2.2 million for financing activities. The Company's financing activities during the first six months of fiscal 1996 included the issuance of the Common Stock in the Initial Public Offering and the Senior Notes in the Debt Offering for an aggregate of $155 million, the use of the net proceeds of the Initial Public Offering and the Debt Offering to repay certain indebtedness and redeem the Series A Preferred Stock and the repurchase and retirement of $5.0 million aggregate principal amount of the Senior Notes for $5.1 million. During fiscal 1995, net cash provided by operations was $9.5 million. Net cash used in investing activities, principally related to capital expenditures for leasehold improvements and fixtures primarily associated with the upgrading of existing stores and to a lesser extent improving corporate infrastructure, was $8.1 million for fiscal 1995. Additionally, fiscal 1995 capital expenditures include purchases related to stores scheduled to open in fiscal 1996. Net cash used in financing activities, principally related to the repurchase of $1.6 million face amount of the 10 1/2% Secured Notes, was $1.6 million during fiscal 1995. On June 12, 1996, the Company amended and restated its credit agreement with BankAmerica Business Credit, Inc. (the "Bank") to provide the Company with the Credit Facility. The Credit Facility provides for a $35.0 million revolving line of credit with interest payable, at the Company's option, on amounts drawn under the facility at either (i) the Bank's prime plus 0.75%, or (ii) the London Interbank Offered Rate ("LIBOR") plus 2.2%. As of August 3, 1996, approximately $2.8 million of indebtedness was outstanding under the Credit Facility. The Company also is required to pay a per annum fee equal to 0.375% on the undrawn portion of the Bank's commitment with respect of the Credit Facility. The Credit Facility is subject to certain borrowing base limitations, subjects the Company to certain convenants and imposes limitations upon investments dividends and other restricted payments and capital expenditures. The Credit Facility is secured by substantially all of the Company's assets, including accounts receivable, inventory, fixtures and equipment and is not subject to scheduled annual repayments, except upon maturity. The Credit Facility has a term of four years, expiring on June 17, 2000. See "Description of Certain Indebtedness--Credit Facility." During fiscal 1995 and the first six months of fiscal 1996, the Company's capital expenditures for leasehold improvements, fixtures and equipment and investments in infrastructure were approximately $3.5 million and $1.2 million, respectively. In addition, in fiscal 1995 and the first six months of fiscal 1996, approximately $2.8 million and $0.3 million, respectively, was expended principally to expand and renovate certain of its stores and approximately $1.8 million and $1.9 million, respectively, was expended in connection with stores scheduled to open in fiscal 1996. The Company anticipates its capital expenditures for the second half of fiscal 1996 will be approximately $11.0 million, consisting of 24 $8.1 million primarily to open new stores and $2.4 million for other general capital expenditures. For fiscal 1997, the Company anticipates its capital expenditures will be approximately $12.0 million to open new stores and for other uses. The Company believes that cash generated from operations will be sufficient to satisfy its cash requirements for fiscal 1996 and fiscal 1997, as supplemented if necessary, by borrowings under the Credit Facility. 25 BUSINESS Loehmann's, founded in 1921 as the "Original Designer Outlet," is a leading national specialty retailer of well known designer and brand name women's fashion apparel, accessories and shoes offered at prices that are typically 25% to 50% below department store prices. The Company believes it has developed a unique franchise as the largest national upscale off-price specialty retailer in the industry. The Company's strong brand name, loyal customer base and long-standing relationships with leading designers and vendors of quality merchandise has enabled it to maintain its franchise. The Company's target customers are relatively affluent women between the ages of 30 and 55 who are attracted to designer and other high quality merchandise offered at exceptional values. The Company currently operates 73 stores in major metropolitan markets located in 23 states. Management believes it has successfully positioned the Company to build on its franchise through an expansion program initially focusing on its core suburban markets and certain central business districts. INDUSTRY OVERVIEW According to published reports, total retail sales of women's apparel and accessories in the United States were approximately $71.8 billion in 1995. The womenswear industry is served by a variety of distribution channels including department stores, specialty stores and off-price retailers. The women's apparel industry is categorized into five product classifications: designer, bridge, better, moderate and budget. Designer merchandise is the most expensive product classification and is characterized by high fashion styling. Designer brands include Donna Karan, Calvin Klein and Ralph Lauren. Bridge products are typically brand name merchandise which may carry designer labels but are less expensive than the designer classification and allow customers to purchase designer-like merchandise at below designer prices. Bridge brands include DKNY, A Line/Anne Klein, Anne Klein II, Adrienne Vittadini, CK/Calvin Klein, Emanuel Ungaro and Tahari. Apparel in the better classification carries brand name labels but is less expensive than bridge apparel. Better brands include Jones New York, Harve Bernard and Kenar. Merchandise in the moderate classification is also generally brand name but is a less expensive product category. Moderate brands include Oleg Cassini and Leslie Fay. Budget merchandise is the least expensive product classification. Designer and bridge merchandise is generally sold in finer department stores such as Bloomingdale's, Lord & Taylor, Nordstrom and Saks Fifth Avenue. Because manufacturers of designer and bridge merchandise are very concerned about maintaining the upscale image of their trademarks, they are typically very selective about which retailers carry their products. As a result, the Company believes that most other off-price retailers have limited access to designer and bridge merchandise. BUSINESS STRATEGY The Company's strategy is to deliver value to its customers by offering at substantial discounts a wide selection of high quality in-season merchandise, including designer and bridge apparel, accessories and shoes. The Company believes that it has created a unique niche market as the largest national upscale off-price specialty retail store--one that differentiates itself from finer department stores by offering similar merchandise at significantly lower prices and from other off-price apparel retailers by offering a broad range of designer and bridge merchandise. The principal elements of the Company's business strategy are as follows: Emphasis on In-Season Designer and High Quality Merchandise The Company offers a wide selection of in-season apparel, accessories and shoes, approximately one-third of which is designer and bridge merchandise. The Company, like finer department stores, is known for carrying designer and bridge labels, including Donna Karan, Calvin Klein, Ralph Lauren, Adrienne Vittadini, Tahari, Dana Buchman, Andrea Jovine and Emanuel Ungaro. 26 Value Pricing The Company provides its customers with exceptional value by offering its merchandise at prices that are typically 25% to 50% below prices charged by department stores for the same items and that are comparable to or lower than prices charged by other off-price retailers. Capitalize on Long-Standing Vendor Relationships Loehmann's is uniquely positioned among off-price retailers as a principal choice for well known designers who believe that their prestige will be preserved by having their merchandise offered by Loehmann's because of its high quality image and affluent customer base. Loehmann's long-standing vendor relationships and its ability to sell large quantities of goods have provided the Company with ready access to a wide selection of merchandise, often on a preferential basis. Broaden Merchandise Categories The Company continually seeks to broaden its appeal and has over the past several years expanded its merchandise mix to include shoes and a broader range of accessories and intimate apparel. These items, which typically generate higher gross margins than the Company's traditional apparel categories, accounted for more than 20% of the Company's net sales in fiscal 1995, an increase from 8% in fiscal 1992. Flexible Purchasing Strategy The Company relies on a flexible purchasing strategy under which it enters any given month with a substantial portion of its purchasing requirements unfulfilled. This strategy enables the Company to react to sales trends, fashion trends and changing customer preferences while enhancing the Company's ability to negotiate with its vendors and take advantage of market inefficiencies and opportunities as they may arise. Efficient Inventory Management The Company ships new high quality merchandise to its stores on a daily basis. The Company believes it is able to constantly replenish its stores because of its efficient allocation and distribution system, which enables the Company to distribute merchandise to its stores typically within 48 to 72 hours after delivery to its distribution center. In addition, the Company utilizes a cyclical markdown strategy which automatically reduces prices as goods age. As a result of this efficient inventory management, the Company is able to enhance its gross margin, maintain a comparatively low investment in inventory, increase its inventory turn and react more effectively to changing fashion trends and customer preferences. Low-Cost Structure In order to provide its customers with exceptional value while maximizing profitability and cash flow, the Company is focused on maintaining an efficient, low-cost operating structure. Key elements of this focus include the Company's no-frills store format, lean corporate overhead and disciplined real estate strategy. EXPANSION STRATEGY The Company has embarked on a store expansion program designed to capitalize on its unique franchise by opening new stores both in existing suburban markets where the Loehmann's franchise is well established and in central business districts which have appealing demographics. The Company intends to open seven stores during fiscal 1996, four of which already have been opened: one each in Merrick, New York, Houston, Texas, San Diego, California and Paramus, New Jersey. Based on the success of its downtown San Francisco store and market research performed by the Company, Loehmann's believes that it can successfully expand its franchise by opening stores in other central business districts in such cities as New York, Boston and Seattle. The Company intends to open a 60,000 square foot flagship store in downtown Manhattan at the site which recently housed Barneys' 27 Seventh Avenue Men's Store. To date, the Company has entered into leases for the three remaining stores expected to be opened in fiscal 1996 including the Manhattan site. Two of the new stores being opened in fiscal 1996 are replacing existing, smaller format stores. In addition, the Company intends to continue its expansion strategy by opening seven to ten stores in each of fiscal 1997 and fiscal 1998. The Company has signed four leases associated with stores to be opened in fiscal 1997 including locations in Seattle, Washington, Ft. Lauderdale, Florida, Tustin, California, and Westbury, New York. The Company is currently in lease negotiations for several other store locations for fiscal 1997 openings. Larger Store Format Based on its historical operating experience, the Company believes that its larger stores are more profitable. The Company's eight largest stores in excess of 23,000 square feet (excluding a test market store in an outlet mall) that were open for the entire year in fiscal 1995 averaged $11.7 million in net sales, as compared to $4.7 million for the balance of the Company's stores (which average approximately 16,000 square feet). These eight largest stores generated store contribution as a percentage of related net sales of 15.1% as compared to 13.3% for the balance of the Company's stores. A comparison of the Company's larger store base to the balance of its store base supports the Company's determination that larger stores generally permit the Company to better display and offer a broader selection of merchandise, enhance turnover of inventory and require fewer markdowns, thus enabling such stores to achieve greater sales, higher margins and increased profits. Accordingly, the Company's new stores are planned to be substantially larger at 25,000 to 35,000 square feet than most of its existing stores. As part of its strategy, the Company will continue to expand the selling area of existing stores where possible. Store Opening Costs The Company does not believe its expansion program will entail significant capital expenditures on a per store basis. Based on its historical experience, the Company believes that its new stores will generate a positive store contribution in the first full year in which such stores are open and are expected to recoup their investment within two years. Furthermore, the Company believes it has a sufficient corporate, purchasing and distribution infrastructure in place ready to handle its current and antici- pated expansion program. The Company estimates that its average net cash requirement to open a typical new store will be approximately $1.7 million, consisting of approximately $1.0 million of capital expenditures for store fixtures and equipment and leasehold improvements, approximately $0.5 million for net working capital and approximately $0.2 million for pre-opening expenses. Actual costs will vary from store to store. Site Selection Based on its historical operating results, the Company believes that in addition to store size, key elements in determining the success of an individual store are the density of the store area's female population over age 18, the affluence of the population frequenting the store's area and the retail strength of the store's area, particularly the upscale nature of the surrounding retail establishments. The Company believes Loehmann's is a destination store which, together with its reputation as a desirable tenant, affords it greater flexibility in selecting store sites. This enables the Company to adhere to its policy of not entering into leases under which the occupancy costs exceed certain acceptable percentages of anticipated net sales. The Company has retained the services of a retail consulting firm that has conducted an extensive analysis of the relevant demographics to advise the Company with respect to its expansion strategy. All decisions as to store openings are decided on a case by case basis by the Company's Board of Directors based on the recommendations of management. 28 MERCHANDISING Selection The Company offers a wide selection of women's sportswear, dresses, suits, outerwear, coats, accessories, intimate apparel and shoes. Approximately one-third of the Company's sales are generated by designer and bridge merchandise with the remainder in the brand name, better and moderate classifications. The Company does not offer budget merchandise in its stores. Most of the Company's merchandise is in-season and is therefore generally available at Loehmann's during the same selling season as it is available in department stores. The following is a list of many of the key brands offered at the Company's stores:
Adrienne Vittadini CK/Calvin Klein Harve Bernard Andrea Jovine Dana Buchman Jones NY A Line/Anne Klein Depeche Mode Kenar Anne Klein II DKNY Oleg Cassini Augustus Donna Karan Ralph Lauren Calvin Klein Emanuel Ungaro Tahari
The Company continually seeks to broaden its appeal and has over the past several years expanded its merchandise mix to include shoes and a broader range of accessories and intimate apparel. These items, which typically generate higher gross margins than the Company's traditional apparel categories, accounted for approximately 20% of the Company's net sales in fiscal 1995, an increase from 8% in fiscal 1992. The following table shows the percentages of the Company's net sales attributable to its various product categories for fiscal 1992 through fiscal 1995:
FISCAL YEAR ------------------------------------ 1992 1993 1994 1995 ------ ------ ------ ------ Sportswear............................... 50.4% 49.6% 48.8% 47.6% Dresses & Suits.......................... 31.5 28.6 26.5 26.0 Coats & Outerwear........................ 7.2 5.9 5.2 5.1 Accessories/Intimate Apparel............. 8.0 11.3 13.0 14.5 Shoes.................................... -- 2.1 3.4 5.5 Other.................................... 2.9 2.5 3.1 1.3 ------ ------ ------ ------ Total.................................. 100.0% 100.0% 100.0% 100.0% ------ ------ ------ ------ ------ ------ ------ ------
All Loehmann's stores carry items from each of its merchandise categories. However, the allocation of merchandise among the stores varies based upon factors relating to the demographics and geographic location of each store as well as the size of the store and its ability to adequately display the merchandise. In a continuing effort to broaden its appeal, the Company currently offers infantwear in approximately 30 of its stores and women's large sizes apparel in approximately 35 of its stores. Pricing The Company seeks to provide its customers with exceptional value by offering its merchandise at prices that are typically 25% to 50% below prices charged by department stores for the same items and that are comparable to or lower than prices charged by other off-price retailers. The Company's central buying staff adheres to a disciplined approach to acquiring merchandise that enables the Company to consistently offer its merchandise at favorable prices. The Company's buyers will only acquire merchandise at prices which permit the Company to offer its merchandise for sale initially at a significant discount to the first marked down price that a department store would charge for the same item. Each item of merchandise offered by the Company carries a price tag displaying the Company's price as well as the typical department store's initial price for the same item. 29 The Company uses a cyclical markdown policy to reduce prices automatically as goods age. The purpose of this policy is to improve inventory turnover and minimize the amount of unsold merchandise at the end of the season, while reinforcing the customer's perception of value and enabling the Company to provide the stores with fresh merchandise on a regular basis. In addition, the Company closely monitors prices charged by competitors in each of its markets and adjusts its prices to preserve its pricing advantage. VENDOR RELATIONSHIPS AND PURCHASING Loehmann's is uniquely positioned among off-price retailers as a principal choice for well known designers who believe that their prestige will be preserved by having their merchandise offered by Loehmann's because of its high quality image and affluent customer base. Approximately 75% of the Company's 50 most active suppliers have been selling merchandise to the Company for at least 10 years. Because of these long-standing vendor relationships and its ability to sell large quantities of goods, the Company has ready access to a wide selection of merchandise, often on a preferential basis. The Company does not engage in significant forward purchasing and a large portion of its purchasing requirements in any given month intentionally remains unfulfilled at the beginning of the month. This strategy enables the Company to react to fashion trends and changing customer preferences while enhancing the Company's ability to negotiate with its vendors and take advantage of market inefficiencies and opportunities as they may arise. The Company purchases a majority of its inventory during the manufacturer's selling season enabling the Company to offer merchandise during the same selling season as it is available in department stores. The Company also purchases a portion of its inventory at the end of the season, when the Company is prepared to purchase a manufacturer's remaining items at an even steeper discount. Vendors who sell to the Company do not need to build into their price structure any anticipation of returns, markdown allowances or advertising allowances, all of which are typical in the department store industry. In addition, the Company pays for goods within an average of approximately 25 to 30 days and often picks up the merchandise directly from the vendors. The Company purchases its inventory from over 400 suppliers, which in many cases include separate divisions of a single manufacturer or designer. These suppliers include a substantial majority of the designer and brand name apparel manufacturers in the United States. Some purchases are also made in the European market, primarily Italy. The Company's 20 largest suppliers accounted for approximately 36% of purchases made by the Company in fiscal 1995. During fiscal 1995, no supplier or group of related suppliers accounted for more than 4% of the Company's total purchases. The Company does not have any long-term supply contracts with its suppliers. The Company maintains its own central buying staff, comprised of 13 experienced off-price buyers, many of whom also have extensive experience with traditional department stores. Historically, the Company has had very low turnover within its buying group, enabling Loehmann's to capitalize on an experienced, respected group of buyers capable of enhancing the Company's already strong vendor relationships. STORE LAYOUT Loehmann's store format and merchandise presentation are designed to project the image of deep discount and exceptional value, as well as to emphasize Loehmann's niche as the off-price equivalent of an upscale specialty store. Loehmann's stores are divided into two shopping areas: a large, open selling area with wall-to-wall merchandise and a smaller, separate, and more intimate area called "The Back Room." The Company presents moderate and better sportswear, dresses and suits, as well as all outerwear, accessories, intimate apparel and shoes on the main selling floor. Designer and bridge merchandise, including gowns, dresses, suits and sportswear, are displayed in The Back Room. 30 The Back Room provides a key point of differentiation to the consumer, as it projects the image of designer goods sold in a no-frills environment and, therefore, at exceptional values. Although the Company estimates that The Back Room generally accounts for only approximately 10% to 15% of a typical Loehmann's store's selling space, The Back Room has generated approximately one-third of the Company's net sales over the last several years. All stores are low maintenance, simple, and functional facilities designed to maximize selling space and contain overhead costs. Store layouts are flexible in that product groupings can be easily moved or expanded. All stores have two or more communal fitting rooms. However, in response to customer preferences, private fitting rooms have been added in most stores. Because the Company is committed to maintaining virtually all of its in-store inventory on the selling floor, its stores do not require significant space devoted to inventory storage. INVENTORY MANAGEMENT AND CONTROL The Company continually strives to improve its merchandising, distribution, planning and allocation methods to manage its inventory efficiently. The Company believes that a key to its success is the efficient distribution of merchandise to its stores and an appropriate allocation of merchandise based on individual store sales data and geographic and demographic factors. The Company's successful inventory management is demonstrated by its rapid inventory turnover; in each of the last five years, inventory turned in excess of five times (on a cost basis). Loehmann's has recently invested in its Merchandise Control, Planning and Allocation Department. The department's goal is to maximize inventory potential rather than just allocate the merchandise. The allocation by this department of merchandise among Company's stores varies based upon factors relating to the demographics and geographic location of each store as well as the size of the store and its ability to adequately display the merchandise. In addition to ensuring a proper allocation of merchandise, the department works closely with senior merchants to develop seasonal sales, inventory, markdown and purchase plans. As each selling season progresses, the department updates the plans for opportunities and focuses the Company's buyers on the most profitable merchandise. Information from the Company's point-of-sale computer system is regularly reviewed and analyzed to assist in making merchandise allocation decisions. In order to facilitate further the planning and allocation process, the Company is currently implementing a new state-of-the-art planning and allocation software package. The Company operates a 126,000 square foot centralized distribution center located at the Company's headquarters as well as a 32,000 square foot satellite warehouse for processing shoes located near the main distribution center. As merchandise arrives at the distribution center, it is priced, ticketed, assigned to individual stores by the Company's merchandising systems, packaged for delivery and transported to the stores. The Company generally transports merchandise from vendors to its distribution center by means of common carrier or its own truck fleet. After the merchandise has been processed, ticketed, sorted and allocated, it is distributed to stores in company-owned or commercial trucks or by air. The time from receipt of goods at the distribution center to placement of merchandise in existing stores typically ranges from 48 to 72 hours. Inventory acquired in anticipation of new store openings may be held at temporary warehouse facilities. The Company believes that its current facilities are capable of servicing its existing stores and planned stores through fiscal 1998. ADVERTISING AND PROMOTION Loehmann's has built its reputation over the years through "word-of-mouth" advertising. In the last two fiscal years, the Company has significantly increased its advertising expenditures. The Company advertises predominantly through direct mail and to a lesser extent through newspaper advertising. 31 In August 1992, the Company began a free membership program called "The Insider Club" which entitles members to notice of special events throughout the year and to a 15% discount on their birthdays. The list of members now includes approximately one million active customers, defined as customers who have made a purchase within the last 12 months. The Company spends a significant portion of its advertising and promotional budget on directed mail to Insider Club members. For example, during fiscal 1995, the Company sent to each Insider Club member approximately 20 to 25 mailings. Such mailings typically include two full-color catalogs featuring the Company's merchandise and containing special discount incentives, announcements of the arrival of new designer merchandise and occasional special sales. In addition all Insider Club members are invited to The Back Room events and fashion promotions via direct mail throughout the year. During these events, special distributions of designer and bridge merchandise are allocated to the participating stores. Management believes that these events generate higher than average traffic and maintain a sense of shopping enthusiasm. In order to enhance the productivity of these and other advertising expenditures, the Company has recently engaged the services of a direct mail target marketing firm to assist the Company in analyzing its database to better target its direct mail program. STORE OPERATIONS The Company operates its stores to enhance the customer's shopping experience by creating a friendly shopping environment within a self-service operation. The Company's stores are organized into seven separate geographic districts each with a district manager. District managers monitor the financial performance of the stores in their respective geographic districts and frequently visit stores to ensure adherence to the Company's merchandising, operations and personnel standards. The typical staff for a Loehmann's store consists of a store manager, and a number of associate store and department managers, sales specialists and additional full and part-time hourly associates depending upon the store's needs. The Company is committed to maintaining consistency throughout its stores. To ensure consistency, district managers visit their stores frequently to evaluate the stores against predetermined company standards. Senior management meets with the district managers on a periodic basis to maintain a clear line of communication. In addition, "mystery shoppers" shop the stores to help ensure that sales associates are friendly and helpful and maintain all of the Company's merchandising, customer service and loss prevention standards. Store management personnel currently complete a training program at a designated training store before assuming management responsibility. Sales specialists receive product and customer service training at the store level. All store and district managers participate in a bonus plan that ties compensation awards to the achievement of specified store profits goals and overall Company profits and also are eligible to participate in the Company's stock option plan. All employees participate in a company profit sharing plan. Loehmann's stores are generally open seven days per week, 12 hours per day from Monday through Saturday and eight hours on Sunday unless prohibited by local statute. The Company accepts cash, personal checks and major credit cards. MANAGEMENT INFORMATION SYSTEMS Each Loehmann's store is linked to the Company's headquarters through a point-of-sale system that interfaces with an IBM RS6000 computer equipped with integrated merchandising, distribution and accounting software packages. The Company's point-of-sale computer system has features that include merchandise scanning, the capture of customer sales information and on-line credit card 32 approval. These features improve transaction accuracy, speed and checkout time as well as increase overall store efficiency. The Company's management information and control systems enable the Company's corporate headquarters to promptly identify sales trends, identify merchandise to be marked down and monitor merchandise mix and inventory levels at individual stores. Management believes that these systems provide a number of benefits, including improved store inventory management, better in-stock availability and higher operating efficiency. The Company believes that the current management information and control systems are capable of supporting the Company's planned expansion for the foreseeable future. 33 PROPERTIES Store Locations The Company currently operates 73 stores in 23 states including four newly-opened stores in Merrick, New York, Houston, Texas, San Diego, California and Paramus, New Jersey. The states and regions in which the Company operates its stores are as follows: [MAP OF UNITED STATES SHOWING STORE LOCATIONS]
NUMBER OF PERCENT OF FISCAL STATES OR REGION STORES 1995 SALES(1) - ----------------------------------------------- --------- ----------------- California..................................... 14 22.2% New York....................................... 9 19.6 Florida........................................ 6 10.5 Other Mid-Atlantic............................. 8 9.9 New Jersey..................................... 8 9.1 New England.................................... 6 6.9 Midwest........................................ 7 6.8 Other Southeast................................ 7 6.5 Texas.......................................... 5 4.6 Other West..................................... 3 3.9 -- ----- Total...................................... 73 100.0% -- -- ----- -----
- ------------ (1) These percentages exclude sales from the Company's 11 stores closed in August 1995 and the four stores opened in fiscal 1996. 34 Leases The leases for the Company's stores typically provide for a 15 to 20-year term with three five-year renewals that are automatic unless the Company elects to terminate the lease. The rental rate in every case is a fixed amount rather than a contingent payment based on a store's gross sales. The leases typically contain tax escalation clauses and require the Company to pay insurance, utilities, repair and maintenance expenses. Increases in the fixed rent payable during the renewal terms are generally less than 10% to 15% of the base rent (although this percentage may increase for new stores). The leases for the stores which are open have initial or renewal terms expiring as follows: 1996-1997 (11 stores); 1998-2000 (31 stores); 2001-2003 (14 stores); and 2004 and later (17 stores). Three of the four leases that expire by year-end fiscal 1996 have renewal options. The Company has generally been successful in renewing its store leases as they expire. The Company leases the land for a 153,000 square foot facility located in an industrial park in the Bronx, New York, which serves as its corporate headquarters and as the site of its central warehousing and distribution operations. This facility contains 27,000 square feet of office space and 126,000 square feet of warehouse space. The ground lease with respect to the land on which the facility is situated provides for aggregate annual base rental payments of $37,500. The lease expires in 2010, but is renewable at certain increased rates until 2050. The facility is subject to two mortgages which relate to New York City Industrial Development Agency Revenue Bonds. See "Description of Certain Indebtedness." In addition, the Company leases a 32,000 square foot warehouse in the Bronx, New York, which serves as additional warehouse space. The lease expires on December 31, 1998 and provides for annual rental payments of $198,000. COMPETITION All aspects of the off-price fashion apparel business are highly competitive, and the Company expects competitive pressures to increase in the future as more factory outlet centers open and department stores continue price discounting. The Company believes that the principal elements of competition are the price, quality, selection and presentation of merchandise, store location and customer service. Management believes that the Company is well positioned to compete on the basis of each of these factors. The competitive environment may also be affected by factors beyond a particular retailer's control, such as shifts in consumer preferences, change in population demographics and traffic patterns, and fluctuating economic conditions. The Company competes primarily with finer department stores. The Company believes it competes successfully with such department stores by offering a wide selection of comparable quality merchandise at significantly lower prices. Recently, many department stores have become more promotional, although such promotions are typically focused on moderate merchandise. Although the Company's gross margins have not been materially affected to date by department stores' pricing strategies, there can be no assurances that, if finer department stores continue to price more aggressively, the Company's margins will not be adversely affected. Most of the department stores and some of the off-price and discount retailers with which the Company competes have access to substantially greater financial and marketing resources than those available to the Company. The Company also faces competition from factory outlet malls and a variety of off-price and discount retailers, some of which are relatively new companies, but many of which are established retail chains or divisions thereof. Such competitors include Burlington Coat Factory, Filene's Basement, Marshall's, Saks Off 5th, Syms, and T.J. Maxx. The Company believes it competes successfully with other off-price and discount retailers by reason of the quality, selection and price of the designer and other better quality merchandise available in the Company's stores. 35 In recent years, some designer and other better quality women's apparel has been offered through mail order catalogs. While not significant at the present time, the Company cannot predict the impact of this and other in-home shopping competition. EMPLOYEES At September 20, 1996, the Company had 2,627 employees, of whom 1,797 were store sales and clerical employees, 187 performed store managerial functions, and 643 were corporate and warehouse personnel. Approximately half of the Company's store and warehouse personnel were employed on a part-time basis at that date. Except for managerial employees, professional support staff and the Company's buyers, all employees are paid on an hourly basis. None of the Company's employees are represented by a labor union. The Company believes that its employee relations are good. TRADEMARK AND SERVICE MARK "Loehmann's" has been registered as a trademark and a service mark with the United States Patent and Trademark Office. The registration of the trademark and the service mark may be renewed to extend the original 20-year registration period indefinitely, provided the marks are still in use. The Company intends to continue to use its trademark and service mark and maintain their registrations. The Company believes its trademark and service mark have received broad recognition and their continued existence is important to the Company's business. LEGAL MATTERS Management is not aware of any litigation or regulatory proceedings against the Company which would materially impact its business or financial condition. 36 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following persons are the executive officers and directors of the Company.
NAME AGE POSITION - --------------------------- --- ---------------------------------------------------------- Norman S. Matthews(1)(3)... 63 Chairman of the Board and Director Robert N. Friedman(1)...... 55 Chairman, Chief Executive Officer and Director Philip Kaplan(1)........... 65 President, Chief Operating Officer, Secretary and Director Bonnie Dexter.............. 45 Senior Vice President, Merchandising Robert Glass............... 50 Senior Vice President, Chief Financial Officer, Treasurer and Assistant Secretary Jan Heppe.................. 44 Senior Vice President and Director of Stores Janet A. Hickey(1)(2)...... 51 Director Richard E. Kroon(3)........ 54 Director Christina A. Mohr(2)....... 40 Director Arthur Reiner.............. 56 Director Cynthia Cohen Turk(2)(3)... 43 Director
- ------------ (1) Member of the Executive Committee. (2) Member of the Audit Committee. (3) Member of the Compensation Committee. NORMAN S. MATTHEWS has been Chairman of the Board and a Director of Loehmann's since September 1995. Mr. Matthews served as Chairman of the Board of Holdings from December 1993 until May 1996 and as a Director of Holdings from October 1988 until May 1996. Mr. Matthews currently serves as a consultant to various retailers. He was President of Federated Department Stores from March 1987 until April 1988 and served in other executive capacities with Federated Department Stores prior to that date. He is a Director of Progressive Corp., an insurance holding company, Lechters, Inc., a housewares chain, Finlay Fine Jewelry, a jewelry lessee in major department stores, Toys "R" Us, a childrens' specialty retailer, and Eye Care Centers of America, Inc. ROBERT N. FRIEDMAN has been Chairman, Chief Executive Officer and a Director of Loehmann's since November 1995 and was President, Chief Executive Officer and a Director of Loehmann's from September to November 1995. Mr. Friedman was President and Chief Executive Officer of Holdings from April 1992 until May 1996. Prior to joining Loehmann's, Mr. Friedman was employed by R.H. Macy Co., Inc. for 28 years in various capacities, including President and Vice Chairman, Merchandising, at Macy's East from 1990-1992, Chairman and C.E.O. of Macy's Bamberger Division and Chairman and C.E.O. of Macy's South/Bullocks. He serves on the Board of Trustees of The Fashion Institute of Technology. PHILIP KAPLAN has been President, Chief Operating Officer, Secretary and a Director of Loehmann's since November 1995, was Chairman, Chief Operating Officer and a Director of Loehmann's from September to November 1995 and was Chairman, Chief Operating Officer, Secretary and Treasurer of Loehmann's from September 1988 to September 1995. Mr. Kaplan was Vice Chairman, Treasurer and a Director of Holdings from February 1987 until May 1996. Mr. Kaplan was president of Verdi International, a manufacturer of luggage, from 1983 to 1987, Senior Vice President of Abraham and Strauss, a division of Federated Department Stores, Inc., from 1979 until 1983 and Executive Vice President--Chief Financial Officer of E.J. Korvette's from 1971 until 1979. BONNIE DEXTER has been Senior Vice President, Merchandising of Loehmann's since May 1994. Ms. Dexter joined the Company as Vice President, Merchandising in May 1993. Prior to that time, she was a Vice President of Retail and Wholesale for Belle France and held a number of merchandising and store management positions at various retail chains, including as a buyer of the May Company of Los 37 Angeles, as a buyer and as a merchandise manager of Filene's and as Senior Vice President, Stores of Accessory Place. ROBERT GLASS has been Senior Vice President, Chief Financial Officer, Treasurer and Assistant Secretary of Loehmann's since September 1994. From 1992 to 1994, Mr. Glass served as a retail consultant. Prior to that time, he held a number of senior retail management positions, including Chief Financial Officer and later President of Gold Circle Stores, a division of Federated Department Stores, Inc., and Executive Vice President of Thrifty Drug from 1990 to 1992. JAN HEPPE has been Senior Vice President and Director of Stores of Loehmann's since September 1995. Prior to that time, she held a number of senior retail management positions including Senior Vice President/General Manager of the John Wanamaker Department Store in Philadelphia, Pennsylvania from 1992 through 1995, Divisional Vice President/General Manager of the John Wanamaker Department Store in Moorestown, New Jersey from 1991 to 1992 and a senior management retail position at Henri Bendel in 1991. Prior to 1991, Ms. Heppe was General Manager of On Course, a catalog and wholesale operation and also held various executive positions at Gimbels, New York. JANET A. HICKEY has been a Director of Loehmann's since September 1995 and was a Director of Holdings from 1988 until May 1996. Ms. Hickey has been Senior Vice President and General Partner of the Sprout Group, a shareholder of the Company, and the venture capital affiliate of Donaldson Lufkin & Jenrette, Inc. ("DLJ, Inc.") and a Divisional Senior Vice President of DLJ Capital Corporation, a subsidiary of DLJ, since June 1985. Ms. Hickey is a director of Corporate Express, Inc. and other private companies. RICHARD E. KROON has been a Director of Loehmann's since September 1995 and was a Director of Holdings from 1988 until May 1996. Mr. Kroon has been Managing Partner of the Sprout Group, the venture capital affiliate of DLJ, since 1981. Mr. Kroon is President, Director and Chief Executive Officer of DLJ Capital Corporation, a subsidiary of DLJ, Inc. He is a Director of several private companies. CHRISTINA A. MOHR has been a Director of Loehmann's since September 1995 and was a director of Holdings from January 1994 until May 1996. Ms. Mohr has been Managing Director, Banking Group of Lazard Freres & Co. LLC, an investment banking firm, since 1990. She was a Vice President, Banking Group, from 1984 to 1990. She is a Director of United Retail Group, Inc., a retail chain. ARTHUR REINER has been a Director of Loehmann's since August 1996. Mr. Reiner has been President and Chief Executive Officer of Finlay Enterprises, the parent of Finlay Fine Jewelry, since January 1996 and Chairman and Chief Executive Officer of Finlay Fine Jewelry since January 1995. Prior to that, he was employed by R.H. Macy Co., Inc. serving as Chairman and Chief Executive Officer of Macy's East from January 1992 to October 1994 and Chairman and Chief Executive Officer of Macy's Northeast from April 1988 to January 1992. CYNTHIA COHEN TURK has been a Director of Loehmann's since September 1995 and was a Director of Holdings from January 1994 until May 1996. Ms. Turk has been President of MARKETPLACE 2000, a retail marketing and strategy consulting firm, which she founded in 1990. Prior to that, Ms. Turk was a partner of Touche Ross (a predecessor of Deloitte & Touche LLP). Ms. Turk is a Director of One Price Clothing, Inc., an apparel retail chain, Specs Music Stores, Inc., a music and video retailer, Office Depot, an office products retailer, the Mark Group and Capital Factors, Inc. Directors of the Company are elected by holders of Common Stock for a three-year term, but are divided into three classes with staggered terms that currently have expiration dates as follows: (a) Class A Directors--1999, (b) Class B Directors--1997, and (c) Class C Directors--1998. As of the date hereof, Mr. Matthews, Mr. Kaplan and Mr. Friedman serve as Class A Directors, Mr. Kroon and Ms. Mohr serve as Class B directors and Ms. Hickey, Ms. Turk and Mr. Reiner serve as Class C 38 Directors. The executive officers of the Company are appointed by the Board of Directors and serve at the pleasure of the Board. EXECUTIVE COMPENSATION The following table sets forth the compensation awarded to, earned by or paid to the named executive officers for services rendered to Holdings and its subsidiary during the fiscal years ended February 3, 1996, January 28, 1995 and January 29, 1994. SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION ------------ ANNUAL COMPENSATION AWARDS ---------------------------------------- ------------ OTHER SECURITIES NAME AND FISCAL ANNUAL UNDERLYING ALL OTHER PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) OPTIONS(#) COMPENSATION($)(1) - ------------------------------- ------ --------- -------- --------------- ------------ ------------------ Robert N. Friedman............. 1995 475,000 135,000 (2) 187,639 (3) Chairman and Chief 1994 450,000 301,000 (2) -- 3,129 Executive Officer 1993 450,000 150,000 (2) -- -- Philip Kaplan.................. 1995 356,250 105,000 (2) 14,657 (3) President and Chief Operating 1994 350,000 234,000 (2) 10,261 3,129 Officer 1993 343,750 -- 57,208 -- -- Robert Glass (4)............... 1995 211,250 17,500 (2) -- 574(3) Senior Vice President and 1994 74,546 12,947 -- 11,172 4,552 Chief Financial Officer 1993 -- -- -- -- -- Henry Mittleman (5)............ 1995 200,929 -- (2) -- -- Former Senior Vice President, 1994 178,196 18,937 (2) -- 3,129 Store Operations 1993 184,139 1,087 (2) 2,234 -- Bonnie Dexter (6).............. 1995 165,000 20,000 (2) -- (3) Senior Vice President, 1994 139,054 26,985 -- 3,910 1,442 Merchandising 1993 -- -- -- -- --
- ------------ (1) Consists of Company contributions under the Loehmann's, Inc. Deferred Profit Sharing Plan of $3,129 for each of Messrs. Friedman, Kaplan and Mittleman and $1,442 for Ms. Dexter in fiscal 1994, and reimbursement of $4,552 and $574 in moving expenses for Mr. Glass during fiscal 1994 and fiscal 1995, respectively. (2) For each named executive officer, the aggregate amount of other annual compensation is less than the lesser of 10% of such officer's total salary and bonus for such year or $50,000. (3) Amounts to be contributed under the Loehmann's, Inc. Deferred Profit Sharing Plan have not yet been determined. (4) Mr. Glass became an executive officer of Loehmann's in September 1994. (5) Mr. Mittleman resigned as Senior Vice President for Store Operations effective September 14, 1995. (6) Although Ms. Dexter was employed by the Company during a portion of fiscal 1993, she did not serve as an executive officer of the Company. Accordingly, in accordance with the rules of the Securities and Exchange Commission, information for Ms. Dexter for fiscal 1993 has been omitted. The following table provides certain summary information concerning individual grants of stock options made to each of the executives named in the Summary Compensation Table above during the fiscal year ended February 3, 1996. OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS ---------------------------------------------------------- POTENTIAL REALIZABLE NUMBER OF VALUE AT ASSUMED SECURITIES ANNUAL RATES OF UNDERLYING % OF TOTAL STOCK PRICE --------- OPTIONS GRANTED EXERCISE OR APPRECIATION OPTIONS TO EMPLOYEES IN BASE PRICE EXPIRATION -------------------- NAME GRANTED(#) FISCAL YEAR ($/SHARE) DATE 5% 10% - -------------------------- --------- ---------------- ----------- ---------- -------- -------- Robert N. Friedman........ 187,639 71.1% 5.01 (1) $383,407 $897,535 Philip Kaplan............. 14,657 5.6% 5.01 (1) 29,950 70,113 Robert Glass.............. -- -- -- -- -- -- Henry Mittleman........... -- -- -- -- -- -- Bonnie Dexter............. -- -- -- -- -- --
- ------------ (1) One-third of these options vest in each of the next three fiscal years and expire five years from the date of vesting, with certain exceptions. 39 The following table sets forth information concerning the value of unexercised options as of February 3, 1996 held by the executives named in the Summary Compensation Table above. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES SHARES UNDERLYING VALUE OF UNEXERCISED ACQUIRED VALUE UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS ON EXERCISE REALIZED AT FISCAL YEAR END(#) AT FISCAL YEAR END ($) NAME (#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(1) - --------------------------- ----------- -------- ------------------------- ---------------------------- Robert N. Friedman......... -- -- 140,303/187,639 980,786/571,029 Philip Kaplan.............. -- -- 208,850/14,657 1,460,906/44,604 Robert Glass............... -- -- 2,234/8,938 15,616/62,477 Henry Mittleman............ 5,669 38,927 --/ -- --/ -- Bonnie Dexter.............. -- -- 1,788/3,799 12,498/26,555
- ------------ (1) Based on an estimated stock price at February 3, 1996 of $8.06. EMPLOYMENT AND SEVERANCE AGREEMENTS The Company is a party to an employment agreement with each of Messrs. Friedman, Kaplan and Glass (the "Employment Agreements"). MR. FRIEDMAN Mr. Friedman's employment agreement, as amended (the "Friedman Agreement"), provides that he will serve as Chairman and Chief Executive Officer of Holdings and the Company from November 1, 1995 through January 31, 1999, for an annual base salary of not less than $550,000 for fiscal 1996, $575,000 for fiscal 1997 and $600,000 for fiscal 1998. Mr. Friedman also is eligible to receive an annual bonus equal to 100% of his base salary in effect for each of fiscal 1996 and fiscal 1997 and 60% of his base salary in effect for fiscal 1998 if, for each such fiscal year, the Company attains its targeted EBITDA (as defined in the Friedman Agreement). The Friedman Agreement also provides for certain insurance and other benefits to be maintained and paid by the Company. The Friedman Agreement provides for a grant to Mr. Friedman on November 1, 1995, of options to purchase up to 187,639 shares of Common Stock at an exercise price of $5.01 per share. Of such options, 134,068 vest automatically in equal installments at the end of each of the current and next two succeeding fiscal years commencing after fiscal 1996 and the remaining 53,571 options vest automatically in equal installments at the end of each of the current and next succeeding fiscal year commencing after fiscal 1996. In addition, on February 23, 1996, the Company granted Mr. Friedman options to purchase up to 35,707 shares of Common Stock at an exercise price of $8.06. One-half of such options vest automatically at the end of each of the current and the next fiscal year. As of September 20, 1996, 186,222 of Mr. Friedman's options had vested and, of these vested options, 45,919 had been exercised. The Friedman Agreement provides that if Mr. Friedman's employment is terminated by the Company without Cause or by Mr. Friedman with Good Reason (as such terms are defined in the Friedman Agreement), the Company will be required to pay his base salary then in effect for the greater of 12 months following his termination or the remainder of his term of employment. Mr. Friedman also will be entitled to receive any bonus earned with respect to any previously completed fiscal year which remains unpaid as of the date of termination. If Mr. Friedman's employment is terminated, either by the Company or by Mr. Friedman for Good Reason, coincident with or within one year after a Change of Control (as defined in the Friedman Agreement), the Company will be required to pay Mr. Friedman a lump sum, in cash, equal to two times his base salary then in effect and all unvested options will vest in 40 full. If Mr. Friedman's employment is terminated by the Company without Cause, by Mr. Friedman for Good Reason or as a result of a Change of Control, the Company also, with certain exceptions, will be required to continue to maintain life insurance for Mr. Friedman for the remainder of his life or until he attains the age of 70 with a death benefit equal to his base salary at the date of termination and medical insurance for Mr. Friedman and his spouse until their respective deaths. The Friedman Agreement provides that the Company has certain rights to purchase shares of the Common Stock and/or vested options held by Mr. Friedman upon termination of his employment. Finally, the Friedman Agreement provides that Mr. Friedman will not, with certain exceptions, "engage or be engaged in a competing business" (as defined in the Friedman Agreement) for a period of two years following termination of his employment (unless he is terminated without Cause or he resigns with Good Reason). MR. KAPLAN Mr. Kaplan's employment agreement, as amended (the "Kaplan Agreement"), provides that he will serve as President and Chief Operating Officer of Holdings and the Company from November 1, 1995 through January 31, 1998, for an annual base salary of $375,000. Mr. Kaplan also is eligible to receive an annual bonus equal to 64% of his base salary in effect for each fiscal year during the term of the Kaplan Agreement if, for such fiscal year, the Company attains its targeted EBITDA (as defined in the Kaplan Agreement). The Kaplan Agreement also provides for certain insurance and other benefits to be maintained and paid by the Company. The Kaplan Agreement provides for a grant on November 1, 1995 of options to purchase 14,657 shares of Common Stock at an exercise price of $5.01 per share. Such options vest automatically during the term of Mr. Kaplan's employment. In addition, on February 23, 1996, the Company granted Mr. Kaplan options to purchase up to 6,840 shares of Common Stock at an exercise price of $8.06. One- half of such options vest automatically at the end of each of the current and the next fiscal year. As of September 20, 1996, 264,711 of Mr. Kaplan's options had vested and, of these vested options, 55,861 had been exercised. The Kaplan Agreement provides that if Mr. Kaplan's employment is terminated by the Company without Cause or by Mr. Kaplan for Good Reason (as such terms are defined in the Kaplan Agreement), the Company will be required to pay his base salary, annual bonus and life and medical insurance through the remainder of his term of employment, and certain of Mr. Kaplan's unvested options will vest. In addition, if such termination is subsequent to a Change of Control of the Company (as defined in the Kaplan Agreement), the Company will be required to pay Mr. Kaplan's base salary and bonus in one lump sum promptly following such termination and all of Mr. Kaplan's unvested options will vest. The Kaplan Agreement provides that the Company has certain rights to purchase shares of the Common Stock held by Mr. Kaplan upon termination of his employment, and that Mr. Kaplan has certain rights to require the Company to purchase shares and/or vested options held by him upon termination. Upon the expiration of the term of Mr. Kaplan's Employment Agreement, Mr. Kaplan has agreed to act as a consultant to the Company and to serve on the Boards of Directors of the Company and Holdings (unless such Boards request his resignation therefrom) in exchange for which the Company will pay him 20% of his base salary and will provide him with an automobile. Finally, the Kaplan Agreement provides that Mr. Kaplan will not, with certain exceptions, "engage or be engaged in a competing business" (as defined in the Kaplan Agreement) for a period of two years following termination of his employment (unless he is terminated without Cause or he resigns with Good Reason). 41 COMPENSATION OF MEMBERS OF THE BOARD OF DIRECTORS Except as described below, the members of the Company's Board of Directors are not paid an annual retainer or meeting fee. In connection with Ms. Mohr's and Ms. Turk's service as directors of the Company, Entrecanales Inc., ("Entrecanales"), an affiliate of Sefinco Ltd. ("Sefinco"), entered into agreements with each of Ms. Mohr and Ms. Turk providing for (a) compensation for Ms. Mohr and Ms. Turk of $25,000 and $40,000 per annum, respectively, payable by Entrecanales, and (b) the grant by Entrecanales to each of Ms. Mohr and Ms. Turk of 44,680 stock appreciation rights ("SARs"), on terms described below. The SARs were not granted by and are not obligations of the Company. All SARs have vested in accordance with their terms. Upon redemption of any vested SAR, the holder is entitled to receive the amount by which the market value per share of Common Stock exceeds $5.59 per SAR. Ms. Turk has exercised all of her SARs. All vested and unredeemed SARs lapse on June 1, 1998. In connection with Mr. Reiner's election as a member of the Company's Board of Directors, the Company has agreed to pay him an annual retainer of $15,000 and meeting fees of $1,000 per board meeting ($500 for telephonic meetings). COMPENSATION OF CHAIRMAN OF THE BOARD The Company has an open-ended consulting agreement with Mr. Matthews, pursuant to which he is currently paid $75,000 per annum. In addition, in connection with Mr. Matthews' agreement to serve as Chairman of the Board, Mr. Matthews was granted options pursuant to the 1988 Stock Plan to purchase up to 91,232 shares of the Common Stock, 24,197 exercisable at $1.07 per share, 22,345 exercisable at $4.48 per share, 22,345 exercisable at $2.24 per share and 22,345 exercisable at $8.95 per share. All such options have vested. Mr. Matthews has exercised options on 24,197 shares at $1.07 per share and 22,345 shares at $2.24 per share. In addition, on July 1, 1995 Mr. Matthews was granted options pursuant to the 1988 Stock Plan to purchase 44,689 shares of the Common Stock at $5.01 per share. Half of the options vested on July 1, 1996 and the other half will vest on July 1, 1997. Unvested options vest upon certain changes in control of the Company. Within 180 days upon termination, depending on the cause of termination, the Company has the right to purchase Mr. Matthews' shares and unexercised vested options. The Company also has a right of first refusal upon notice of proposed sale of shares by Mr. Matthews. STOCK INCENTIVE PLANS 1988 Stock Plan. On September 30, 1988, the Board of Directors of Holdings adopted the Loehmann's Holdings, Inc. 1988 Stock Option Plan (the "1988 Stock Plan"). The purpose of the 1988 Stock Plan is to promote the success of Holdings by providing a method whereby key employees and directors of Holdings and its subsidiaries may be encouraged to invest in Holdings Common Stock and thereby increase their proprietary interest in its business, encourage them to remain in the employ of, or as directors of, Holdings and increase their personal interest in the continued success and progress of Holdings. The 1988 Stock Plan provides that a committee appointed by the Board of Holdings, consisting of at least two directors, is authorized to grant options to purchase shares of Holdings Common Stock thereunder. In connection with the Holdings Merger each such outstanding option became an option to purchase approximately 0.22 shares of the Company's Common Stock on the same terms and conditions. A maximum of 1,077,010 shares of Common Stock (subject to adjustment as described below) may be delivered by the Company pursuant to options granted under the 1988 Stock Plan, 1,048,537 of 42 which have been granted and of which 429,415 are currently exercisable. The number and kind of options granted is subject to adjustment, in the sole discretion of the committee, upon the occurrence of certain corporate events (such as a stock dividend, reorganization or offer to sell shares at below fair market value) in order to preserve the benefits intended to be made available to grantees under the 1988 Stock Plan. Certain of the options vest in installments over a period of time from the date of the grant and certain of the options vest depending on the attainment by the Company of certain performance criteria. As amended, nonemployee directors are no longer eligible to receive awards under the 1988 Stock Plan. The Company's Board of Directors may amend, suspend or discontinue the 1988 Stock Plan at any time except that, without the prior approval of the stockholders of the Company, no such amendment may (i) abolish the committee, change the qualifications of committee members or withdraw the 1988 Stock Plan administration from its supervision, (ii) materially change the requirements as to eligibility for participation in the 1988 Stock Plan, (iii) increase the maximum number of shares as to which options may be granted under the 1988 Stock Plan, except for adjustments to reflect stock dividends or other recapitalizations affecting the number or kind of outstanding shares, (iv) extend the maximum option period or the period during which options may be granted under the 1988 Stock Plan or (v) decrease the minimum option price. Since the end of fiscal 1995, under the terms of the 1988 Stock Plan, the committee made grants under the 1988 Stock Plan of stock options to purchase shares of Common Stock at an exercise price equal to $22.69 as follows: certain employees who are not Executive Officers were granted options to purchase an aggregate of 30,000 shares of Common Stock. The options will not vest until the fifth anniversary of the date of the grant. New Stock Plan. Prior to the consummation of the Initial Public Offering, the Company adopted the Loehmann's, Inc. New Stock Incentive Plan (the "New Stock Plan" and together with the 1988 Stock Plan, the "Stock Plans"). A maximum of 446,892 shares of Common Stock (subject to adjustment as described below) may be delivered by the Company pursuant to options, stock appreciation rights ("SARs"), restricted stock, unrestricted stock and performance awards (collectively, "awards") granted under the New Stock Plan, subject to specified aggregate limits on certain types of awards and annual individual limits on certain types of awards. Only officers, directors and executive, managerial and professional employees of the Company and its affiliates are eligible for awards under the New Stock Plan. The New Stock Plan is administered by a committee appointed by the Company's Board of Directors consisting of at least two directors. During the ten-year term of the plan, the committee will have authority, subject to the terms of the New Stock Plan, to determine when and to whom to make grants under the plan, the number of shares to be covered by the grants, the types and terms of options, "incentive stock options" within the meaning of Section 422 of the Code, "nonqualified stock options" SARs, restricted stock, unrestricted stock and performance awards granted and the exercise price of options and SARs and to prescribe, amend and rescind rules and regulations relating to the New Stock Plan. The committee may, in its discretion, with the grantee's consent, cancel any award under the plan and issue a new award in substitution therefor or accelerate the exercisability of any award granted under the plan or extend the scheduled expiration date of an award. The New Stock Plan limits the number of shares with respect to which options and SARs may be granted to any individual to 223,446 in any year. Shares subject to issuance under the New Stock Plan may be authorized and unissued or treasury shares of Common Stock. The Company's Board of Directors may amend, suspend or discontinue the New Stock Plan at any time except that, without stockholder approval no such amendment may (i) materially increase the benefits accruing to New Stock Plan grantees, (ii) materially increase the maximum number of shares as to which awards or specific types of awards may be granted under the New Stock Plan, except for 43 adjustments to reflect stock dividends or other recapitalizations affecting the number or kind of outstanding shares, (iii) materially change the requirements as to eligibility for participation in the New Stock Plan, (iv) permit a stock option to have an option exercise price, or a SAR to have an appreciation base, of less than 100% of the fair market value of a share of Common Stock on the date the stock option or SAR is granted, (v) permit an option or unrelated SAR to be exercisable, a restricted stock award to vest, or shares of Common Stock to become deliverable pursuant to a performance award, more than ten years after the date of grant or (vi) extend the term of the New Stock Plan beyond the initial ten-year period. Since the end of fiscal 1995, under the terms of the New Stock Plan, the committee made grants under the New Stock Plan of stock options to purchase shares of Common Stock at exercise prices equal to between $8.06 and $23.13 as follows: Mr. Friedman was granted options to purchase 63,614 shares of Common Stock, exercisable at $8.06 per share; Mr. Kaplan was granted options to purchase 10,513 shares of Common Stock, exercisable at $8.06 per share; Mr. Glass was granted options to purchase 11,172 shares of Common Stock, exercisable at $8.06 per share and options to purchase 20,000 shares of Common Stock, exercisable at $22.69 per share; Ms. Dexter was granted options to purchase 11,172 shares of Common Stock, exercisable at $8.06 and options to purchase 20,000 shares of Common Stock, exercisable at $22.69 per share; all Executive Officers as a group were granted options to purchase 167,643 shares of Common Stock, exercisable at prices equal to between $8.06 and $22.69 per share; and all employees who are not Executive Officers as a group were granted options to purchase 126,355 shares of Common Stock, exercisable at prices equal to between $8.06 and $23.13 per share. All but 120,000 options to exercise shares will vest equally over a two, three or five year period beginning on the first anniversary of the date of grant and will become 100% vested on the second, third or fifth anniversary of the date of grant. The remainder of the options vest on the fifth anniversary of the date of grant. Additional awards may be made under the plan upon such terms and conditioning as determined by the committee in its discretion as described above. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During fiscal 1995, Messrs. Kroon and Matthews and Ms. Turk served as members of the Compensation Committee of the Board of Directors. 44 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information as of October 10, 1996 with respect to beneficial ownership of shares of the Common Stock by (i) all stockholders known by the Company to be beneficial owners of more than 5% of such class, (ii) each director, (iii) each executive officer named in the Summary Compensation Table, (iv) each Selling Stockholder and (v) all directors and executive officers as a group.
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP PRIOR TO THE OFFERING NUMBER OF AFTER THE OFFERING(1) NAME AND ADDRESS OF BENEFICIAL ----------------------- SHARES --------------------- OWNER NUMBER PERCENTAGE BEING OFFERED(1) NUMBER PERCENTAGE - -------------------------------------- --------- ---------- ---------------- ------- ---------- Sefinco Ltd.(2)....................... 1,279,023 15.3% 511,609 767,414 9.1% c/o Entrecanales Inc. 767 Fifth Avenue, 5th Floor New York, New York 10153 Sprout Capital V(3)................... 396,914 4.8% 138,920 257,994 3.1% Sprout Growth, L.P.(3)................ 479,923 5.8 167,973 311,950 3.7% Sprout Growth, Ltd.(3)................ 53,430 * 18,701 34,729 * DLJ Venture Capital Fund II, 23,853 * 8,349 15,504 * L.P.(3)............................... Donaldson, Lufkin & Jenrette Securities Corporation(3)............ 249,405 3.0% 87,292 162,113 1.9% Equity-Linked Investors, L.P.(4)...... 323,797 3.9% 273,954 49,843 * Equity-Linked Investors-II(4)......... 323,797 3.9% 53,328 270,469 3.2% Putnam Investors(5)................... 373,586 4.5% 373,586 -- -- Trust U/D Paul J. Pinto............... 21,653 * 10,827 10,826 * Trust U/D John J. Pinto............... 21,653 * 10,827 10,826 * Allan Bogner.......................... 199,177 2.4% 80,000 119,177 1.4% Philip Kaplan(6)...................... 315,963 3.7% 78,991 236,972 2.7% Robert Friedman(7).................... 437,474 5.0% 109,371 328,103 3.8% Norman S. Matthews(8)................. 185,088 2.2% 46,272 138,816 1.6% Janet A. Hickey(3).................... -- -- -- -- -- Richard E. Kroon(3)................... -- -- -- -- -- Christina A. Mohr..................... -- -- -- -- -- Arthur Reiner......................... -- -- -- -- -- Cynthia Cohen Turk.................... -- -- -- -- -- Bonnie Dexter(9)...................... 2,788 * -- 2,788 * Robert Glass(10)...................... 12,234 * -- 12,234 * Henry Mittleman....................... -- -- -- -- -- All directors and executive officers as a group (11 persons)(11).......... 953,547 10.5% 234,634 718,913 7.9%
- ------------ * Less than 1% (1) Without giving effect to the Underwriters' over-allotment option. The Selling Stockholders have granted an option to the Underwriters, exercisable during the 30-day period after the date of this Prospectus, to purchase up to an aggregate of 295,500 shares of Common Stock, solely to cover over-allotments, if any, as follows: Sefinco Ltd., 93,387 shares; Sprout Capital V, 25,358 shares; Sprout Growth, L.P., 30,661 shares; Sprout Growth, Ltd., 3,414 shares; DLJ Venture Capital Fund II, L.P., 1,524 shares; Donaldson, Lufkin & Jenrette Securities Corporation, 15,934 shares; Equity-Linked Investors-II, 59,741 shares; Trust U/D Paul J. Pinto, 1,976 shares; Trust U/D John J. Pinto, 1,976 shares; Allan Bogner, 14,603 shares; Philip Kaplan, 15,798 shares; Robert Friedman, 21,874 shares; and Norman Matthews, 9,254 shares. (2) Includes 33,517 shares of Class B Common Stock which are convertible into Common Stock after November 6, 1996. (3) Sprout Capital V, Sprout Growth, L.P., Sprout Growth, Ltd., DLJ Venture Capital Fund II, L.P. and Donaldson Lufkin & Jenrette Securities Corporation ("DLJ" and, collectively with the other entities named above, the "Sprout Group") are all affiliates. Ms. Hickey, who is a Director, and Mr. Kroon, who is a Director, are general partners of, or executive officers in (1) certain of the affiliates of DLJ that own shares of Common Stock or (2) entities that control such affiliates. The business address of all such entities is 277 Park Avenue, New York, New York 10172. Ms. Hickey and Mr. Kroon disclaim beneficial ownership of such shares. (4) Includes 49,843 shares of Class B Common Stock which are convertible into Common Stock after November 6, 1996. Equity-Linked Investors, L.P. and Equity-Linked Investors-II are New York limited partnerships whose business address is c/o Desai Capital Management Incorporated, 540 Madison Avenue, New York, New York 10022. Pursuant to an investment and advisory agreement, Desai Capital Management Incorporated ("DCMI") may vote or dispose of the shares owned by Equity-Linked Investors, L.P. and Equity-Linked Investors-II. Rohit M. Desai is the managing general partner of the general partner of each of Equity-Linked, L.P. and Equity-Linked Investors-II. Mr. Desai is also the sole 45 stockholder, Chairman of the Board and President of DCMI. DCMI and Mr. Desai each disclaims beneficial ownership of the shares owned by Equity-Linked Investors, L.P. and Equity-Linked Investors-II. (5) Putnam Investors includes Putnam Diversified Income Trust, Putnam Master Intermediate Income Trust, Putnam Managed High Yield Trust, Putnam Master Income Trust, Putnam Capital Manager Trust--PCM High Yield Fund, Putnam High Income Convertible and Bond Fund, Putnam High Yield Managed Trust, Putnam Premier Income Trust and the Ameritech Corp. Pension Trust (collectively, "Putnam Investors"). (6) Includes options to purchase 208,850 shares of Common Stock granted pursuant to the Stock Plans which are immediately exercisable and options to purchase 25,170 shares of Common Stock granted pursuant to the Stock Plans which are not immediately exercisable. (7) Includes options to purchase 140,303 shares of Common Stock granted pursuant to the Stock Plans which are immediately exercisable and options to purchase 251,253 shares of Common Stock granted pursuant to the Stock Plans which are not immediately exercisable. (8) Includes 22,345 shares of Class B Common Stock which are convertible into Common Stock after November 6, 1996, options to purchase 67,034 shares of Common Stock granted pursuant to the Stock Plans which are immediately exercisable and options to purchase 22,344 shares of Common Stock granted pursuant to the Stock Plans which are not immediately exercisable. (9) Consists of options to purchase 1,788 shares of Common Stock granted pursuant to the Stock Plans which are immediately exercisable. (10) Consists of options to purchase 2,234 shares of Common Stock granted pursuant to the Stock Plans which are immediately exercisable. (11) Includes 22,345 shares of Class B Common Stock which are convertible into Common Stock after November 6, 1996, options to purchase 420,209 shares of Common Stock granted pursuant to the Stock Plans which are immediately exercisable and options to purchase 298,767 shares of Common Stock granted pursuant to the Stock Plans which are not immediately exercisable. SHAREHOLDERS' AGREEMENTS Sefinco Ltd. and the Sprout Group are parties to a shareholders' agreement dated September 19, 1988, as amended and supplemented (the "Shareholders' Agreement"), which provides that Sefinco and the Sprout Group each is entitled to nominate two directors to the Board of Directors until the earlier of (i) the date on which 60% of the shares of Common Stock then outstanding have been sold pursuant to one or more public offerings (including the Offering contemplated hereby) and (ii) the Company's 1998 annual meeting of stockholders. Upon consummation of the Offering, the Shareholders Agreement will terminate. Certain of the Company's stockholders have been granted registration rights, which rights will have terminated upon completion of the Offering. 46 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AFFILIATE TRANSACTIONS DLJ and certain of its affiliates are principal stockholders of the Company and DLJ acted as an underwriter of the Senior Notes in the Debt Offering. In addition, (i) members of the Sprout Group are selling certain of its shares of Common Stock in this Offering, (ii) members of the Sprout Group sold 104,653 shares of Common Stock in the Initial Public Offering for $1,654,564 in the aggregate, (iii) approximately $20.9 million of the proceeds from the Initial Public Offering and the Debt Offering were used to redeem all of the outstanding Series A Preferred Stock, certain of which shares are owned by DLJ and other significant holders of the Company's Common Stock and (iv) DLJ has been paid $50,000 for financial advisory services rendered to the Company each year during the last three fiscal years and this fiscal year. See "Principal and Selling Stockholders." Entrecanales Inc., a principal stockholder, has been paid $50,000 for financial advisory services rendered to the Company each year during the last three fiscal years and this fiscal year. See "Principal and Selling Stockholders." Certain of the principal and selling stockholders of the Company (including Putnam Investors) have owned and currently own debt securities of the Company. Pursuant to agreements with certain stockholders of the Company, the Company paid all of the fees and expenses for the Registration Statement on Form S-1 for the Initial Public Offering, which fees and expenses totaled approximately $748,000. Certain of the stockholders of the Company (including Sefinco Ltd., the Sprout Group, Equity-Linked Investors, L.P., Equity-Linked Investors-II and Putnam Investors) sold 535,800 shares of Common Stock for $8,470,998 in the aggregate in the Initial Public Offering. 47 DESCRIPTION OF CAPITAL STOCK GENERAL The Company is authorized to issue up to 66,969,237 shares of stock, which shares consist of 25,000,000 shares of Common Stock, 469,237 shares of Class B Common Stock, and 41,500,000 shares of preferred stock, par value $.01 per share (the "Preferred Stock"). As of the date hereof, 8,322,186 shares of Common Stock are outstanding, 469,237 shares of Class B Common Stock are outstanding and no shares of Preferred Stock are outstanding. COMMON STOCK General. The shares of Common Stock are entitled to share ratably with the shares of Class B Common Stock in such dividends (other than dividends on Common Stock payable in shares of the capital stock of the Company) as may be declared by the Board of Directors and paid by the Company out of funds legally available therefor. The payment of cash dividends by the Company is restricted by the terms of the Credit Facility and by the Senior Note Indenture, and the Company does not anticipate paying cash dividends in the foreseeable future. See "Dividend Policy" and "Description of Certain Indebtedness." In the event of any liquidation, dissolution or winding up of the Company, holders of the Common Stock and Class B Common Stock are entitled to share ratably in the balance, if any, remaining after payment of all debts and other liabilities of the Company. Holders of the Common Stock have no redemption, preemptive or subscription rights. Holders of Common Stock are entitled to one vote per share for the election of directors and for all other matters to be submitted to a vote of the Company's stockholders. Except as provided below, the exclusive voting power for all purposes is vested in the holders of the Common Stock. Holders of shares of Common Stock have no cumulative voting rights. Shares of Common Stock are not convertible into shares of any other class. CLASS B COMMON STOCK General. The shares of Class B Common Stock are entitled to share ratably with the shares of Common Stock in such dividends (other than dividends on Common Stock payable in shares of the capital stock of the Company) as may be declared by the Board of Directors and paid by the Company out of funds legally available therefor. Although the holders of Class B Common Stock will not share in any dividends on the Common Stock payable in shares of capital stock of the Company, the number of shares of Common Stock issuable upon the conversion of a share of Class B Common Stock will be subject to adjustment in such event. See "Adjustments." The payment of cash dividends by the Company is restricted by the terms of the Credit Facility and restricted by the Senior Note Indenture, and the Company does not anticipate paying cash dividends in the foreseeable future. See "Dividend Policy" and "Description of Certain Indebtedness." In the event of any liquidation, dissolution or winding up of the Company, holders of the Common Stock and Class B Common Stock are entitled to share ratably in the balance, if any, remaining after payment of all debts and other liabilities of the Company. Except as described below, holders of the Class B Common Stock have no redemption, preemptive or subscription rights. Except as required by Delaware's General Corporation Law (the "Delaware GCL"), holders of Class B Common Stock have no right to vote for the election of directors or for any other matters that may be submitted to a vote of the Company's stockholders, except for an increase in the number of authorized shares of the Class B Common Stock, which must be approved by two-thirds of each of the shares of Common Stock and the shares of Class B Common Stock. Holders of shares of Class B Common Stock have no cumulative voting rights. 48 Shares of Class B Common Stock are convertible, at any time after November 6, 1996, at the option of the holder, on a one-for-one basis (subject to adjustment), into shares of Common Stock. Shares of Class B Common Stock may be converted by surrendering to the Transfer Agent for the Class B Common Stock a stock certificate signed by the registered holder indicating such holder's election to convert all or a portion of the shares of the Class B Common Stock evidenced by such certificate. As used herein, the term "Underlying Common Stock" means the shares of Common Stock issued or issuable upon conversion of the Class B Common Stock. Mergers and Other Business Combinations. In the event of a Non-Surviving Combination (as defined below), each share of Class B Common Stock will be exchanged for the same consideration as it would have received if it had been converted into Common Stock immediately prior to such event. As used herein, a "Non-Surviving Combination" means any merger, consolidation or other business combination by the Company with one or more persons (other than a wholly owned subsidiary of the Company) in which the other person is the survivor, or a sale of all or substantially all of the assets of the Company to one or more such other persons, if, in connection with any of the foregoing, consideration (other than common equity securities of the Company) is distributed to holders of Common Stock in exchange for all or substantially all of their equity interest in the Company. Adjustments. The number of shares of Common Stock issuable upon the conversion of each share of Class B Common Stock (as well as the number of votes allocable to each such share of Class B Common Stock, the amount payable in respect of each such share on account of the liquidation, dissolution or winding up of the Company and the dividends payable on each such share) are subject to adjustment in certain events, including (i) a distribution on the Common Stock in shares of its capital stock or a combination, subdivision or reclassification of Common Stock or (ii) the issuance or sale of rights, warrants or options or convertible or exchangeable securities to holders of Common Stock or other persons entitling such holders to purchase shares of Common Stock for a consideration per share less than the then current market value (as defined) per share of Common Stock (not including certain sales or issuances to the management of the Company, if approved by the Board of Directors). In the case of distributions described in clause (i) above and sales or issuances to holders of Common Stock described in clause (ii) above, no adjustment in the number of shares of Common Stock issuable upon conversion of the Class B Common Stock will be required until cumulative adjustments require an adjustment of at least 1% thereof. The Company will notify the holders of the Class B Common Stock in the event of any adjustments. The Company has authorized and reserved for issuance such number of shares of Common Stock as shall be issuable upon the conversion of all outstanding shares of Class B Common Stock. Such shares of Common Stock, when issued, will be duly and validly issued and fully paid and nonassessable. No fractional shares will be issued upon conversion of shares of Class B Common Stock, but the Company will pay the cash value of any fractional shares otherwise issuable. PREFERRED STOCK Authorized but Unissued Preferred Stock. The Board of Directors of the Company is authorized, without further action of the shareholders of the Company, to issue any unissued stock and to classify or reclassify, or set or change the preferences, dividend, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications or terms or conditions of redemption of such stock. CERTAIN PROVISIONS OF CERTIFICATE OF INCORPORATION AND BY-LAWS Certain provisions of the Company's Amended and Restated Certificate of Incorporation and By-laws of the Company are summarized in the following paragraphs. These provisions may be deemed to have an anti-takeover effect and may delay or prevent a tender offer or takeover attempt that a stockholder might consider in its best interest, including those attempts that might result in a premium over the market price for the shares held by stockholders. 49 Stockholder Meetings. The Amended and Restated Certificate of Incorporation provides that any action required or permitted to be taken by the stockholders of the Company may be effected only at an annual or special meeting of stockholders and prohibits stockholder action by written consent in lieu of a meeting in all other circumstances. The Company's By-laws provide that special meetings of stockholders may be called only by the President, Chairman of the Board or the Board of Directors. This provision will make it more difficult for stockholders to take actions opposed by the Board of Directors. Advance Notice Provisions. The Company's By-laws establish an advance notice procedure for stockholders to make nominations of candidates for election as directors, or to bring other business before an annual meeting of stockholders of the Company. The By-laws provide that only persons who are nominated by, or at the direction of, the Board of Directors, or by a stockholder who has given timely written notice to the Secretary of the Company prior to the meeting at which directors are to be elected, will be eligible for election as directors of the Company. Under the By-laws, for notice of stockholder nominations to be made at an annual meeting to be timely, such notice must be received by the Company not less than 30 days nor more than 60 days prior to the meeting, or in the event that less than 40 days' notice or prior public disclosure of the date of the annual meeting is given or made to stockholders, notice by the stockholder to be timely must be received not later than the close of business on the tenth day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made. Under the By-laws, a stockholder's notice must also contain certain information specified in the By-laws. Indemnification. The Certificate provides that directors and officers of the Company will be indemnified by the Company against all expenses and liabilities reasonably incurred in connection with or resulting from any claim, action, suit or proceeding in which he or she may become involved by reason of his service for or on behalf of the Company, provided he or she acted in good faith in what he or she reasonably believed to be the best interests of the Company. The Certificate also provides that this right of directors and officers to indemnification is not exclusive of any other right now possessed or hereafter acquired under any statute, agreement or otherwise. Classified Board of Directors. The By-laws provide that the Board of Directors shall be divided into three classes of directors serving staggered three year terms, with each class to consist as nearly as practicable of one-third of the members of the Board of Directors. The overall effect of the provisions of the Certificate of Incorporation and By-laws described above may be to render more difficult or to discourage a merger, tender offer, proxy context, the assumption of control of the Company by a holder of a large block of the Company's capital stock or other person, or the removal of incumbent management, even if such actions may be beneficial to the Company's stockholders generally. PERSONAL LIABILITY OF DIRECTORS The Delaware GCL authorizes a Delaware corporation to eliminate or limit the personal liability of a director to the corporation and its stockholders for monetary damages for breach of certain fiduciary duties as a director and, accordingly, the Company's Amended and Restated Certificate of Incorporation includes a provision eliminating liability for monetary damages for any breach of fiduciary duty as a director, except (i) for any breach of the duty of loyalty to the Company or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) for any transaction from which the director derived an improper personal benefit; or (iv) for willful or negligent payment of dividends, or approval of stock repurchases or redemptions that are unlawful under Delaware law. Pursuant to the Delaware GCL, directors of the Company are not insulated from liability for breach of their duty of loyalty (requiring that, in making a business decision, directors act in good faith and in the honest belief that the action taken was in the best interest of the corporation), or for claims arising under the Federal securities laws. The foregoing provision of the Amended and Restated Certificate of Incorporation may reduce the likelihood of derivative litigation against directors and may discourage or deter stockholders or management from bringing a lawsuit against directors for 50 breaches of their fiduciary duties, even though such an action, if successful, otherwise might have benefitted the Company and its stockholders. CERTAIN STATUTORY PROVISIONS Section 203 of the Delaware GCL contains certain provisions that may make more difficult the acquisition of control of the Company by means of a tender offer, open market purchase, proxy fight or otherwise. These provisions are designed to encourage persons seeking to acquire control of the Company to negotiate with the Board of Directors. However, these provisions could have the effect of discouraging a prospective acquiror from making a tender offer or otherwise attempting to obtain control of the Company. To the extent that these provisions discourage takeover attempts, they could deprive stockholders of opportunities to realize takeover premiums for their shares or could depress the market price of shares. Set forth below is a description of the relevant provisions of Section 203 of the Delaware GCL. The description is intended as summary only and is qualified in its entirety by reference to Section 203 of the Delaware GCL. Section 203 of the Delaware GCL prohibits certain "business combination" transactions between a publicly held Delaware corporation, such as the Company after the Offering, and any "interested stockholder" for a period of three years after the date on which such stockholder became an interested stockholder, unless (i) the board of directors approves, prior to such date, either the proposed business combination or the proposed acquisition of stock which resulted in the stockholder becoming an interested stockholder, (ii) upon consummation of the transaction in which the stockholder becoming an interested stockholder, the interested stockholder acquires at least 85% of those shares of the voting stock of the corporation which are not held by the directors, offers or certain employee stock plans or (iii) on or subsequent to the consummation date, the business combination with the interested stockholder is approved by the board of directors and also approved at a stockholders' meeting by the affirmative vote of the holders of at least two-thirds of the outstanding shares of the corporation's voting stock other than shares held by the interested stockholder. For purposes of Section 203, a "business combination" includes a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder, and an "interested stockholder" is a person who, together with affiliates and associates, owns (or within three years, did own) 15% or more of the corporation's voting stock. A corporation, at its option, may exclude itself from the coverage of Section 203 by amending its charter or by-laws by action of its stockholders to exempt itself from coverage, provided that such by-law or charter amendment shall not become effective until 12 months after the date it is adopted. To date, the Company has not elected to opt out of Section 203 of the Delaware GCL pursuant to its terms. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for the Common Stock is American Stock Transfer & Trust Company. The Transfer Agent and Registrar for the Company's Class B Common Stock is Chemical Trust Company of California, San Francisco, California. 51 DESCRIPTION OF CERTAIN INDEBTEDNESS SENIOR NOTES As of August 3, 1996, $95 million aggregate principal amount of the Senior Notes were outstanding. The Senior Notes mature on May 15, 2003, are limited to $100.0 million aggregate principal amount, and are unsecured senior obligations of the Company, senior in right of payment to any subordinated indebtedness of the Company. Each Senior Note bears interest at a rate of 11 7/8% from May 10, 1996 or from the most recent interest payment date to which interest has been paid, payable semiannually on May 15 and November 15, in each year, commencing November 15, 1996. The Senior Notes are subject to redemption at any time on or after May 15, 2000 at the option of the Company, in whole or in part, on not less than 30 nor more than 60 days' prior notice in amounts of $1,000 or integral multiples thereof at the following redemption prices (expressed as percentages of the principal amount), if redeemed during the 12-month period beginning May 15th of the years indicated below:
REDEMPTION YEAR PRICE - ------------------------------------------------------- ---------- 2000................................................... 105.938% 2001................................................... 102.969% 2002 and thereafter.................................... 100.000%
in each case, together with accrued and unpaid interest, if any, to the redemption date (subject to the rights of holders of record on relevant record dates to receive interest due on an interest payment date). The Senior Notes are not entitled to the benefit of any sinking fund. In the event of a Change of Control (as defined in the Senior Note Indenture), the Company will be obligated to make an offer to purchase all outstanding Senior Notes at a purchase price of 101% of the principal amount thereof, plus accrued and unpaid interest to the date of repurchase. The Senior Note Indenture contains certain covenants that, among other things, will limit the ability of the Company or any of its subsidiaries to incur additional indebtedness, transfer or sell assets, pay dividends or make certain other restricted payments, incur liens, enter into certain transactions with affiliates or consummate certain mergers, consolidations or sales of all or substantially all of its assets. In addition, subject to certain conditions, the Company is obligated to make offers to repurchase the Senior Notes with the net proceeds of certain asset sales. These covenants are subject to certain exceptions and qualifications. CREDIT AGREEMENT On June 12, 1996, the Company amended and restated its credit agreement with the Bank to provide the Company with the Credit Facility. The Credit Facility provides for a $35.0 million revolving line of credit with interest payable, at the Company's option, on amounts drawn under the facility at either (i) the Bank's prime rate plus 0.75% or (ii) LIBOR plus 2.2%. On August 3, 1996, approximately $2.8 of indebtedness was outstanding under the Credit Facility.The Company also is required to pay a per annum fee equal to 0.375% on the undrawn portion of the Bank's commitment in respect of the Credit Facility. The Credit Facility is subject to certain borrowing base limitations, subjects the Company to certain covenants and imposes limitations upon investments, dividends and other restricted payments and capital expenditures. The Credit Facility is secured by substantially all of the Company's assets, including accounts receivable, inventory, fixtures and equipment and is not subject to scheduled annual repayments, except upon maturity. The Credit Facility has a term of four years, expiring on June 17, 2000. 52 SHARES ELIGIBLE FOR FUTURE SALE GENERAL There will be 8,385,638 shares of Common Stock outstanding upon the consummation of the Offering. Of these shares, the 4,107,800 shares sold in the Initial Public Offering are freely tradeable, and upon completion of this Offering 1,970,000 additional shares will be freely tradeable, without restriction or further registration under the Securities Act except for any of such shares held by "affiliates" of the Company. The remaining 2,307,838 shares of Common Stock held by the existing stockholders are "restricted securities" under the Securities Act. Of these restricted securities, 1,908,687 shares are held by executive officers, directors and certain shareholders who, together with the Company, have agreed not to sell, contract to sell, or otherwise dispose of, any shares of Common Stock without the consent of Montgomery Securities for a period of 120 days after the date of this Prospectus. Upon expiration of such agreements, such shares will be eligible for sale in the public markets in accordance with Rule 144. The 399,151 shares not subject to such agreements will be eligible for sale in the public markets in accordance with Rule 144 on November 3, 1996. In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated) who has beneficially owned restricted shares for at least two years, including persons who may be deemed "affiliates" of the Company, will be entitled to sell in any three-month period a number of shares that does not exceed the greater of (i) 1% of the then outstanding shares of Common Stock or (ii) the average weekly trading volume of the Common Stock during the four calendar weeks immediately preceding the date on which notice of the sale is filed with the Securities and Exchange Commission. Sales pursuant to Rule 144 are also subject to certain other requirements relating to manner of sale, notice and availability of current public information about the Company. A person (or persons whose shares are aggregated) who is not deemed to have been an affiliate of the Company at any time during the three months immediately preceding the sale is entitled to sell restricted shares pursuant to Rule 144(k) without regard to the limitations described above, provided that three years have expired since the later of the date on which such restricted shares were first acquired from the Company or from an affiliate of the Company. See "Security Ownership of Certain Beneficial Owners." Upon consummation of the Offering, options to purchase 958,664 shares of Common Stock granted to certain officers and key employees of the Company pursuant to the Stock Plans will be outstanding. Of the shares underlying these outstanding options, 719,431 are subject to the agreements described above restricting the sale of such shares for a period of 120 days after the date of this Prospectus. The Company has filed a registration statement under the Securities Act to register shares of Common Stock issuable upon the exercise of stock options granted under the Company's Stock Option Plans. Except as limited by the agreements described above and by Rule 144 volume limitations applicable to affiliates, shares issued upon the exercise of stock options generally are available for sale in the open market. In addition, 469,237 shares of Class B Common Stock may be converted into shares of Common Stock beginning on November 6, 1996 and such shares of Common Stock may be freely sold by such holders who are not deemed affiliates of the Company. The Company is unable to predict the effect that sales made under Rule 144, pursuant to future registration statements, or otherwise, may have on any then prevailing market price for shares of the Common Stock. Nevertheless, sales of a substantial amount of Common Stock in the public market, or the perception that such sales could occur, could adversely affect market prices. 53 UNDERWRITING The Underwriters named below have severally agreed, subject to the terms and conditions set forth in the Underwriting Agreement, to purchase from the Selling Stockholders the number of shares of Common Stock indicated below opposite their respective names at the public offering price less the underwriting discount set forth on the cover page of this Prospectus. The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent and that the Underwriters are committed to purchase all of the shares if they purchase any.
NUMBER NAME OF UNDERWRITER OF SHARES - ---------------------------------------------------------------- --------- Montgomery Securities........................................... Salomon Brothers Inc ........................................... Robertson, Stephens & Company LLC............................... --------- Total....................................................... 1,970,000
The Underwriters have advised the Selling Stockholders that the Underwriters propose initially to offer the Common Stock to the public on the terms set forth on the cover page of this Prospectus. The Underwriters may allow to selected dealers a concession of not more than per share; and the Underwriters may allow, and such dealers may reallow, a concession of not more than per share to certain other dealers. After the public offering, the offering price and other selling terms may be changed by the Underwriters. The Common Stock is offered subject to receipt and acceptance by the Underwriters, and to certain other conditions, including the right to reject orders in whole or in part. Certain of the Selling Stockholders have granted an option to the Underwriters, exercisable during the 30-day period after the date of this Prospectus, to purchase up to a maximum of an aggregate of 295,500 additional shares of Common Stock to cover over-allotments, if any, at the same price per share as the shares initially to be purchased by the Underwriters. See "Principal and Selling Stockholders." To the extent that the Underwriters exercise this option, the Underwriters will be committed, subject to certain conditions, to purchase such additional shares in approximately the same proportion as set forth in the above table. The Underwriters may purchase such shares only to cover over-allotments made in connection with this Offering. The Underwriting Agreement provides that the Company and the Selling Stockholders will indemnify the Underwriters against certain liabilities, including civil liabilities under the Securities Act, or will contribute to payments the Underwriters may be required to make in respect thereof. The Company's officers and directors and the Selling Stockholders have agreed that, subject to certain limited exceptions, for a period of 120 days after the date of this Prospectus, they will not offer, sell or dispose of any shares of their Common Stock without the prior written consent of Montgomery Securities. The Underwriters have advised the Company that the Underwriters do not intend to confirm sales to any account over which they exercise discretionary authority in excess of 5% of the number of shares of Common Stock offered hereby. Certain of the Underwriters and selling group members (if any) that currently act as market makers for the Common Stock may engage in "passive market making" in the Common Stock on the Nasdaq National Market in accordance with Rule 10b-6A under the Securities and Exchange Act of 1934, as amended (the "Exchange Act"). Rule 10b-6A permits, upon the satisfaction of certain conditions, underwriters and selling group members participating in a distribution that are also Nasdaq market makers in the security being distributed to engage in limited market making transactions during the period when Rule 10b-6 under the Exchange Act would otherwise prohibit such activity. Rule 10b-6A prohibits underwriters and selling group members engaged in passive market making generally from 54 entering a bid or effecting a purchase at a price that exceeds the highest bid for those securities displayed on Nasdaq by a market maker that is not participating in the distribution. Under Rule 10b-6A, each underwriter or selling group member engaged in passive market making is subject to a daily net purchase limitation equal to 30% of such entity's average daily trading volume during the two full consecutive calendar months immediately preceding the date of the filing of the registration statement under the Securities Act pertaining to the security to be distributed. Passive market making may stabilize the market price of the Common Stock at a level above that which might otherwise prevail and, if commenced, may be discontinued at any time. LEGAL MATTERS Certain legal matters in connection with the Common Stock offered hereby will be passed upon for the Company by Paul, Weiss, Rifkind, Wharton & Garrison, New York, New York and for the Underwriters by Fried, Frank, Harris, Shriver & Jacobson (a partnership including professional corporations), Los Angeles, California. EXPERTS The consolidated financial statements of Loehmann's, Inc. at February 3, 1996 and January 28, 1995, and for each of the fiscal years ended February 3, 1996, January 28, 1995 and January 29, 1994 appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. ADDITIONAL INFORMATION Holdings is subject to the informational requirements of the Exchange Act and in accordance therewith files reports and other information with the Securities and Exchange Commission (the "Commission"). Reports, proxy statements and other information filed by the Company with the Commission can be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Avenue, N.W., Washington, D.C. 20549 or at its Regional Offices located at Room 1400, 500 West Madison Street, Chicago, Illinois 60661 and 7 World Trade Center, 13th Floor, New York, New York 10048, and copies of such material can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. Additionally, copies of reports, proxy statements and other information filed with the Commission electronically by the Company may be inspected by accessing the Commission's Internet site at http://www.sec.gov. The Company's Common Stock is listed for quotation on the Nasdaq National Market, and such reports, proxy statements and other information can also be inspected at the office of Nasdaq Operations, 1735 K Street, NW, Washington, D.C. 20006. The Company has filed with the Securities and Exchange Commission a Registration Statement on Form S-1 under the Securities Act with respect to the Common Stock offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules filed therewith. For further information with respect to the Company and the Common Stock offered hereby, reference is hereby made to such Registration Statement and to the financial statements, and exhibits filed therewith. Except as provided below, statements contained in this Prospectus regarding the contents of any contract or other documents referred to are not necessarily complete and, in each instance, reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. This Prospectus contains a description of all provisions of the documents filed as exhibits to the Registration Statement that are material to investors. 55 The Company intends to furnish its stockholders with annual reports containing audited financial statements. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain statements under the captions "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Prospectus, constitute "forward looking statements" within the meaning of the Reform Act. Such forward looking statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward looking statements. Such factors include, among others, those described under "Risk Factors" and the following: general economic and business conditions; competition; success of operating initiatives; development and operating costs; advertising and promotional efforts; brand awareness; the existence or adherence to development schedules; the existence or absence of adverse publicity; availability, locations and terms of sites for store development; changes in business strategy or development plans; quality of management; availability, terms and deployment of capital; business abilities and judgment of personnel; availability of qualified personnel; labor and employee benefit costs; changes in, or the failure to comply with, government regulations; construction costs and other factors referenced in this Prospectus. See "Risk Factors." 56 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS LOEHMANN'S, INC. CONTENTS
PAGE ---- CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Auditors....................................................... F-2 Consolidated Balance Sheets at January 28, 1995, February 3, 1996 and August 3, 1996 (unaudited).......................................................................... F-3 Consolidated Statements of Operations for the fiscal years ended January 29, 1994, January 28, 1995 and February 3, 1996 and the six months ended July 29, 1995 (unaudited) and August 3, 1996 (unaudited)............................. F-4 Consolidated Statements of Changes in Common Stockholders' Equity (Deficit) for the fiscal years ended January 29, 1994, January 28, 1995 and February 3, 1996 and the six months ended July 29, 1995 (unaudited) and August 3, 1996 (unaudited).................................................................. F-5 Consolidated Statements of Cash Flows for the fiscal years ended January 29, 1994, January 28, 1995 and February 3, 1996 and the six months ended July 29, 1995 (unaudited) and August 3, 1996 (unaudited)............................. F-6 Notes to Consolidated Financial Statements........................................... F-7
F-1 REPORT OF INDEPENDENT AUDITORS Board of Directors Loehmann's, Inc. We have audited the accompanying consolidated balance sheets of Loehmann's, Inc. as of February 3, 1996 and January 28, 1995, and the related consolidated statements of operations, changes in common stockholders' equity (deficit) and cash flows for the fiscal years ended February 3, 1996, January 28, 1995 and January 29, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Loehmann's, Inc. at February 3, 1996 and January 28, 1995, and the consolidated results of its operations and cash flows for the fiscal years ended February 3, 1996, January 28, 1995 and January 29, 1994 in conformity with generally accepted accounting principles. As discussed in Note 5 to the consolidated financial statements, in fiscal 1995 Loehmann's, Inc. adopted FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." ERNST & YOUNG LLP New York, New York May 10, 1996 F-2 LOEHMANN'S, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
JANUARY 28, FEBRUARY 3, AUGUST 3, 1995 1996 1996 ----------- ----------- --------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................ $ 12,822 $ 12,512 $ 1,884 Accounts receivable...................................... 1,477 804 847 Merchandise inventory.................................... 44,138 43,721 46,560 Prepaid expenses......................................... 923 918 1,770 ----------- ----------- --------- Total current assets....................................... 59,360 57,955 51,061 Property, equipment and leaseholds, net.................... 71,909 60,245 59,142 Deferred debt issuance costs and other assets, net......... 3,908 3,296 3,997 Purchase price in excess of net assets acquired, net....... 43,435 42,115 41,467 ----------- ----------- --------- Total assets............................................... $ 178,612 $ 163,611 $ 155,667 ----------- ----------- --------- ----------- ----------- --------- LIABILITIES AND COMMON STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable......................................... $ 21,750 $ 21,474 $ 18,512 Accrued expenses......................................... 16,712 16,709 16,643 Accrued interest......................................... 6,787 7,037 2,855 Current portion of long-term debt........................ 62 66 66 ----------- ----------- --------- Total current liabilities.................................. 45,311 45,286 38,076 Long-term debt: Credit agreement......................................... -- -- 2,791 11 7/8% senior notes..................................... -- -- 95,000 13 3/4% senior subordinated notes........................ 77,550 77,550 -- 10 1/2% senior secured notes............................. 51,639 51,471 -- Revenue bonds and notes.................................. 2,778 2,712 2,686 ----------- ----------- --------- Total long-term debt....................................... 131,967 131,733 100,477 Other noncurrent liabilities............................... 393 393 393 Series A preferred stock, subject to mandatory redemption, 41,500,000 shares authorized 31,312,484, 37,408,739 and 0 shares issued and outstanding at January 28, 1995, February 3, 1996 and August 3, 1996, respectively........ 13,223 15,279 -- Common stockholders' equity (deficit): Common stock, 25,000,000 shares authorized 4,704,089, 4,725,420, 8,322,186 shares issued and outstanding at January 28, 1995, February 3, 1996 and August 3, 1996, respectively............................................... 47 47 83 Class B convertible common stock, 469,237 shares authorized, issued and outstanding......................... 2,352 2,352 2,352 Additional paid-in capital............................... 23,636 23,857 79,340 Accumulated deficit...................................... (38,317) (55,336) (65,054) ----------- ----------- --------- Total common stockholders' equity (deficit)................ (12,282) (29,080) 16,721 ----------- ----------- --------- Total liabilities and common stockholders' equity (deficit).................................................. $ 178,612 $ 163,611 $ 155,667 ----------- ----------- --------- ----------- ----------- ---------
The accompanying notes are an integral part of these consolidated financial statements. F-3 LOEHMANN'S, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL YEAR ENDED SIX MONTHS ENDED ----------------------------------------- --------------------- JANUARY 29, JANUARY 28, FEBRUARY 3, JULY 29, AUGUST 3, 1994 1995 1996 1995 1996 ----------- ----------- ----------- -------- --------- (UNAUDITED) Net sales......................... $ 373,443 $ 392,606 $ 386,090 $186,932 $ 194,772 Cost of sales..................... 274,991 278,398 265,889 129,227 132,938 ----------- ----------- ----------- -------- --------- Gross profit...................... 98,452 114,208 120,201 57,705 61,834 Store operating expenses.......... 59,059 64,869 68,042 32,465 33,056 Pre-opening costs................. 213 147 -- -- 376 General and administrative expenses.......................... 16,192 20,624 21,443 9,994 11,255 Depreciation and amortization..... 14,334 11,955 12,120 6,062 6,046 Charge for store closings and impairment of assets.............. -- -- 15,300 15,300 -- ----------- ----------- ----------- -------- --------- Operating income (loss)........... 8,654 16,613 3,296 (6,116) 11,101 Interest expense, net............. 17,299 18,085 18,153 8,955 7,990 ----------- ----------- ----------- -------- --------- Income (loss) before income taxes............................. (8,645) (1,472) (14,857) (15,071) 3,111 Provision for income taxes........ 79 34 106 108 60 ----------- ----------- ----------- -------- --------- Income (loss) before extraordinary item.............................. (8,724) (1,506) (14,963) (15,179) 3,051 Extraordinary loss on early extinguishment of debt............ 3,507 -- -- -- 7,101 ----------- ----------- ----------- -------- --------- Net loss.......................... (12,231) (1,506) (14,963) (15,179) (4,050) Stock dividends on and normal and accelerated accretion of preferred stock................. 1,496 1,802 2,056 922 5,668 ----------- ----------- ----------- -------- --------- Net loss applicable to common stock............................. $ (13,727) $ (3,308) $ (17,019) $(16,101) $ (9,718) ----------- ----------- ----------- -------- --------- ----------- ----------- ----------- -------- --------- Net loss per share applicable to common stock before extraordinary item................ $ (2.18) $ (0.63) $ (3.12) $ (3.07) $ (0.38) ----------- ----------- ----------- -------- --------- ----------- ----------- ----------- -------- --------- Net loss per share applicable to common stock after extraordinary item.............. $ (2.93) $ (0.63) $ (3.12) $ (3.07) $ (1.40) ----------- ----------- ----------- -------- --------- ----------- ----------- ----------- -------- --------- Weighted average number of common shares outstanding................ 4,680 5,228 5,463 5,247 6,934
The accompanying notes are an integral part of these consolidated financial statements. F-4 LOEHMANN'S, INC. CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS, EXCEPT SHARE DATA)
CLASS B COMMON STOCK COMMON STOCK -------------------- ------------------ ADDITIONAL NUMBER OF NUMBER OF PAID-IN ACCUMULATED SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTALS ---------- ------- --------- ------ ---------- ----------- -------- Balances as of January 30, 1993............................. 3,581,152 $ 36 469,237 $2,352 $ 20,501 $ (21,282) $ 1,607 Stock options earned............ -- -- -- -- 728 -- 728 Exercise of stock options....... 109,908 1 -- -- 116 -- 117 Sale of common stock............ 734,170 7 -- -- 1,793 -- 1,800 Net loss for the fiscal year ended January 29, 1994........ -- -- -- -- -- (12,231) (12,231) Dividend on and accretion of preferred stock.................. -- -- -- -- -- (1,496) (1,496) ---------- ------- --------- ------ ---------- ----------- -------- Balances as of January 29, 1994............................. 4,425,230 44 469,237 2,352 23,138 (35,009) (9,475) Stock options earned............ -- -- -- -- 195 -- 195 Exercise of stock options....... 278,859 3 -- -- 303 -- 306 Net loss for the fiscal year ended January 28, 1995........ -- -- -- -- -- (1,506) (1,506) Dividend on and accretion of preferred stock.................. -- -- -- -- -- (1,802) (1,802) ---------- ------- --------- ------ ---------- ----------- -------- Balances as of January 28, 1995............................. 4,704,089 47 469,237 2,352 23,636 (38,317) (12,282) Stock options earned............ -- -- -- -- 199 -- 199 Exercise of stock options....... 21,331 -- -- -- 22 -- 22 Net loss for the fiscal year ended February 3, 1996........ -- -- -- -- -- (14,963) (14,963) Dividend on and accretion of preferred stock.................. -- -- -- -- -- (2,056) (2,056) ---------- ------- --------- ------ ---------- ----------- -------- Balances as of February 3, 1996............................. 4,725,420 47 469,237 2,352 23,857 (55,336) (29,080) Exercise of stock options (unaudited)...................... 24,766 -- -- -- 55 -- 55 Sale of common stock (unaudited)...................... 3,572,000 36 -- -- 55,428 -- 55,464 Dividend on normal and accelerated accretion of preferred stock (unaudited)... -- -- -- -- -- (5,668) (5,668) Net loss for the six months ended August 3, 1996 (unaudited)...................... -- -- -- -- -- (4,050) (4,050) Balances as of August 3, 1996 (unaudited)...................... 8,322,186 $ 83 469,237 $2,352 $ 79,340 $ (65,054) $ 16,721 ---------- ------- --------- ------ ---------- ----------- -------- ---------- ------- --------- ------ ---------- ----------- --------
The accompanying notes are an integral part of these consolidated financial statements. F-5 LOEHMANN'S, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FISCAL YEAR ENDED SIX MONTHS ENDED ----------------------------------------- --------------------- JANUARY 29, JANUARY 28, FEBRUARY 3, JULY 29, AUGUST 3, 1994 1995 1996 1995 1996 ----------- ----------- ----------- -------- --------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES Net loss................................ $ (12,231) $ (1,506) $ (14,963) $(15,179) $ (4,050 ) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and amortization.......... 14,334 11,955 12,120 6,062 6,046 Accretion of 10 1/2% senior secured notes................................... 349 1,202 1,328 649 510 Charges for store closings, impairment of assets and other.................. 1,474 -- 10,538 10,538 -- Loss on early retirement of senior notes................................... -- -- -- -- 7,101 Changes in assets and liabilities: Accounts receivable.................. (579) 1,279 673 (227) (43 ) Merchandise inventory................ (700) 2,623 417 (514) (2,839 ) Prepaid expenses..................... (1,602) 915 5 152 (852 ) Accounts payable..................... (5,637) 5,836 (276) (1,068) (2,962 ) Accrued expenses..................... 1,064 (207) (3) 818 (66 ) Accrued interest..................... (389) 170 250 (64) (4,182 ) ----------- ----------- ----------- -------- --------- Net changes in current assets and liabilities............................. (7,843) 10,616 1,066 (903) (10,944 ) Net change in other noncurrent assets and liabilities...................... (2,714) (193) (627) (18) (3,408 ) ----------- ----------- ----------- -------- --------- Total adjustments....................... 5,600 23,580 24,425 16,328 (695 ) ----------- ----------- ----------- -------- --------- Net cash (used in) provided by operations.............................. (6,631) 22,074 9,462 1,149 (4,745 ) ----------- ----------- ----------- -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures.................... (5,882) (5,853) (8,130) (3,080) (3,727 ) ----------- ----------- ----------- -------- --------- Net cash used in investing activities... (5,882) (5,853) (8,130) (3,080) (3,727 ) ----------- ----------- ----------- -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Borrowings (payments) on credit agreements, net......................... 5,023 (5,023) -- -- 2,791 Payments on term loan................... (17,500) -- -- -- -- Sale of 10 1/2% senior secured notes.... 50,087 -- -- -- -- Purchase of 10 1/2% senior secured notes................................... -- -- (1,584) (1,584) (55,905 ) Purchase of 13 3/4% senior subordinated notes................................... (29,950) -- -- (78,325 ) Sale of 11 7/8% senior secured notes.... -- -- -- -- 100,000 Purchase of 11 7/8% senior secured notes................................... -- -- -- -- (5,165 ) Redemption of preferred stock........... -- -- -- -- (20,947 ) Sale of common stock.................... 1,800 -- -- -- 55,421 Other financing activities, net......... 85 159 (58) (3) (26 ) ----------- ----------- ----------- -------- --------- Net cash provided by (used in) financing activities.............................. 9,545 (4,864) (1,642) (1,587) (2,156 ) ----------- ----------- ----------- -------- --------- Net (decrease) increase in cash and cash equivalents............................. (2,968) 11,357 (310) (3,518) (10,628 ) Cash and cash equivalents at beginning of period............................... 4,433 1,465 12,822 12,822 12,512 ----------- ----------- ----------- -------- --------- Cash and cash equivalents at end of period.................................. $ 1,465 $ 12,822 $ 12,512 $ 9,304 $ 1,884 ----------- ----------- ----------- -------- --------- ----------- ----------- ----------- -------- --------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash interest paid during period........ $ 17,409 $ 16,738 $ 16,845 $ 8,472 $ 12,352 ----------- ----------- ----------- -------- --------- ----------- ----------- ----------- -------- ---------
The accompanying notes are an integral part of these consolidated financial statements. F-6 LOEHMANN'S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED WITH RESPECT TO THE SIX MONTHS AND AUGUST 3, 1996 AND JULY 29, 1995) 1. BASIS OF PRESENTATION AND ORGANIZATION The accompanying consolidated financial statements include the accounts of Loehmann's, Inc. and its wholly-owned subsidiaries, collectively referred to hereafter as the Company. All significant intercompany items have been eliminated. Certain amounts in the consolidated financial statements have been reclassified to conform to the fiscal 1995 presentation. The balance sheet at August 3, 1996 and the statements of operations and cash flows for each of the six months ended August 3, 1996 and July 29, 1995 have been prepared by the Company without audit in accordance with generally accepted accounting principals for interim financial information. In the opinion of management, all adjustments (consisting of only normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended August 3, 1996 are not necessarily indicative of the results that may be expected for the fiscal year ended February 1, 1997. The Company is a leading specialty retailer of well known designer and brand name women's fashion apparel, accessories and shoes offered at prices that are typically 25% to 50% below department store prices. Effective August 28, 1988 (the "Purchase Date") for accounting purposes but occurring on September 19, 1988, the Company's stock was acquired for a purchase price of $170.3 million in a leveraged buyout transaction. The acquisition was accounted for using the purchase method of accounting. At the date of acquisition, the excess of the purchase price over the appraised fair market value of the identifiable net assets acquired was reflected as goodwill. Effective May 7, 1996, the Company's predecessor, Loehmann's Holdings, Inc., a Maryland corporation ("Holdings"), whose only material assets consisted of all of the outstanding stock of and an intercompany note issued by Loehmann's, Inc., merged with and into a new wholly-owned Delaware subsidiary formed for the purpose of reincorporating Holdings from Maryland to Delaware. Effective May 8, 1996, the surviving corporation of such merger merged with and into the Company, with the Company being the ultimate surviving corporation (together with the reincorporation from Maryland to Delaware, the "Holdings Merger"). As a result of the Holdings Merger, each share of Holdings' Common Stock, par value $0.008403361 per share, and Class B Common Stock, par value $0.008403361 per share, was converted into approximately 0.22 shares of Loehmann's, Inc. Common Stock, par value $0.01 per share and 0.22 shares of Class B Common Stock, par value $0.01 per share, respectively, and the number of common shares authorized was changed to 25,000,000. Accordingly, the financial information appearing herein (including all share and per share data) reflects the retroactive application of the Holdings Merger. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES FISCAL YEAR The Company follows the standard fiscal year of the retail industry which is a 52 or 53 week period ending on Saturday closest to January 31. Fiscal years ended February 3, 1996, January 28, 1995 and January 29, 1994 had 53 weeks, 52 weeks and 52 weeks, respectively. F-7 LOEHMANN'S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED WITH RESPECT TO THE SIX MONTHS AND AUGUST 3, 1996 AND JULY 29, 1995) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS The Company considers all highly liquid marketable securities purchased with an original maturity of three months or less to be cash and cash equivalents. The carrying amount reported in the consolidated balance sheets for cash and cash equivalents approximates fair value. MERCHANDISE INVENTORY Merchandise inventory is valued at the lower of cost or market as determined by the retail inventory method. However, certain warehoused inventory that is not available for sale is valued on a specific cost basis. The merchandise inventory valued on a specific cost basis at February 3, 1996 and January 28, 1995 included $10.5 million and $9.7 million, respectively. ADVERTISING EXPENSE The cost of advertising is expensed as incurred. The Company incurred $13.0 million, $10.2 million, and $7.7 million in advertising costs during fiscal 1995, fiscal 1994, and fiscal 1993, respectively. DEPRECIATION AND AMORTIZATION Building and furniture, fixtures and equipment are depreciated on a straight-line basis over their estimated useful lives of 20 years and a range from three years to eight years, respectively. Leasehold interests represent the beneficial value of operating leases as determined by an independent appraisal of the individual leases at the Purchase Date. Such amounts are amortized on a straight-line basis over the related lease term. The Company evaluates the ongoing value of the leasehold interests based upon each store's operating results. Leasehold improvements are amortized on a straight-line basis over the shorter of the related lease terms or their useful life. Amortization expense for fiscal 1995, fiscal 1994 and fiscal 1993 includes stock option compensation expense of $199,000, $195,000 and $728,000, respectively. PRE-OPENING COSTS Expenses incurred in connection with the opening of new stores are expensed in the fiscal quarter in which the stores open. There were no expenses incurred in connection with the opening of new stores in fiscal 1995. In fiscal 1994 and fiscal 1993, the Company expensed $147,000 and $213,000 of pre-opening costs, respectively. F-8 LOEHMANN'S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED WITH RESPECT TO THE SIX MONTHS AND AUGUST 3, 1996 AND JULY 29, 1995) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) PURCHASE PRICE IN EXCESS OF NET ASSETS ACQUIRED, NET The purchase price in excess of identifiable net assets acquired is being amortized on a straight-line basis over 40 years. Amortization expense for fiscal 1995, fiscal 1994 and fiscal 1993 amounted to $1.3 million annually. Accumulated amortization at February 3, 1996 and January 28, 1995 was $9.6 million and $8.3 million, respectively. On an ongoing basis, the Company evaluates the carrying value of its goodwill relying on a number of factors, including operating results, business plans and certain economic projections. In addition, the Company's evaluation considers nonfinancial data such as changes in the operating environment, competitive information, market trends and business relationships. Finally, the evaluation also considers changes in the Company's strategic direction or market emphasis. The Company believes the carrying value of goodwill at February 3, 1996 to be economically recoverable. DEFERRED DEBT ISSUANCE COSTS Deferred debt issuance costs are amortized over the terms of the related debt agreements. Deferred debt issuance costs were $6.9 million at February 3, 1996 and January 28, 1995. Amortization expense for fiscal 1995, fiscal 1994 and fiscal 1993 amounted to $1.2 million, $1.2 million, and $2.7 million, respectively. Total accumulated amortization at February 3, 1996 and January 28, 1995 amounted to $4.5 million and $3.3 million, respectively. INCOME TAXES Income taxes are provided using the liability method. Under the liability method, deferred income taxes reflect tax carryforwards and the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial statement and income tax purposes, as determined under enacted tax laws and rates. The financial effect of changes in tax laws or rates is accounted for in the period of enactment. NET LOSS PER SHARE OF COMMON STOCK Net loss per share is determined by dividing net loss (after deducting dividends on and accretion of preferred stock) by the weighted average number of Common and Class B Common shares outstanding. In contemplation of the Company's offering to sell 3,572,000 shares of Common Stock (see Note 3), the impact of options granted in the twelve month period preceding the offering were reflected in all years' computations of net loss applicable to Common Stock. Options to purchase Common Stock that were granted prior to fiscal 1995 were not considered in the computations of net loss per share applicable to Common Stock for fiscal 1995, fiscal 1994 and fiscal 1993, as their effect was antidilutive. Additionally, all options to purchase common stock were not considered in calculations of net loss per share applicable to common stock for the six months ended August 3, 1996 and July 29, 1995 as their effect was antidilutive. Unaudited supplemental earnings per share for the quarter ended August 3, 1996 include approximately 3,572,000 shares deemed to be sold by the Company in connection with the Offerings to redeem the Existing Obligations as if such redemptions had occurred at the beginning of the year. If such transactions had been completed immediately prior to the commencement of that year, net income per share for the six months ended August 3, 1996 would have been $0.37 (See Note 3). F-9 LOEHMANN'S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED WITH RESPECT TO THE SIX MONTHS AND AUGUST 3, 1996 AND JULY 29, 1995) 3. EQUITY AND DEBT OFFERING On May 10, 1996, the Company sold 3,572,000 shares of Common Stock and $100.0 million principal amount of 11 7/8% Senior Notes due 2003 (the "Senior Notes"). The net proceeds of approximately $155 million received from such offerings (the "Offerings") were used (i) to redeem in full $52.5 million face amount of the Company's 10 1/2% Senior Secured Notes due 1997, at a redemption price of 103.5% of the face amount of such notes, plus accrued and unpaid interest, (ii) to redeem in full $77.6 million face amount of the Company's 13 3/4% Senior Subordinated Notes due 1999 at a redemption price of 101.0% of the face amount of such notes, plus accrued and unpaid interest and (iii) to redeem all issued and outstanding shares of the Company's Series A Preferred Stock at its liquidation price of $0.56 per share for a total of $20.9 million (collectively, the "Existing Obligations"). As a result of these transactions, the Company incurred approximately $4.7 million in extraordinary losses on the early extinguishment of debt and $2.0 million in losses from write-off of related deferred financing costs associated with such indebtedness, and a $5.1 million charge to accumulated deficit from the accelerated accretion of the Series A Preferred Stock. 4. INCOME TAXES The Company's provision for income taxes primarily represents state and local minimum and alternative minimum taxes. Tax expense for fiscal 1995, fiscal 1994 and fiscal 1993 was $106,000, $34,000 and $79,000, respectively. Potential tax benefits from losses have been reduced by corresponding increases in valuation allowances recorded against deferred tax assets. Significant components of deferred tax liabilities and assets are as follows:
JANUARY 28, FEBRUARY 3, 1995 1996 ----------- ----------- (IN THOUSANDS) Deferred tax liabilities............................. $ (104) $ (130) Deferred tax assets: Excess book over tax depreciation.................. 2,506 3,097 Capitalization of inventory expenses............... 381 469 Book rent in excess of tax......................... 272 323 Compensation....................................... 2,093 1,851 State income taxes................................. 66 28 Asset impairment reserve........................... -- 2,349 Net operating loss carryforwards................... 7,980 10,550 ----------- ----------- Total deferred tax assets............................ 13,298 18,667 ----------- ----------- Net deferred tax assets.............................. 13,194 18,537 Less valuation allowance............................. (13,194) (18,537) ----------- ----------- $ -- $ -- ----------- ----------- ----------- -----------
At February 3, 1996, the Company had net operating loss carryforwards of approximately $27.0 million and $18.0 million for regular and alternative minimum tax purposes, respectively. F-10 LOEHMANN'S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED WITH RESPECT TO THE SIX MONTHS AND AUGUST 3, 1996 AND JULY 29, 1995) 5. CHARGE FOR STORE CLOSINGS During the second quarter of fiscal 1995, the Company implemented a plan to close 11 underperforming stores and, as a result, recorded a $10.35 million charge to continuing operations. These closures are intended to improve overall chain profitability and achieve a more competitive cost structure. The store closures were completed by the end of August 1995. Reserved amounts remaining at February 3, 1996 relating to long-term lease commitments are not material. Net sales and operating income (loss), including certain specifically allocated charges, for these stores were $8.2 million and $117,000, respectively, in fiscal 1995 and $18.6 million and $(265,000), respectively, in fiscal 1994. The charge for store closings consisted of the following components:
FISCAL YEAR ENDED FEBRUARY 3, 1996 ---------------- (IN THOUSANDS) Write-off of leasehold interest, leasehold improvements and furniture, fixtures and equipment........................... $ 5,500 Estimated costs associated with obligations for leased properties after closing dates, net of settlement income...................................................... 950 Additional expenses and markdowns associated with store closings.................................................... 3,600 Costs of severance arrangements and related expenses........ 300 -------- Total charge for store closings............................. $ 10,350 -------- --------
6. CHARGE FOR IMPAIRMENT OF ASSETS During the second quarter of fiscal 1995, the Company completed certain market analyses as part of an overall strategic plan. As an outcome of those analyses, the Company shortened the period of time in which it intended to occupy certain stores and as a consequence, the undiscounted cash flows estimated to be generated from the revised intended use was not sufficient to recover the assets' carrying amount. Based on these indicators, the primary intangible assets associated with these locations were determined to be impaired as defined by Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," ("FAS No. 121"). Accordingly, the Company recorded a $4.95 million impairment loss to continuing operations, representing the excess net book value of these assets over their fair value. Fair value was based on appraisal value. F-11 LOEHMANN'S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED WITH RESPECT TO THE SIX MONTHS AND AUGUST 3, 1996 AND JULY 29, 1995) 6. CHARGE FOR IMPAIRMENT OF ASSETS--(CONTINUED) The impairment charge consisted of the following components:
FISCAL YEAR ENDED FEBRUARY 3, 1996 ---------------- (IN THOUSANDS) Furniture, fixtures and equipment........................... $ 250 Leasehold interests......................................... 4,450 Leasehold improvements...................................... 250 ------- Total charge for impairment of assets....................... $4,950 ------- -------
7. PROPERTY, EQUIPMENT AND LEASEHOLDS, NET Property, equipment and leaseholds are recorded at cost less accumulated depreciation and amortization. The components of property, equipment and leaseholds are as follows:
JANUARY 28, FEBRUARY 3, 1995 1996 ----------- ----------- (IN THOUSANDS) Building............................................. $ 7,879 $ 7,879 Furniture, fixtures and equipment.................... 30,461 27,610 Leasehold interests.................................. 65,695 51,781 Leasehold improvements............................... 18,213 20,881 ----------- ----------- Total property, equipment and leaseholds............. 122,248 108,151 Accumulated depreciation and amortization............ (50,339) (47,906) ----------- ----------- Property, equipment and leaseholds, net.............. $71,909 $60,245 ----------- ----------- ----------- -----------
8. PROFIT-SHARING PLAN The Company maintains a defined contribution profit-sharing plan. Employees become eligible for participation in the plan after completing one year of service, as defined by the plan provisions. Contributions are made out of the adjusted net profits of the Company, as defined, as determined by the Board of Directors. The Company recorded a contribution of $500,000 to the profit-sharing plan during fiscal 1995 and fiscal 1994. No contribution was made in fiscal 1993. 9. DEBT Senior Subordinated Notes and Senior Secured Notes Debt at February 3, 1996 principally consisted of $77.55 million face amount of 13 3/4% Senior Subordinated Notes due 1999 and $54.1 million face amount of 10 1/2% Senior Secured Notes due 1997 (see Note 3). F-12 LOEHMANN'S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED WITH RESPECT TO THE SIX MONTHS AND AUGUST 3, 1996 AND JULY 29, 1995) 9. DEBT--(CONTINUED) The 10 1/2% Senior Secured Notes were sold at a discount from par of 10.08% along with approximately 419,000 shares of common stock in October 1993. The net proceeds were used to repay the remaining balance on an existing term loan of $12.0 million and to repurchase $30.0 million of the 13 3/4% Senior Subordinated Notes at 106.789% plus accrued interest. The 10 1/2% Senior Secured Notes were carried at the discounted value and were accreted to face value over their term using the effective interest method. In connection with the above transactions, the Company wrote off in fiscal 1993, as an extraordinary item, approximately $1.5 million representing previously deferred financing costs attributed to the existing term loan and a pro rata portion of the deferred financing costs related to the repurchased 13 3/4% Senior Subordinated Notes. In addition, the Company incurred an extraordinary loss of approximately $2.0 million on the early extinguishment of the 13 3/4% Senior Subordinated Notes. Based upon a quoted market price of 91, the fair value of the 13 3/4% Senior Subordinated Notes outstanding at February 3, 1996 approximated $70.6 million. Using available market information and appropriate valuation methodologies, the fair value of the 10 1/2% Senior Secured Notes outstanding at February 3, 1996 approximated $54.9 million. Revenue Bonds and Notes At February 3, 1996, the Company has outstanding $2.8 million New York City Revenue Bonds and Notes, principally due 2004, with interest rates ranging from 5 1/2% to 9 1/2%. Old Credit Agreement At February 3, 1996, the Company had a revolving credit agreement, as amended, ("Old Credit Agreement") which provided for a credit facility totaling $20.0 million. The facility bore interest at a base rate (equivalent to the bank's reference rate) plus 1.5% and was secured by substantially all of the Company's assets, including accounts receivable, inventory and fixtures and equipment. At February 3, 1996 and January 28, 1995, no borrowings were outstanding under the facility. Pursuant to the Old Credit Agreement, as amended, all cash receipts from the normal course of business were required to be deposited into a depository account (as defined) which was used to repay borrowings, if any, under the facility. The Old Credit Agreement commitment termination date was October 14, 1997. There was a 0.5% annual commitment fee associated with the unused portion of the facility (see "New Credit Agreement" below). The principal financial covenants, which were applicable under the Old Credit Agreement, as amended, and related Indenture pursuant to which the 10 1/2% Senior Secured Notes were issued were as follows: the Company was required to maintain, for the twelve-month period ending on the last day of each fiscal quarter, a "Fixed Charge Coverage Ratio" of 1.2 to 1 through February 3, 1996 and thereafter and an "Interest Coverage Ratio" of not less than 1.2 to 1 through February 3, 1996 and thereafter. At February 3, 1996, the Company maintained a Fixed Charge Coverage Ratio of 1.37 and an Interest Coverage Ratio of 1.86 for the preceding twelve-month period. In addition, there were limitations on the Company's ability to incur additional borrowings. The Company was also required to repay the facility in full once each year and maintain a zero principal balance for at least 30 days during such period. F-13 LOEHMANN'S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED WITH RESPECT TO THE SIX MONTHS AND AUGUST 3, 1996 AND JULY 29, 1995) 9. DEBT--(CONTINUED) Senior Notes As part of the Offerings, the Company sold $100.0 million aggregate face amount of 11 7/8% Senior Notes. The Senior Notes mature on May 15, 2003, are limited to $100.0 million aggregate face amount and are unsecured senior obligations of the Company, senior in right of payment to any subordinated indebtedness of the Company. The Senior Notes bear interest at a rate of 11 7/8% from May 10, 1996 or from the most recent interest payment date to which interest has been paid, payable semiannually on May 15 and November 15 in each year, commencing November 15, 1996. During the second quarter of 1996, the Company purchased $5.0 million face amount of the 11 7/8% senior notes on the open market incurring an extraordinary loss of approximately $365,000 in connection with this purchase. The Senior Notes are subject to redemption at any time on or after May 15, 2000 at the option of the Company, in whole or in part, on not less than 30 nor more than 60 days' prior notice in amounts of $1,000 or integral multiples thereof at the following redemption prices (expressed as percentages of the principal amount), if redeemed during the 12-month period beginning May 15th of the years indicated below:
REDEMPTION YEAR PRICE - ---------------------------------------------------------------- ---------- 2000............................................................ 105.938% 2001............................................................ 102.969% 2002 and thereafter............................................. 100.000%
in each case, together with accrued and unpaid interests, if any, to the redemption date (subject to the rights of holders of record on relevant record dates to receive interest due on an interest payment date). The Senior Notes are not entitled to the benefit of any sinking fund. The Senior Notes Indenture contains certain covenants that, among other things, limit the ability of the Company or any of its subsidiaries to incur additional indebtedness, transfer or sell assets, pay dividends or make certain other restricted payments, incur liens, enter into certain transactions with affiliates or consummate certain mergers, consolidations or sales of all or substantially all of its assets. In addition, subject to certain conditions, the Company is obligated to make offers to repurchase the Senior Notes with the net proceeds of certain asset sales. These covenants are subject to certain exceptions and qualifications. New Credit Agreement Effective June 12, 1996, the Company amended and restated its credit agreement with Bank-America Business Credit, Inc. (the "Bank") to provide the Company with a new credit facility (the "New Credit Agreement"). The New Credit Agreement provides for a $35.0 million revolving line of credit with interest payable at the Company's option, on amounts drawn under the facility at either the Bank's prime rate plus 0.75%, or LIBOR plus 2.2% at the Company's option. The Company also is required to pay a per annum fee equal to 0.375% on the undrawn portion of the Bank's commitments in respect of the New Credit Agreement. The New Credit Agreement is subject to certain borrowing base limitations, subjects the Company to certain covenants, imposes limitations upon investments, dividends and other restricted payments and capital expenditures. The New Credit Agreement is occurred by substantially all of the Company's F-14 LOEHMANN'S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED WITH RESPECT TO THE SIX MONTHS AND AUGUST 3, 1996 AND JULY 29, 1995) 9. DEBT--(CONTINUED) assets, including accounts receivable, inventory, fixtures and equipment and is not subject to scheduled annual repayments, except upon maturity. The New Credit Agreement has a term of four years. At August 3, 1996, outstanding borrowings under the New Credit Agreement were approximately $2.8 million. 10. COMMITMENTS AND CONTINGENCIES The Company is the lessee under various long-term operating leases for store locations and equipment rentals for up to 29 years, including renewal options. The leases typically provide for three five-year renewals that are automatic unless the Company elects to terminate the lease. Rent expense related to these leases amounted to $8.1 million, $7.4 million and $7.5 million for the fiscal years ended February 3, 1996, January 28, 1995 and January 29, 1994, respectively. Future minimum payments under noncancelable operating leases consisted of the following at February 3, 1996:
(IN THOUSANDS) -------------- 1996.......................................................... $ 10,066 1997.......................................................... 11,639 1998.......................................................... 11,337 1999.......................................................... 10,605 2000.......................................................... 9,733 Thereafter.................................................... 110,946 -------------- Total......................................................... $164,326 -------------- --------------
11. STOCK OPTION PLAN On September 30, 1988, the Company adopted the Loehmann's Holdings, Inc. 1988 Stock Option Plan, as amended on April 2, 1992, pursuant to which a committee appointed by the Board of Directors is authorized to grant options to purchase up to 1,077,000 shares of Common Stock to key employees and directors. The following information pertains to the Company's stock option plan:
FISCAL YEAR ENDED ----------------------------------------- JANUARY 29, JANUARY 28, FEBRUARY 3, 1994 1995 1996 ----------- ----------- ----------- (IN THOUSANDS) Outstanding options, beginning of year..................... 895,000 857,000 604,000 Granted.................................................... 77,000 45,000 264,000 Canceled................................................... (5,000) (18,000) (120,000) Exercised.................................................. (110,000) (280,000) (19,000) ----------- ----------- ----------- Outstanding options, end of year........................... 857,000 604,000 729,000 ----------- ----------- ----------- ----------- ----------- ----------- Options exercisable, end of year........................... 400,000 354,000 432,000 ----------- ----------- ----------- ----------- ----------- ----------- Options available for future grant......................... 77,000 50,000 42,000 ----------- ----------- ----------- ----------- ----------- -----------
F-15 LOEHMANN'S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED WITH RESPECT TO THE SIX MONTHS AND AUGUST 3, 1996 AND JULY 29, 1995) 11. STOCK OPTION PLAN--(CONTINUED) Stock options are granted to officers and key employees based upon a price determined by the Board of Directors of the Company. Compensation expense is recorded in the period that options are earned. The 729,000 options outstanding at February 3, 1996, vest equally over a range of two to five years from the date of grant provided the individuals remain in the employ of the Company. Options are exercisable at a price ranging from $1.07 to $8.95. Options must be exercised within five years from the date they are earned. In addition to the aforementioned plan, 134,000 options were granted to a key executive in fiscal 1995 pursuant to an individual plan. Such options have an exercise price of $5.01 and vest equally over a three year period. In October 1995, the FASB issued Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, which provides an alternative to APB Opinion No. 25, Accounting for Stock Issued to Employees, in accounting for stock-based compensation issued to employees. The Statement allows for a fair value based method of accounting for employee stock options and similar equity instruments. The Company has determined it will continue to report stock- based compensation for all options that are earned under APB Opinion No. 25. The Company expects that the adoption of FAS No. 123 would result in increased compensation expense in future periods. 12. SERIES A PREFERRED STOCK AND CLASS B COMMON STOCK The Series A Preferred Stock of Holdings was redeemable by Holdings at any time at $.56 per share plus accrued and unpaid dividends. Holdings was required to redeem 50% of the outstanding shares of Series A Preferred Stock on August 1, 1999 and the remainder of the outstanding shares of Series A Preferred Stock on August 1, 2000, at a mandatory redemption price equal to the liquidation preference per share of $.56 plus all accrued and unpaid cash dividends thereon. Holders of the Series A Preferred Stock were entitled to receive a 5% semiannual dividends payable in shares of preferred stock, through and including February 1, 1997, unless the Company's credit agreements permitted the payment of cash dividends, and were payable in cash subsequent to the date, subject to restrictions in the Company's credit agreements. The Company's indenture pursuant to which the Senior Notes were issued prohibits and restricts the payment of cash dividends. Fifteen stock dividends with respect to the Series A Preferred Stock were declared and recorded during the period August 1, 1989 to February 3, 1996, aggregating 19,412,939 shares. The accretion on the Preferred Stock has been calculated using the effective interest method (see Note 3). Each share of Class B Common Stock will be convertible into one share of Common Stock, subject to adjustment at any time. Subject to restrictions contained in the Company's various credit agreements, the Company will be required to offer to repurchase the Class B Common Stock at its independently appraised value. The Company's various credit agreements prohibit or restricted any such repurchase. 13. QUARTERLY FINANCIAL DATA (UNAUDITED) The following summarizes the Company's results of operations for each quarter of fiscal 1995 and 1994. The net income (loss) per share applicable to Common Stock computation for each quarter is based on the weighted average number of shares of Common and Class B Common shares outstanding. Accordingly, the sum of the quarterly per share amounts may not equal the total per share amount for F-16 LOEHMANN'S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED WITH RESPECT TO THE SIX MONTHS AND AUGUST 3, 1996 AND JULY 29, 1995) 13. QUARTERLY FINANCIAL DATA (UNAUDITED)--(CONTINUED) the respective years. In contemplation of the Company's offering to sell 3,572,000 shares of Common Stock (See Note 3), the impact of options granted in the twelve month period preceding the offering are reflected in all quarterly computations of net income (loss) applicable to common stock presented. The Company's outstanding stock options granted prior to fiscal 1995 were not included in the quarterly computations of net income (loss) applicable to Common Stock as the market value of its Common Stock was estimated to be less than the exercise price of all options granted or their effects were antidilutive. Results of operations during the second and fourth quarters are traditionally impacted by end of season clearance events. In addition, fourth quarter operations are impacted by employee performance bonuses which were earned as of February 3, 1996.
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- -------- -------- ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FISCAL YEAR ENDED FEBRUARY 3, 1996 Net sales........................................... $97,506 $ 89,426 $ 99,362 $99,796 ------- -------- -------- ------- ------- -------- -------- ------- Gross profit........................................ $30,823 $ 26,882 $ 32,694 $29,802 ------- -------- -------- ------- ------- -------- -------- ------- Store closings and impairment of assets............. -- 15,300 -- -- ------- -------- -------- ------- ------- -------- -------- ------- Operating income (loss)............................. $ 5,818 $(11,934) $ 7,364 $ 2,048 Interest expense, net............................... 4,422 4,533 4,460 4,738 ------- -------- -------- ------- Income (loss) before income taxes................... 1,396 (16,467) 2,904 (2,690) Provision (benefit) for income taxes................ 59 49 7 (9) ------- -------- -------- ------- Net income (loss)................................... 1,337 (16,516) 2,897 (2,681) Stock dividends on and accretion of preferred stock............................................... 506 416 416 718 ------- -------- -------- ------- Net income (loss) applicable to common stock........ $ 831 $(16,932) $ 2,481 $(3,399) ------- -------- -------- ------- ------- -------- -------- ------- Net income (loss) income per share applicable to common stock........................................ $ 0.16 $ (3.23) $ 0.47 $ (0.65) ------- -------- -------- ------- ------- -------- -------- ------- FISCAL YEAR ENDED JANUARY 28, 1995 Net sales........................................... $96,170 $ 90,798 $105,762 $99,876 ------- -------- -------- ------- ------- -------- -------- ------- Gross profit........................................ $28,248 $ 26,419 $ 32,322 $27,219 ------- -------- -------- ------- ------- -------- -------- ------- Operating income.................................... $ 5,448 $ 3,334 $ 6,776 $ 1,055 Interest expense, net............................... 4,612 4,454 4,528 4,491 ------- -------- -------- ------- Income (loss) before income taxes................... 836 (1,120) 2,248 (3,436) Provision (benefit) for income taxes................ 26 19 10 (21) ------- -------- -------- ------- Net income (loss)................................... 810 (1,139) 2,238 (3,415) Stock dividends on and accretion of preferred stock............................................... 406 462 465 469 ------- -------- -------- ------- Net income (loss) applicable to common stock........ $ 404 $ (1,601) $ 1,773 $(3,884) ------- -------- -------- ------- ------- -------- -------- ------- Net (loss) income per share applicable to common stock............................................... $ 0.08 $ (0.32) $ 0.36 $ (0.74) ------- -------- -------- ------- ------- -------- -------- -------
F-17 - ---------------------------------------- -------------------------------------- - ---------------------------------------- -------------------------------------- No dealer, representative or any other person has been authorized to give any information or to make any representations other than those contained in this Prospectus, and, if given or made, such information or representation must not be relied upon 1,970,000 SHARES as having been authorized by the Company, the Selling Stockholders or by the Underwriters. Neither the delivery of this Prospectus nor any sale made hereunder shall under any circumstances create any implication that there has been no change in the affairs of the Company since the date hereof. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities offered hereby by anyone in any jurisdiction in which such offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do [LOEHMANN'S LOGO] so or to anyone to whom it is unlawful to make such offer or solicitation. ---------------------- TABLE OF CONTENTS COMMON STOCK ---------------------- Page ---- Prospectus Summary................... 3 Risk Factors......................... 7 ------------------- The Company.......................... 11 Use of Proceeds...................... 12 PROSPECTUS Price Range of Common Stock.......... 12 Dividend Policy...................... 12 ------------------- Capitalization....................... 13 Selected Consolidated Financial and Operating Data..................... 14 Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 17 Business............................. 26 MONTGOMERY SECURITIES Management........................... 37 Principal and Selling Stockholders... 45 Certain Relationships and Related SALOMON BROTHERS INC Transactions....................... 47 Description of Capital Stock......... 48 Description of Certain Indebtedness.. 52 ROBERTSON, STEPHENS & COMPANY Shares Eligible for Future Sale...... 53 Underwriting......................... 54 Legal Matters........................ 55 Experts.............................. 55 Additional Information............... 55 Special Note Regarding Forward- Looking Statements................. 56 , 1996 Index to Financial Statements........F-1 - ---------------------------------------- -------------------------------------- - ---------------------------------------- -------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table itemizes the expenses incurred by Loehmann's, Inc. (the "Registrant"), in connection with the issuance and distribution of the securities being registered, other than underwriting discounts. All the amounts shown are estimates except the Securities and Exchange Commission registration fee and the National Association of Securities Dealers, Inc. filing fee. All of such expenses will be paid or reimbursed by the Selling Stockholders.
TO BE PAID BY THE SELLING STOCKHOLDERS -------------------- Registration Fee--Securities and Exchange Commission...... $ 20,995 Filing Fee--National Association of Securities Dealers, Inc....................................................... 6,589 Accounting Fees and Expenses.............................. 50,000* Legal Fees and Expenses (other than Blue Sky)............. 200,000* Blue Sky Fees and Expenses, including Legal Fees.......... 21,000* Printing, including Registration Statement, Prospectus, etc. ..................................................... 135,000* Travel and Related Expenses............................... 41,000* Miscellaneous Expenses.................................... 50,416* ---------- Total......................................... $525,000* ----------
- ------------ * Estimated. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 145(a) of the General Corporation Law of the State of Delaware provides that a Delaware corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or enterprise, against expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect of any criminal action or proceeding, had no cause to believe his conduct was unlawful. Section 145(b) provides that a Delaware corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that such person acted in any of the capacities set forth above, against expenses actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted under similar standards, except that no indemnification may be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the court in which such action or suit was brought shall determine that despite the adjudication of liability, such person is fairly and reasonably entitled to be indemnified for such expenses which the court shall deem proper. Section 145 further provides that to the extent a director or officer of a corporation has been successful in the defense of any action, suit or proceeding referred to in subsections (a) and (b) or in the defense of any claim, issue or matter therein, he shall be indemnified against expenses actually and reasonably incurred by him in connection therewith; that indemnification provided for by Section 145 shall not be deemed exclusive of any other rights to which the indemnified party may be entitled; and that the corporation may purchase and maintain insurance on behalf of a director or officer of the II-1 corporation against any liability asserted against him or incurred by him in any such capacity or arising out of his status as such whether or not the corporation would have the power to indemnify him against such liabilities under such Section 145. The Company's Restated Certificate of Incorporation provides for indemnification of the Company's directors and officers to the fullest extent permitted by law. The Company's Restated Certificate of Incorporation also permits the Board of Directors to authorize the Company to purchase and maintain insurance against any liability asserted against any director, officer, employee or agent of the Company arising out of his capacity as such. Insofar as indemnification for liabilities under the Securities Act may be permitted to directors, officers, or controlling persons of the Company pursuant to the Company's Restated Certificate of Incorporation, its By-laws and the Delaware General Corporation Law, the Company has been informed that in the opinion of the Commission such indemnification is against public policy as expressed in such Act and is therefore unenforceable. As permitted by the Delaware General Corporation Law, the Company's Restated Certificate of Incorporation provides that directors of the Company shall not be personally liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under section 174 of the Delaware General Corporation Law, relating to prohibited dividends or distributions or the repurchase or redemption of stock or (iv) for any transaction from which the director derives an improper personal benefit. As a result of this provision, the Company and its stockholders may be unable to obtain monetary damages from a director for breach of his or her duty of care. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Since October 1, 1993, the Company has issued the following unregistered securities: (a) Issuance of 10 1/2% Senior Secured Notes and Common Stock. On October 14, 1993, Holdings sold an aggregate of $55.7 million face amount of its 10 1/2% Senior Secured Notes and 734,170 shares of Holdings Common Stock for consideration consisting of approximately $19.06 million in cash and $29.95 million principal amount of Holdings 13.75% Senior Subordinated Notes, which were canceled. Donaldson, Lufkin & Jenrette Securities Corporation served as the Company's placement agent in connection with such offering. There were six institutional purchasers in the offering consisting of funds associated with the Putnam Companies and T. Rowe Price, as well as Deltec Asset Management Corporation, Manufacturers Life Insurance Company, Prudential Insurance Company and Harvard University. (b) Grants and exercises of Stock Options. During the year ended January 29, 1994, the Company granted options to purchase 77,237 shares of Common Stock at a price ranging between $1.07 and $8.95 per share. During the year ended January 28, 1995, the Company granted options to purchase 44,689 shares of Common Stock at a price of $1.07 per share. During the year ended February 3, 1996, the Company granted options to purchase 263,966 shares of Common Stock at a price ranging between $1.07 and $5.01 per share. Since February 4, 1996, the Company granted options to purchase 323,998 shares of common stock at a price ranging between $5.01 and $22.69 per share. Prior to the Company's Initial Public Offering, the Company granted 469,144 shares of Common Stock upon the exercise of stock options. The securities described in (a) were offered and sold in reliance upon the exemption from registration under Section 4(2) of the Securities Act, relative to sales by an issuer not involving any public offering. The offers and sales described in (b) were made in reliance upon an exemption from registration pursuant to Rule 701 promulgated under the Securities Act and by virtue of the fact that the transactions did not involve an "offer" or "sale" as such terms are defined under the Securities Act. II-2 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS DESCRIPTION - ------------ ---------------------------------------------------------------------------------- * 1.1 --Form of Underwriting Agreement for sale of Common Stock. 3.1 --Amended and Restated Certificate of Incorporation of Loehmann's, Inc., filed as Exhibit 3.1 to Loehmann's, Inc.'s Registration Statement on Form S-1 (Registration No. 33-97100) and incorporated herein by reference. 3.2 --By-Laws of Loehmann's, Inc., filed as Exhibit 3.2 to Loehmann's, Inc.'s Registration Statement on Form S-1 (Registration No. 33-97100) and incorporated herein by reference. 4.1 --Senior Note Indenture dated as of May 10, 1996 between Loehmann's, Inc. and United States Trust Company of New York, filed as Exhibit 4.1 to Loehmann's, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended May 4, 1996 (Registration No. 0-28410) and incorporated herein by reference. *4.2 --Second Amended and Restated Credit Agreement, dated as of May 6, 1996, between Loehmann's, Inc., and BankAmerica Business Credit, Inc. and certain Banks party thereto. *4.3 --Letter from Loehmann's, Inc. to the Securities and Exchange Commission agreeing to furnish copies of certain debt instruments. *5.1 --Opinion of Paul, Weiss, Rifkind, Wharton & Garrison. 10.1 --Stock Subscription Agreement dated as of September 19, 1988, among Holdings and the Stockholders listed therein and DLJ Securities Corp., as Escrow Agent, filed as Exhibit 10.1 to Loehmann's Holdings, Inc.'s Registration Statement on Form S-1 (Registration No. 33-25718) and incorporated herein by reference. 10.2 --Shareholder Agreement dated September 19, 1988 by and among Holdings and the Shareholders listed therein, filed as Exhibit 10.2 to Loehmann's Holdings, Inc.'s Registration Statement on Form S-1 (Registration No. 33-25718) and incorporated herein by reference. 10.3 --Amendment No. 1 to Shareholders' Agreement dated October 14, 1993 among Holdings and the Shareholders described therein, filed as Exhibit 10.3 to Loehmann's Holdings, Inc.'s Registration Statement on Form S-4 (Registration No. 33-71922) and incorporated herein by reference. *10.4 --Amendment No. 2 to Shareholders' Agreement dated as of May 9, 1996 among Loehmann's, Inc. and the shareholders listed therein. 10.5 --Common Stock Rights Agreement dated as of October 14, 1993 among Loehmann's Holdings, Inc. and the Purchasers named therein, filed as Exhibit 10.4 to Loehmann's Holdings, Inc.'s Registration Statement on Form S-4 (Registration No. 33-71922) and incorporated herein by reference. 10.6 --Lease Agreement between the New York City Industrial Development Agency and Loehmann's, Inc. dated as of December 1, 1983, filed as Exhibit 10.3 to Loehmann's Holdings, Inc.'s Registration Statement on Form S-1 (Registration No. 33-25718) and incorporated herein by reference. 10.7 --Amended and Restated Agreement among Loehmann's Holdings, Inc., Loehmann's, Inc. and Philip Kaplan dated as of September 19, 1988 and Memorandum dated March 1, 1993 amending such Agreement, filed as Exhibit 10.8 to Loehmann's Holdings, Inc.'s Registration Statement on Form S-4 (Registration No. 33-71922) and incorporated herein by reference. 10.8 --Amendment No. 1 to Employment Agreement among Loehmann's Holdings, Inc., Loehmann's, Inc. and Philip Kaplan dated as of November 1, 1995, filed as Exhibit 10.9 to Loehmann's, Inc.'s Registration Statement on Form S-1 (Registration No. 33-97100) and incorporated herein by reference. 10.9 --Amendment No. 2 to Employment Agreement among Loehmann's Holdings, Inc., Loehmann's, Inc. and Philip Kaplan dated as of April 5, 1996, filed as Exhibit 10.10 to Loehmann's, Inc.'s Registration Statement on Form S-1 (Registration No. 33-97100) and incorporated herein by reference. 10.10 --Agreement among Loehmann's Holdings, Inc., Loehmann's, Inc. and Robert N. Friedman dated as of November 1, 1995, filed as Exhibit 10.11 to Loehmann's, Inc.'s Registration Statement on Form S-1 (Registration No. 33-97100) and incorporated herein by reference.
II-3
(a) EXHIBITS DESCRIPTION - ------------ ---------------------------------------------------------------------------------- 10.11 --Amendment No. 1 to Employment Agreement among Loehmann's Holdings, Inc., Loehmann's, Inc. and Robert Friedman dated as of April 5, 1996, filed as Exhibit 10.12 to Loehmann's, Inc.'s Registration Statement on Form S-1 (Registration No. 33-97100) and incorporated herein by reference. 10.12 --Compensation/Consultation Agreement between Loehmann's Holdings, Inc. and Norman Matthews, filed as Exhibit 10.8 to Loehmann's Holdings, Inc.'s Registration Statement on Form S-1 (Registration No. 33-25718) and incorporated herein by reference. 10.13 --Loehmann's, Inc. Amended and Restated Deferred Profit Sharing Plan, effective January 31, 1993, filed as Exhibit 10.15 Loehmann's, Inc.'s Registration Statement on Form S-1 (Registration No. 33-97100) and incorporated herein by reference. 10.14 --Loehmann's Holdings, Inc. 1988 Stock Option Plan, as amended, filed as Exhibit 10.16 to Loehmann's, Inc.'s Registration Statement on Form S-1 (Registration No. 33-97100) and incorporated herein by reference. 10.15 --Non-Qualified Stock Option Agreement dated September 30, 1988 between Loehmann's Holdings, Inc. and Philip Kaplan, filed as Exhibit 10.11 to Loehmann's Holdings, Inc.'s Registration Statement on Form S-1 (Registration No. 33-25718) and incorporated herein by reference. 10.16 --Loehmann's, Inc. New Stock Incentive Plan, filed as Exhibit 10.18 to Loehmann's, Inc.'s Registration Statement on Form S-1 (Registration No. 33-97100) and incorporated herein by reference. 10.17 --Executive Incentive Compensation Plan, filed as Exhibit 10.13 to Loehmann's Holdings, Inc.'s Registration Statement on Form S-1 (Registration No. 33-25718) and incorporated herein by reference. 10.18 --Non-Qualified Stock Option Agreement dated as of December 19, 1993 between Loehmann's Holdings, Inc. and Norman S. Matthews, filed as Exhibit 10.15 to Loehmann's Holdings, Inc.'s Registration Statement on Form S-4 (Registration No. 33-71922) and incorporated herein by reference. *23.1 --Consent of Paul, Weiss, Rifkind, Wharton & Garrison (included in opinion filed as Exhibit 5.1). *23.2 --Consent of Ernst & Young LLP. **24.1 --Power of Attorney.
- ------------ * Filed herewith. ** Previously filed. (b) Financial Statement Schedules included separately in the Registration Statement. None ITEM 17. UNDERTAKINGS. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) II-4 under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-5 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Amendment to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the 11th day of October, 1996. LOEHMANN'S, INC. By /S/ PHILIP KAPLAN ................................... Philip Kaplan President and Chief Operating Officer Pursuant to the requirements of the Securities Act of 1933, this Amendment to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - -------------------------------------- --------------------------------- ------------------- * Chairman of the Board and October 11, 1996 ...................................... Director Norman S. Matthews /s/ PHILIP KAPLAN President and Chief Operating October 11, 1996 ...................................... Officer and Director (Principal Philip Kaplan Executive Officer) /s/ ROBERT N. FRIEDMAN Chairman and Chief Executive October 11, 1996 ...................................... Officer and Director Robert N. Friedman * Senior Vice President and Chief October 11, 1996 ...................................... Financial Officer (Principal Robert Glass Financial and Accounting Officer) * Vice President and Director October 11, 1996 ...................................... Janet A. Hickey * Director October 11, 1996 ...................................... Richard E. Kroon * Director October 11, 1996 ...................................... Christina A. Mohr * Director October 11, 1996 ...................................... Arthur Reiner * Director October 11, 1996 ...................................... Cynthia Cohen Turk *By /s/ PHILIP KAPLAN .................................. Philip Kaplan (Attorney-in-fact)
II-6 EXHIBIT INDEX
EXHIBITS DESCRIPTION PAGE - -------- ------------------------------------------------------------------------------ ---- * 1.1 --Form of Underwriting Agreement for sale of Common Stock. 3.1 --Amended and Restated Certificate of Incorporation of Loehmann's, Inc., filed as Exhibit 3.1 to Loehmann's, Inc.'s Registration Statement on Form S-1 (Registration No. 33-97100) and incorporated herein by reference. 3.2 --By-Laws of Loehmann's, Inc., filed as Exhibit 3-2 to Loehmann's, Inc.'s Registration Statement on Form S-1 (Registration No. 33-97100) and incorporated herein by reference. 4.1 --11 7/8% Senior Note Indenture dated as of May 10, 1996, between Loehmann's, Inc. and United States Trust Company of New York, filed as Exhibit 4.1 to Loehmann's, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended May 4, 1996 (Registration No. 0-28410) and incorporated herein by reference. *4.2 --Second Amended and Restated Credit Agreement, dated as of May 6, 1996, between Loehmann's, Inc., and BankAmerica Business Credit, Inc. and certain Banks party thereto. *4.3 --A letter from Loehmann's Inc. to the Securities and Exchange Commission agreeing to furnish copies of certain debt instruments. *5.1 --Opinion of Paul, Weiss, Rifkind, Wharton & Garrison. 10.1 --Stock Subscription Agreement dated as of September 19, 1988, among Holdings and the Stockholders listed therein and DLJ Securities Corp., as Escrow Agent, filed as Exhibit 10.1 to Loehmann's Holdings, Inc.'s Registration Statement on Form S-1 (Registration No. 33-25718) and incorporated herein by reference. 10.2 --Shareholder Agreement dated September 19, 1988 by and among Holdings and the Shareholders listed therein, filed as Exhibit 10.2 to Loehmann's Holdings, Inc.'s Registration Statement on Form S-1 (Registration No. 33-25718) and incorporated herein by reference. 10.3 --Amendment No. 1 to Shareholders' Agreement dated October 14, 1993 among Holdings and the Shareholders described therein, filed as Exhibit 10.3 to Loehmann's Holdings, Inc.'s Registration Statement on Form S-4 (Registration No. 33-71922) and incorporated herein by reference. *10.4 --Amendment No. 2 to Shareholders' Agreement dated as of May 9, 1996 among Loehmann's, Inc. and the shareholders listed therein. 10.5 --Common Stock Rights Agreement dated as of October 14, 1993 among Loehmann's Holdings, Inc. and the Purchasers named therein, filed as Exhibit 10.4 to Loehmann's Holdings, Inc.'s Registration Statement on Form S-4 (Registration No. 33-71922) and incorporated herein by reference. 10.6 --Lease Agreement between the New York City Industrial Development Agency and Loehmann's, Inc. dated as of December 1, 1983, filed as Exhibit 10.3 to Loehmann's Holdings, Inc.'s Registration Statement on Form S-1 (Registration No. 33-25718) and incorporated herein by reference. 10.7 --Amended and Restated Agreement among Loehmann's Holdings, Inc., Loehmann's, Inc. and Philip Kaplan dated as of September 19, 1988 and Memorandum dated March 1, 1993 amending such Agreement, filed as Exhibit 10.8 to Loehmann's Holdings, Inc.'s Registration Statement on Form S-4 (Registration No. 33-71922) and incorporated herein by reference. 10.8 --Amendment No. 1 to Employment Agreement among Loehmann's Holdings, Inc., Loehmann's, Inc. and Philip Kaplan dated as of November 1, 1995, filed as Exhibit 10.9 to Loehmann's, Inc.'s Registration Statement on Form S-1 (Registration No. 33-97100) and incorporated herein by reference. 10.9 --Amendment No. 2 to Employment Agreement among Loehmann's Holdings, Inc., Loehmann's, Inc. and Philip Kaplan dated as of April 5, 1996, filed as Exhibit 10.10 to Loehmann's, Inc.'s Registration Statement on Form S-1 (Registration No. 33-97100) and incorporated herein by reference. 10.10 --Agreement among Loehmann's Holdings, Inc., Loehmann's, Inc. and Robert N. Friedman dated as of November 1, 1995, filed as Exhibit 10.11 to Loehmann's, Inc.'s Registration Statement on Form S-1 (Registration No. 33-97100) and incorporated herein by reference.
EXHIBITS DESCRIPTION PAGE - -------- ------------------------------------------------------------------------------ ---- 10.11 --Amendment No. 1 to Employment Agreement among Loehmann's Holdings, Inc., Loehmann's, Inc. and Robert Friedman dated as of April 5, 1996, filed as Exhibit 10.12 to Loehmann's, Inc.'s Registration Statement on Form S-1 (Registration No. 33-97100) and incorporated herein by reference. 10.12 --Compensation/Consultation Agreement between Loehmann's Holdings, Inc. and Norman Matthews, filed as Exhibit 10.8 to Loehmann's Holdings, Inc.'s Registration Statement on Form S-1 (Registration No. 33-25718) and incorporated herein by reference. 10.13 --Loehmann's, Inc. Amended and Restated Deferred Profit Sharing Plan, effective January 31, 1993, filed as Exhibit 10.15 to Loehmann's, Inc.'s Registration Statement on Form S-1 (Registration No. 33-97100) and incorporated herein by reference. 10.14 --Loehmann's Holdings, Inc. 1988 Stock Option Plan, as amended, filed as Exhibit 10.16 to Loehmann's, Inc.'s Registration Statement on Form S-1 (Registration No. 33-97100) and incorporated herein by reference. 10.15 --Non-Qualified Stock Option Agreement dated September 30, 1988 between Loehmann's Holdings, Inc. and Philip Kaplan, filed as Exhibit 10.11 to Loehmann's Holdings, Inc.'s Registration Statement on Form S-1 (Registration No. 33-25718) and incorporated herein by reference. 10.16 --Loehmann's, Inc. New Stock Incentive Plan, filed as Exhibit 10.18 to Loehmann's, Inc.'s Registration Statement on Form S-1 (Registration No. 33-97100) and incorporated herein by reference. 10.17 --Executive Incentive Compensation Plan, filed as Exhibit 10.13 to Loehmann's Holdings, Inc.'s Registration Statement on Form S-1 (Registration No. 33-25718) and incorporated herein by reference. 10.18 --Non-Qualified Stock Option Agreement dated as of December 19, 1993 between Loehmann's Holdings, Inc. and Norman S. Matthews, filed as Exhibit 10.15 to Loehmann's Holdings, Inc.'s Registration Statement on Form S-4 (Registration No. 33-71922) and incorporated herein by reference. *23.1 --Consent of Paul, Weiss, Rifkind, Wharton & Garrison (included in opinion filed as Exhibit 5.1). *23.2 --Consent of Ernst & Young LLP. **24.1 --Power of Attorney.
- ------------ * Filed herewith. ** Previously filed. EX-1.1 2 Exhibit 1.1 1,970,000 Shares Loehmann's, Inc. Common Stock UNDERWRITING AGREEMENT ---------------------- October __, 1996 MONTGOMERY SECURITIES SALOMON BROTHERS INC ROBERTSON STEPHENS & COMPANY c/o MONTGOMERY SECURITIES 600 Montgomery Street San Francisco, California 94111 Dear Sirs: SECTION 1. Introductory. Certain stockholders (the "Selling ------------ Stockholders") of Loehmann's, Inc., a Delaware corporation (the "Company), named in Schedule B annexed hereto, propose to sell 1,970,000 shares of the Common Stock of the Company (the "Common Stock") to you (the "Underwriters"). Said 1,970,000 shares are herein called the "Firm Common Shares." In addition, the Selling Stockholders named in Schedule C hereto propose to grant to the Underwriters an option to purchase up to 295,500 additional shares of Common Stock (the "Optional Common Shares"), as provided in Section 5 hereof. The Firm Common Shares and, to the extent such option is exercised, the Optional Common Shares are hereinafter collectively referred to as the "Common Shares" or "Shares." You have advised the Company and the Selling Stockholders that the Underwriters propose to make a public offering of the Common Shares on the effective date of the registration statement hereinafter referred to, or as soon thereafter as in your judgment is advisable. The Company and each of the Selling Stockholders hereby confirm their respective agreements with respect to the purchase of the Common Shares by the Underwriters as follows: SECTION 2. Representations and Warranties of the Company. The Company --------------------------------------------- represents and warrants to the several Underwriters that: (a) A registration statement on Form S-1 (File No. 333-) with respect to the Common Shares has been prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended (the "Act"), and the rules and regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") thereunder, and has been filed with the Commission. The Company has prepared and has filed or proposes to file prior to the effective date of such registration statement an amendment or amendments to such registration statement, which amendment or amendments have been or will be similarly prepared. There have been delivered to you four signed copies of such registration statement and amendments, together with four copies of each exhibit filed therewith. Conformed copies of such registration statement and amendments (but without exhibits) and of the related preliminary prospectus have been delivered to you in such reasonable quantities as you have requested for each of the Underwriters. The Company will next file with the Commission one of the following: (i) prior to the effectiveness of such registration statement, a further amendment thereto, including the form of final prospectus, (ii) a final prospectus in accordance with Rules 430A and 424(b) of the Rules and Regulations, or (iii) a term sheet (the "Term Sheet") as described in and in accordance with Rules 434 and 424(b) of the Rules and Regulations. As filed, the final prospectus, if one is used, or the Term Sheet and Preliminary Prospectus, if a final prospectus is not used, shall include all Rule 430A Information (as defined herein) and, except to the extent that you shall agree in writing to a modification, shall be in all substantive respects in the form furnished to you prior to the date and time that this Agreement was executed and delivered by the parties hereto, or, to the extent not completed at such date and time, shall contain only such specific additional information and other changes (beyond that contained in the latest Preliminary Prospectus (as defined)) as the Company shall have previously advised you in writing would be included or made therein. The term "Registration Statement" as used in this Agreement shall mean registration statement at the time such registration statement becomes effective and, in the event any post-effective amendment thereto becomes effective prior to the First Closing Date (as hereinafter defined), shall also mean such registration statement as so amended; provided, however, that such term shall also include (i) all Rule 430A Information deemed to be included in such registration statement at the time such registration statement becomes effective as provided by Rule 430A of the Rules and Regulations, and (ii) a registration statement, if any, filed pursuant to Rule 462(b) of the Rules and Regulations relating to the Common Shares. The term "Preliminary Prospectus" shall mean any preliminary prospectus referred to in the preceding paragraph and any preliminary prospectus included in the Registration Statement at the time it becomes effective that omits Rule 430A Information. The term "Prospectus" as used in this Agreement shall 2 mean either (i) the prospectus relating to the Common Shares in the form in which it is first filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations or, (ii) if a Term Sheet is not used and no filing pursuant to Rule 424(b) of the Rules and Regulations is required, the form of final prospectus included in the Registration Statement at the time such registration statement becomes effective, or (iii) if a Term Sheet is used, the Term Sheet in the form in which it is first filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations, together with the Preliminary Prospectus included in the Registration Statement at the time it becomes effective. The term "Rule 430A Information" means information with respect to the Common Shares and the offering thereof permitted to be omitted from the Registration Statement when it becomes effective pursuant to Rule 430A of the Rules and Regulations. Any reference herein to any Preliminary Prospectus or the Prospectus shall be deemed to refer to and include the documents incorporated by reference therein pursuant to Form S-1 under the Act, as of the date of such Preliminary Prospectus or Prospectus, as the case may be. (b) The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus, and each Preliminary Prospectus that has been distributed by the Underwriters or the Company to prospective investors has conformed in all material respects to the requirements of the Act and the Rules and Regulations and as of its date, has not included any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and at the time the Registration Statement becomes effective, and at all times subsequent thereto up to and including each Closing Date hereinafter mentioned, the Registration Statement and Prospectus, and any amendments or supplements thereto, will contain all material statements and information required to be included therein by the Act and the Rules and Regulations and will in all material respects conform to the requirements of the Act and the Rules and Regulations, and neither the Registration Statement nor the Prospectus, nor any amendment or supplement thereto, will include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, no representation or warranty contained in this subsection 2(b) shall be applicable to information contained in or omitted from any Preliminary Prospectus, the Registration Statement, the Prospectus or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Company by or on behalf of any Underwriters directly or through the Underwriters specifically for use in the preparation thereof. (c) Any term sheet and prospectus subject to completion provided by the Company to the Underwriters for use in connection with the offering and sale of the Shares pursuant to Rule 434 under the Act together are not materially 3 different from the prospectus included in the Registration Statement (exclusive of any information deemed a part thereof by virtue of Rule 434(d)); (d) The Company does not own or control, directly or indirectly, any corporation, association or other entity other than the subsidiaries listed in Exhibit 22 to the Registration Statement. The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of Delaware, with full power and authority (corporate and other) to own and lease its properties and conduct its business as described in the Prospectus; the Company is in possession of and operating in compliance in all material respects with all authorizations, licenses, permits, consents, certificates and orders material to the conduct of its respective business, all of which are valid and in full force and effect; the Company is duly qualified to do business and in good standing as a foreign corporation in each jurisdiction in which the ownership or leasing of properties or the conduct of its business require such qualification, except for jurisdictions in which the failure to so qualify would not have a material adverse effect upon the Company; and, to the best of the Company's knowledge, no proceeding has been instituted in any such jurisdiction, revoking, limiting or curtailing, or seeking to revoke, limit or curtail, such power and authority or qualification. (e) The Company has an authorized and outstanding capital stock as set forth under the heading "Description of Capital Stock" in the Prospectus (subject to the exercise of outstanding stock options after the date of the Prospectus); the issued and outstanding shares of Common Stock (including the shares to be sold by the Selling Stockholders) have been duly authorized and validly issued, are fully paid and nonassessable, have been issued in compliance with all federal and state securities laws, were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities, and conform to the description thereof contained in the Prospectus. Except as disclosed in or contemplated by the Prospectus and the financial statements of the Company, and the related notes thereto, included in the Prospectus, the Company has no outstanding options to purchase, or any preemptive rights or other rights to subscribe for or to purchase, any securities or obligations convertible into, or any contracts or commitments to issue or sell, shares of its capital stock or any such options, rights, convertible securities or obligations. The description of the Company's stock option, stock bonus and other stock plans or arrangements, and the options or other rights granted and exercised thereunder, set forth in the Prospectus, accurately and fairly presents in all material respects the information required to be shown with respect to such plans, arrangements, options and rights. (f) No stockholder of the Company has any right which has not been waived to require the Company to register the sale of any shares owned by such stockholder under the Act in the public offering contemplated by this Agreement. No further approval or authority of the stockholders (other than the Selling 4 Stockholders individually) or the Board of Directors of the Company will be required for the transfer and sale of the Common Shares to be sold by the Selling Stockholders as contemplated herein. (g) The Company has full legal right, power and authority to enter into this Agreement and perform the transactions contemplated hereby. This Agreement has been duly authorized, executed and delivered by the Company and constitutes a valid and binding obligation of the Company enforceable in accordance with its terms, except as enforceability may be limited by general equitable principles, bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally and except as to those provisions relating to indemnity or contribution for liabilities arising under the Act. The making and performance of this Agreement by the Company and the consummation of the transactions herein contemplated will not violate any provisions of the certificate of incorporation or bylaws, or other organizational documents, of the Company, and will not conflict with, result in the breach or violation of, or constitute, either by itself or upon notice or the passage of time or both, a default under any agreement, mortgage, deed of trust, lease, franchise, license, indenture, permit or other instrument to which the Company is a party or by which the Company or any of its properties may be bound or affected, any statute or any authorization, judgment, decree, order, rule or regulation of any court or any regulatory body, administrative agency or other governmental body applicable to the Company or any of its properties, except for any violation, breach or default that would not have a material adverse effect on the Company or on the consummation of the transactions contemplated hereby. No consent, approval, authorization or other order of any court, regulatory body, administrative agency or other governmental body is required for the execution and delivery of this Agreement or the consummation of the transactions contemplated by this Agreement, except for compliance with the Act, the Blue Sky laws applicable to the public offering of the Common Shares by the several Underwriters and the clearance of such offering with the National Association of Securities Dealers, Inc. (the "NASD") and except for any such consent, approval, authorization or other order the failure of which to obtain would not have a material adverse effect on the Company or on the consummation of the transactions contemplated hereby. (h) Ernst & Young LLP, who have expressed their opinion with respect to the financial statements and schedules filed with the Commission as a part of the Registration Statement and included in the Prospectus and in the Registration Statement, are independent accountants as required by the Act and the Rules and Regulations. (i) The financial statements and schedules of the Company and the related notes thereto, included in the Registration Statement present fairly the financial position of the Company as of the respective dates of such financial statements and schedules, and the results of operations and changes in financial 5 position of the Company for the respective periods covered thereby. Such statements, schedules and related notes have been prepared in accordance with generally accepted accounting principles applied on a consistent basis as certified by the independent accountants named in subsection 2(h). No other financial statements or schedules are required to be included in the Registration Statement. The selected financial data set forth in the Prospectus under the captions "Capitalization" and "Selected Consolidated Financial Data" fairly present the information set forth therein on the basis stated in the Registration Statement. (j) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (k) Except as disclosed in the Prospectus, and except as to defaults which individually or in the aggregate would not be material to the Company, the Company is not in violation or default of any provision of its certificate of incorporation or bylaws, or other organizational documents, or in breach of or default with respect to any provision of any agreement, judgment, decree, order, mortgage, deed of trust, lease, franchise, license, indenture, permit or other instrument to which it is a party or by which any of its properties are bound; and, to the best of the Company's knowledge, there does not exist any state of facts which constitutes an event of default on the part of the Company as defined in such documents or which, with notice or lapse of time or both, would constitute such an event of default. (l) There are no contracts or other documents required to be described in the Registration Statement or to be filed as exhibits to the Registration Statement by the Act or by the Rules and Regulations which have not been described or filed as required. The contracts so described in the Prospectus are in full force and effect on the date hereof; and the Company is not, nor to the best of the Company's knowledge, is any other party in breach of or default under any of such contracts, except for such breaches or defaults that individually or in the aggregate would not be material to the Company. (m) There are no legal or governmental actions, suits or proceedings pending or, to the best of the Company's knowledge, threatened to which the Company is or may be a party or of which property owned or leased by the Company is or may be the subject, or related to environmental or discrimination matters, which actions, suits or proceedings might, individually or in the 6 aggregate, prevent or materially adversely affect the transactions contemplated by this Agreement or result in a material adverse change in the condition (financial or otherwise), properties, business, operations or prospects of the Company. The Company is not a party or subject to the provisions of any material injunction, judgment, decree or order of any court, regulatory body, administrative agency or other governmental body. (n) There is (i) no significant unfair labor practice complaint pending against the Company or, to the best knowledge of the Company, threatened against it, before the National Labor Relations Board or any state or local labor relations board, and no significant grievance or more significant arbitration proceeding arising out of or under any collective bargaining agreement is so pending against the Company or, to the best knowledge of the Company, threatened against any of them, and (ii) no significant strike, labor dispute, slowdown or stoppage pending against the Company or, to the best knowledge of the Company, threatened against it except for such actions specified in clause (i) or (ii) above, which, singly or in the aggregate could not reasonably be expected to have a material adverse effect on the Company. (o) Except as disclosed in the Prospectus, there are no material business relationships or related party transactions required to be disclosed therein by Item 404 of Regulation S-K of the Commission. (p) The Company has not violated any foreign, federal, state or local law or regulation relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("Environmental Laws"), nor any federal or state law relating to discrimination in the hiring, promotion or pay of employees nor any applicable federal or state wages and hours laws, nor any provisions of the Employee Retirement Income Security Act or the rules and regulations promulgated thereunder, except for such violations which singly or in the aggregate could not reasonably be expected to have a material adverse effect on the Company. (q) The Company has such permits, licenses, franchises and authorizations of governmental or regulatory authorities ("permits"), including, without limitation, under any applicable Environmental Laws, as are necessary to own, lease and operate its properties and to conduct its business as described in the Prospectus; the Company has fulfilled and performed all of its material obligations with respect to such permits and no event has occurred which allows, or after notice or lapse of time would allow, revocation or termination thereof or results in any other material impairment of the rights of the holder of any such permit; and, except as described in the Prospectus, such permits contain no restrictions that are materially burdensome to the Company. 7 (r) The Company has good title to all the properties and assets reflected as owned in the financial statements hereinabove described (or elsewhere in the Prospectus), subject to no lien, mortgage, pledge, charge or encumbrance of any kind except (i) those, if any, reflected in such financial statements (or elsewhere in the Prospectus), or (ii) those which are not material in amount and do not adversely affect the use made and proposed to be made of such property by the Company. The Company holds its leased properties under valid and binding leases, with such exceptions as are not materially significant in relation to the business of the Company. Except as disclosed in the Prospectus, the Company owns or leases all such properties as are necessary to its operations as now conducted. (s) Since the respective dates as of which information is given in the Registration Statement and Prospectus, and except as described in or specifically contemplated by the Prospectus: (i) the Company has not incurred any material liabilities or obligations, indirect, direct or contingent, or other transaction which is not in the ordinary course of business or which could result in a material reduction in the future earnings of the Company; (ii) the Company has not sustained any material loss or interference with its business or properties from fire, flood, windstorm, accident or other calamity, whether or not covered by insurance; (iii) the Company has not paid or declared any dividends or other distributions with respect to its capital stock and the Company is not in default in the payment of principal or interest on any outstanding debt obligations; (iv) there has not been any change in the capital stock (other than upon the exercise of options and warrants described in the Registration Statement) or indebtedness material to the Company (other than in the ordinary course of business); and (v) there has not been any material adverse change in the condition (financial or otherwise), business, properties, result of operations or prospects of the Company. (t) Except as disclosed in or specifically contemplated by the Prospectus, the Company has sufficient trademarks, trade names, patent rights, mask works, copyrights, licenses, approvals and governmental authorizations to conduct its business as now conducted; the expiration of any trademarks, trade names, patent rights, mask works, copyrights, licenses, approvals or governmental authorizations would not have a material adverse effect on the condition (financial or otherwise), business, results of operations or prospects of the Company; and the Company has no knowledge of any material infringement by it of trademark, trade name rights, patent rights, mask works, copyrights, licenses, trade secret or other similar rights of others, and there is no claim being made against the Company regarding trademark, trade name, patent, mask work, copyright, license, trade secret or other infringement which could have a material adverse effect on the condition (financial or otherwise), business, results of operations or prospects of the Company. 8 (u) The Company has filed all necessary federal, state and foreign income and franchise tax returns and has paid all taxes shown as due thereon; and the Company has no knowledge of any tax deficiency which has been or might be asserted or threatened against the Company which would materially and adversely affect the business, operations or properties of the Company. (v) The Company is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (w) The Company has complied with all provisions of Section 517.075, Florida Statutes (Chapter 92-198, Laws of Florida). (x) The Company has not distributed and will not distribute prior to the First Closing Date any offering material in connection with the offering and sale of the Common Shares other than the Preliminary Prospectus, the Prospectus, the Registration Statement and the other materials permitted by the Act. (y) The Company maintains insurance of the types and in the amounts generally deemed adequate for its business, including, but not limited to, insurance covering real and personal property owned or leased by the Company against theft, damage, destruction, acts of vandalism and all other risks customarily insured against, all of which insurance is in full force and effect. (z) The Company has not at any time during the last five years (i) made any unlawful contribution to any candidate for foreign office, or failed to disclose fully any contribution in violation of law or (ii) made any payment to any federal or state governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments required or permitted by the laws of the United States or any jurisdiction thereof. (aa) The Company has not taken and will not take, directly or indirectly, any action designed to or that might be reasonably expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Common Shares. SECTION 3. Representations, Warranties and Covenants of the Selling -------------------------------------------------------- Stockholders. - ------------- (a) Each of the Selling Stockholders represents and warrants severally and not jointly to, and agrees with, the several Underwriters that: (i) Such Selling Stockholder has, and on the First Closing Date and the Second Closing Date hereinafter mentioned will have, good title to the Common Shares proposed to be sold by such Selling 9 Stockholder hereunder on such Closing Date and full right, power and authority to enter into this Agreement and to sell, assign, transfer and deliver such Common Shares hereunder, free and clear of all voting trust arrangements, liens, encumbrances, equities, security interests, restrictions and claims whatsoever; and upon delivery of and payment for such Common Shares hereunder, such Selling Stockholder will convey to the Underwriters good title thereto, free and clear of all liens, encumbrances, equities, claims, restrictions, security interests, voting trusts or other defects of title whatsoever. (ii) Such Selling Stockholder has executed and delivered a Power of Attorney and (except for the Putnam Funds, as defined in Section 8 herein) caused to be executed and delivered on its, his or her behalf a Custody Agreement (hereinafter collectively referred to as the "Stockholders Agreement," except with respect to the Putnam Funds the term "Stockholders Agreement" shall only refer to the Power of Attorney) and in connection herewith such Selling Stockholder further represents, warrants and agrees that, except as provided in the Stockholders Agreement, such Selling Stockholder (except for the Putnam Funds) has deposited in custody, under the Stockholders Agreement, with the agent named therein (the "Agent") as custodian, certificates in negotiable form for the Common Shares to be sold hereunder by such Selling Stockholder, for the purpose of further delivery pursuant to this Agreement. Such Selling Stockholder agrees that the Common Shares to be sold by such Selling Stockholder on deposit with the Agent are subject to the interests of the Company and the Underwriters to the extent set forth herein and in the Stockholders Agreement, that the arrangements made for such custody are to that extent irrevocable, and that the obligations of such Selling Stockholder hereunder shall not be terminated, except as provided in this Agreement or in the Stockholders Agreement, by any act of such Selling Stockholder, by operation of law, by the death or incapacity of such Selling Stockholder or by the occurrence of any other event. If the Selling Stockholder should die or become incapacitated, or if any other event should occur, before the delivery of the Common Shares hereunder, the documents evidencing Common Shares then on deposit with the Agent shall be delivered by the Agent in accordance with the terms and conditions of this Agreement and the Stockholders Agreement as if such death, incapacity or other event had not occurred, regardless of whether or not the Agent shall have received notice thereof. This Agreement and the Stockholders Agreement have been duly executed and delivered by or on behalf of such Selling Stockholder and the form of such Stockholders Agreement has been delivered to you. (iii) The performance of this Agreement and the Stockholders Agreement and the consummation of the transactions 10 contemplated hereby and by the Stockholders Agreement will not result in a breach or violation by such Selling Stockholder of any of the terms or provisions of, or constitute a default by such Selling Stockholder under any material indenture, mortgage, deed of trust, trust (constructive or other), loan agreement, lease, franchise, license or other agreement or instrument to which such Selling Stockholder is a party or by which such Selling Stockholder or any of its properties is bound, or any judgment, decree, order, rule or regulation of any court or governmental agency or body applicable to such Selling Stockholder or any of its properties, except (x) for any violation, breach, or default that could not have an adverse effect on the Selling Stockholder's sale of the Common Shares to be sold by it, him or her hereunder or its performance of any of its, his or her other obligations hereunder or under the Stockholders Agreement and (y) that such Selling Stockholder makes no representation or warranty hereunder with respect to federal or state securities or Blue Sky laws. (iv) Such Selling Stockholder has not taken and will not take, directly or indirectly, any action designed to or which might reasonably be expected to cause or result in stabilization or manipulation of the price of the Common Stock of the Company to facilitate the sale or resale of the Common Shares. (v) Each Preliminary Prospectus that has been distributed by the Underwriters or the Company to prospective investors and the Prospectus, insofar as it includes or reflects information with respect to such Selling Stockholder, has conformed in all material respects to the requirements of the Act and the Rules and Regulations and has not included any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein not misleading in light of the circumstances under which it was made; and neither the Registration Statement nor the Prospectus, nor any amendment or supplement thereto, insofar as they include or reflect information with respect to such Selling Stockholder, will include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading. (vi) Such Selling Stockholder (except for each of the Putnam Funds, as defined in Section 8 herein), without independent investigation, is not aware that any of the representations and warranties set forth in Section 2 above is untrue or inaccurate in any material respect. (vii) All stock transfer or other taxes (other than income taxes), if any, that are required to be paid in connection with the sale and transfer of the Common Shares proposed to be sold by such Selling 11 Stockholder to the several Underwriters pursuant to the Underwriting Agreement will be fully paid or provided for by such Selling Stockholder. (viii) No consent, approval, authorization or order of, or any filing with, any court or governmental agency or body is required for the consummation by such Selling Stockholder of the transactions on its part contemplated in this Underwriting Agreement, the Power of Attorney or the Custody Agreement, except as may be required under the Act or state or provincial securities or "blue sky" laws. (ix) Other than as permitted by the Act and the rules and regulations thereunder, such Selling Stockholder has not distributed and will not distribute any preliminary prospectus, the Prospectus or any other offering material in connection with the offering and sale of the Common Shares proposed to be sold by such Selling Stockholder. (b) Each of the Selling Stockholders agrees with the Company and the Underwriters not to offer to sell, sell or contract to sell or otherwise dispose of any shares of Common Stock or securities convertible into or exchangeable for any shares of Common Stock in accordance with the terms of separate letter agreements between each Selling Stockholder and the Underwriters. SECTION 4. Representations and Warranties of the Underwriters. The -------------------------------------------------- Underwriters, on behalf of the several Underwriters, represent and warrant to the Company and to the Selling Stockholders that the information set forth (i) on the cover page of the Prospectus with respect to price, underwriting discounts and commissions and terms of offering and (ii) under "Underwriting" in the Prospectus was furnished to the Company by and on behalf of the Underwriters for use in connection with the preparation of the Registration Statement and the Prospectus and is correct in all material respects. SECTION 5. Purchase, Sale and Delivery of Common Shares. On the -------------------------------------------- basis of the representations, warranties and conditions herein contained, but subject to the terms and conditions herein set forth, each of the Selling Stockholders agrees, severally and not jointly, to sell to the Underwriters the Firm Common Shares set forth opposite such Selling Stockholder's name in Schedule B hereto. The Underwriters agree, severally and not jointly, to purchase from the Selling Stockholders the number of Firm Common Shares described below. The purchase price per share to be paid by the several Underwriters to the Selling Stockholders shall be $____ per share. The obligation of each Underwriter to each Selling Stockholder shall be to purchase from such Selling Stockholder that number of full shares which (as nearly as practicable, as determined by you) bears to the total number of Firm Common Shares to be sold by such Selling Stockholder as set forth opposite such Selling Stockholder's name in Schedule 12 B hereto the same proportion as the number of shares set forth opposite the name of such Underwriter in Schedule A hereto bears to the total number of Firm Common Shares. Delivery of certificates for the Firm Common Shares to be purchased by the Underwriters and payment therefor shall be made at the offices of Montgomery Securities, 600 Montgomery Street, San Francisco, California (or such other place as may be agreed upon by the Company and the Underwriters) at such time and date, not later than the third (or, if the Firm Common Shares are priced, as contemplated by Rule 15c6-1(c) of the Securities Exchange Act of 1934, after 4:30 P.M. Washington, D.C. time, the fourth) full business day following the first date that any of the Common Shares are released by you for sale to the public, as you shall designate by at least 48 hours prior notice to the Company (or at such other time and date, not later than one week after such third or fourth, as the case may be, full business day as may be agreed upon by the Company and the Underwriters) (the "First Closing Date"); provided, however, that if the Prospectus is at any time prior to the First Closing Date recirculated to the public, the First Closing Date shall occur upon the later of the third or fourth, as the case may be, full business day following the first date that any of the Common Shares are released by you for sale to the public or the date that is 48 hours after the date that the Prospectus has been so recirculated. Delivery of certificates for the Firm Common Shares shall be made by or on behalf of the Selling Stockholders to you, for the respective accounts of the Underwriters with respect to the Firm Common Shares to be sold by the Selling Stockholders against payment by you, for the accounts of the several Underwriters, of the purchase price therefor by wire transfer of same day funds to the order of the Company. Within one business day after receipt of such funds, the Company shall pay to each Selling Stockholder an amount equal to (i) the purchase price per share set forth above multiplied by the number of Shares sold by such Selling Stockholder minus (ii) such Selling Stockholder's pro rata portion (calculated based on the total number of Common Shares sold on such Closing Date) of the Expenses (as defined below) incurred in connection with the Offering and payable by the Selling Stockholders pursuant to Section 7 below; provided, however, that compliance by the Company with this obligation shall not be a condition subsequent to the obligations of the Selling Stockholders to the Underwriters under this Agreement. The certificates for the Firm Common Shares shall be registered in such names and denominations as you shall have requested at least two full business days prior to the First Closing Date, and shall be made available for checking and packaging on the business day preceding the First Closing Date at a location in New York, New York, as may be designated by you. Time shall be of the essence, and delivery at the time and place specified in this Agreement is a further condition to the obligations of the Underwriters. In addition, on the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, each of the Selling Stockholders listed on Schedule C hereto hereby grants an option to the several Underwriters to purchase, severally and not jointly, up to an aggregate of 295,500 Optional Common Shares (comprised of the respective number of shares set forth next to each such Selling Stockholder's name on Schedule C attached hereto) at the purchase price per share to be paid for the Firm Common Shares, for use solely in covering any over-allotments made by you for the account of 13 the Underwriters in the sale and distribution of the Firm Common Shares. In the event the option granted to the Underwriters hereunder is not exercised with respect to all 295,500 Optional Common Shares, the Underwriters shall purchase from each Selling Stockholder that number of full shares which (as nearly as practicable as determined by you) equals the product of the total number of Optional Common Shares to be purchased by the Underwriters as set forth in the notice to be provided below, multiplied by a fraction, the numerator of which is the number of Optional Common Shares set forth opposite such Selling Stockholder's name on Schedule C hereto and the denominator of which is 295,500. The option granted hereunder may be exercised at any time (but not more than once) within 30 days after the first date that any of the Common Shares are released by you for sale to the public, upon notice by you to the Company and Selling Stockholders setting forth the aggregate number of Optional Common Shares as to which the Underwriters are exercising the option, the names and denominations in which the certificates for such shares are to be registered and the time and place at which such certificates will be delivered. Such time of delivery (which may not be earlier than the First Closing Date), being herein referred to as the "Second Closing Date," shall be determined by you, but if at any time other than the First Closing Date shall not be earlier than three nor later than five full business days after delivery of such notice of exercise. The number of Optional Common Shares to be purchased by each Underwriter shall be determined by multiplying the number of Optional Common Shares to be sold by the Selling Stockholders pursuant to such notice of exercise by a fraction, the numerator of which is the number of Firm Common Shares to be purchased by such Underwriter as set forth opposite its name in Schedule A and the denominator of which is 1,970,000 (subject to such adjustments to eliminate any fractional share purchases as you in your discretion may make). Certificates for the Optional Common Shares will be made available for checking and packaging on the business day preceding the Second Closing Date at a location in New York, New York, as may be designated by you. The manner of payment for and delivery of the Optional Common Shares shall be the same as for the Firm Common Shares as specified in the two preceding paragraphs. At any time before lapse of the option, you may cancel such option by giving written notice of such cancellation to the Company and said Selling Stockholders. If the option is canceled or expires unexercised in whole or in part, the Company will deregister under the Act the number of Optional Common Shares as to which the option has not been exercised. Subject to the terms and conditions hereof, the Underwriters propose to make a public offering of their respective portions of the Common Shares as soon after the effective date of the Registration Statement as in the judgment of the Underwriters is advisable and at the public offering price set forth on the cover page of and on the terms set forth in the final prospectus, if one is used, or on the first page of the Term Sheet, if one is used. SECTION 6. Covenants of the Company. The Company covenants and ------------------------ agrees that: (a) The Company will use its best efforts to cause the Registration Statement and any amendment thereof, if not effective at the time and date that this Agreement is executed and delivered by the parties hereto, to become effective at the earliest practicable time. If the Registration Statement has become 14 or becomes effective pursuant to Rule 430A of the Rules and Regulations, or the filing of the Prospectus is otherwise required under Rule 424(b) of the Rules and Regulations, the Company will file the Prospectus, properly completed, pursuant to the applicable paragraph of Rule 424(b) of the Rules and Regulations within the time period prescribed and will provide evidence satisfactory to you of such timely filing. The Company will promptly advise you in writing (i) of the receipt of any comments of the Commission, (ii) of any request of the Commission for amendment of or supplement to the Registration Statement (either before or after it becomes effective), any Preliminary Prospectus or the Prospectus or for additional information, (iii) when the Registration Statement shall have become effective, and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of the institution of any proceedings for that purpose. If the Commission shall enter any such stop order at any time, the Company will use its best efforts to obtain the lifting of such order at the earliest practicable moment. The Company will not file any amendment or supplement to the Registration Statement (either before or after it becomes effective), any Preliminary Prospectus or the Prospectus (including the issuance or filing of any Term Sheet) of which you have not been furnished with a copy a reasonable time prior to such filing or to which you reasonably object or which is not in compliance with the Act and the Rules and Regulations. (b) The Company will prepare and file with the Commission, promptly upon your request, any amendments or supplements to the Registration Statement or the Prospectus (including the issuance or filing of any Term Sheet) which in your judgment may be necessary or advisable to enable the several Underwriters to continue the distribution of the Common Shares and will use its best efforts to cause the same to become effective as promptly as possible. The Company will fully and completely comply with the provisions of Rule 430A of the Rules and Regulations with respect to information omitted from the Registration Statement in reliance upon such Rule. (c) If at any time, within the nine-month period referred to in Section 10(a)(3) of the Act, at which a prospectus relating to the Common Shares is required to be delivered under the Act any event occurs, as a result of which the Prospectus, including any amendments or supplements, would include an untrue statement of a material fact, or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, or if it is necessary at any time to amend the Prospectus, including any amendments or supplements, to comply with the Act or the Rules and Regulations, the Company will promptly advise you thereof and will promptly prepare and file with the Commission, at its own expense, an amendment or supplement which will correct such statement or omission or an amendment or supplement which will effect such compliance and will use its best efforts to cause the same to become effective as soon as possible; and, in case any Underwriter is required to deliver a prospectus after such nine-month period, the Company upon request, but at the 15 expense of such Underwriter, will promptly prepare such amendment or amendments to the Registration Statement and such Prospectus or Prospectuses as may be necessary to permit compliance with the requirements of Section 10(a)(3) of the Act. (d) As soon as practicable, but not later than 45 days after the end of the first quarter ending after one year following the "effective date of the Registration Statement" (as defined in Rule 158(c) of the Rules and Regulations), the Company will make generally available to its stockholders an earnings statement (which need not be audited) covering a period of 12 consecutive months beginning after the effective date of the Registration Statement which will satisfy the provisions of the last paragraph of Section 11(a) of the Act. (e) During such period as a prospectus is required by law to be delivered in connection with sales by an Underwriter or dealer, the Company, at its expense, but only for the nine-month period referred to in Section 10(a)(3) of the Act, will furnish to you and the Selling Stockholders or mail to your order copies of the Registration Statement, the Prospectus, the Preliminary Prospectus and all amendments and supplements to any such documents in each case as soon as available and in such quantities as you and the Selling Stockholders may request, for the purposes contemplated by the Act. (f) The Company shall cooperate with you and your counsel in order to qualify or register the Common Shares for sale under (or obtain exemptions from the application of) the Blue Sky laws of such jurisdictions as you designate, will comply with such laws and will continue such qualifications, registrations and exemptions in effect so long as reasonably required for the distribution of the Common Shares. The Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any such jurisdiction where it is not presently qualified or where it would be subject to taxation as a foreign corporation. The Company will advise you promptly of the suspension of the qualification or registration of (or any such exemption relating to) the Common Shares for offering, sale or trading in any jurisdiction or any initiation or threat of any proceeding for any such purpose, and in the event of the issuance of any order suspending such qualification, registration or exemption, the Company, with your cooperation, will use its best efforts to obtain the withdrawal thereof. (g) During the period of five years hereafter, the Company will furnish to the Underwriters: (i) as soon as practicable after the end of each fiscal year, copies of the Annual Report of the Company containing the balance sheet of the Company as of the close of such fiscal year and statements of income, stockholders' equity and cash flows for the year then ended and the opinion thereon of the Company's independent public accountants; (ii) as soon as practicable after the filing thereof, copies of each proxy statement, Annual Report 16 on Form 10-K, Quarterly Report on Form 10-Q, Report on Form 8-K or other report filed by the Company with the Commission, the NASD or any securities exchange; and (iii) as soon as available, copies of any report or communication of the Company mailed generally to holders of its Common Stock. (h) During the period of 120 days after the date of the Prospectus, without the prior written consent of Montgomery Securities, the Company will not (other than pursuant to the grant of stock options and awards authorized under the Company's Stock Plans (as defined in the Prospectus), the exercise of outstanding stock options and warrants and the conversion of outstanding shares of Class B Common Stock, in each case as disclosed in the Prospectus) issue, offer, sell, grant options to purchase or otherwise dispose of any of the Company's equity securities or any other securities convertible into or exchangeable with its Common Stock or other equity security. (i) The Company will use its best efforts to designate and maintain the inclusion of the Common Stock for quotation as a national market system security on the NASD Automated Quotation System. (j) The Company will use its best efforts to do and perform all things required or necessary to be done and performed under this Agreement by the Company prior to the First Closing Date or any Second Closing Date, as the case may be, and to satisfy all conditions precedent to the delivery of the Shares. You, on behalf of the Underwriters, may, in your sole discretion, waive in writing the performance by the Company of any one or more of the foregoing covenants or extend the time for their performance. SECTION 7. Payment of Expenses. Whether or not the transactions ------------------- contemplated hereunder are consummated or this Agreement becomes effective or is terminated, the Company and the Selling Stockholders agree to pay all costs, fees and expenses incurred in connection with the performance of their obligations hereunder and in connection with the transactions contemplated hereby, including without limiting the generality of the foregoing, (i) all expenses incident to the issuance and delivery of the Common Shares (including all printing and engraving costs), (ii) all fees and expenses of the registrar and transfer agent of the Common Stock, (iii) all necessary issue, transfer and other stamp taxes in connection with the issuance and sale of the Common Shares to be sold by the Company to the Underwriters, (iv) all fees and expenses of the Company's counsel and the Company's independent accountants, (v) all costs and expenses incurred in connection with the preparation, printing, filing, shipping and distribution of the Registration Statement, each Preliminary Prospectus and the Prospectus (including all exhibits and financial statements) and all amendments and supplements provided for herein, this Agreement, the Agreement Among Underwriters, the Selected Dealers Agreement, the Underwriters' Questionnaire, the Underwriters' Power of Attorney and the Blue Sky memorandum, (vi) all filing fees, attorneys' fees and expenses (not in excess of an aggregate of $17,500, including for counsel fees in 17 connection with the filings referenced in subparagraph (vii) below) incurred by the Company or the Underwriters in connection with qualifying or registering (or obtaining exemptions from the qualification or registration of) all or any part of the Common Shares for offer and sale under the Blue Sky laws (including the securities laws of Canada), (vii) the filing fee of the National Association of Securities Dealers, Inc. (the "NASD"), and attorneys' fees and expenses incurred by the Company or the Underwriters in connection with the filing with the NASD and (viii) all other fees, costs and expenses referred to in Item 13 of the Registration Statement. At least one day prior to each Closing Date, the Company shall deliver to the Selling Stockholders a statement setting forth the Expenses not previously paid by the Selling Stockholders and each Selling Stockholder's pro rata portion of such Expenses. If the transactions contemplated hereunder are consummated, then the Company shall retain an amount equal to the Expenses not previously paid by the Selling Stockholders from the proceeds received by the Company from the Underwriters on each Closing Date and the Company shall use such retained amount to pay the Expenses to the appropriate parties. The Company shall then pay the remainder of such proceeds to the Selling Stockholders as set forth in Section 5 hereof. Except as provided in this Section 7, Section 9 and Section 11 hereof, the Underwriters shall pay all of their own expenses, including the fees and disbursements of their counsel (excluding those relating to qualification, registration or exemption under the Blue Sky laws and the Blue Sky memorandum referred to above). This Section 7 shall not affect any agreements relating to the payment of expenses between the Company and the Selling Stockholders. In addition to the obligation to pay the Expenses as provided above, the Selling Stockholders, severally and not jointly, will pay the following fees and expenses: (i) any fees and expenses of counsel for such Selling Stockholders; (ii) any fees and expenses of the Agent as provided for in the Power of Attorney; and (iii) all expenses and taxes incident to the sale and delivery of the Common Shares to be sold by such Selling Stockholders, which are not otherwise specifically provided for in the previous paragraph, to the Underwriters hereunder. SECTION 8. Conditions of the Obligations of the Underwriters. The ------------------------------------------------- obligations of the several Underwriters to purchase and pay for the Firm Common Shares on the First Closing Date and the Optional Common Shares on the Second Closing Date shall be subject to the accuracy of the representations and warranties on the part of the Company and the Selling Stockholders herein set forth as of the date hereof and as of the First Closing Date or the Second Closing Date, as the case may be, to the accuracy of the statements of Company officers and the Selling Stockholders made pursuant to the provisions hereof, to the performance by the Company and the Selling Stockholders of their respective obligations hereunder, and to the following additional conditions: (a) The Registration Statement shall have become effective not later than 5:00 P.M. (or in the case of a registration statement filed pursuant to Rule 462(b) of the Rules and Regulations relating to the Common Shares, not later than 10 P.M.), Washington, D.C. time, on the date of this Agreement, or at such later time as shall have been consented to by you; if the filing of the Prospectus, or any supplement thereto, is required pursuant to Rule 424(b) of the Rules and Regulations, the Prospectus shall have been filed in the manner and within the 18 time period required by Rule 424(b) of the Rules and Regulations; and prior to such Closing Date, no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been instituted or shall be pending or, to the knowledge of the Company, the Selling Stockholders or you, shall be contemplated by the Commission; and any request of the Commission for inclusion of additional information in the Registration Statement, or otherwise, shall have been complied with to your satisfaction. (b) Since the respective dates as of which information is given in the Registration Statement and Prospectus, (i) there shall not have been any change in the capital stock (other than pursuant to the exercise of outstanding options and warrants disclosed in the Prospectus) of the Company or any material change in the indebtedness (other than as set forth or contemplated by the Registration Statement or the Prospectus, or in the ordinary course of business) of the Company, (ii) except as set forth or contemplated by the Registration Statement or the Prospectus, no material verbal or written agreement or other transaction shall have been entered into by the Company, which is not in the ordinary course of business or which could result in a material reduction in the future earnings of the Company, (iii) no loss or damage (whether or not insured) to the property of the Company shall have been sustained which materially and adversely affects the condition (financial or otherwise), business, results of operations or prospects of the Company, (iv) no legal or governmental action, suit or proceeding affecting the Company which is material to the Company or which materially affects or may affect the transactions contemplated by this Agreement shall have been instituted or threatened, (v) there shall not have been any material change in the condition (financial or otherwise), business, management, results or operations or prospects of the Company which makes it impractical or inadvisable in the judgment of the Underwriters to proceed with the public offering or purchase the Common Shares as contemplated hereby, (vi) on the Closing Date you shall have received a certificate dated the Closing Date, signed by Philip Kaplan and Robert Glass, in their capacities as the President and Chief Financial Officer of the Company, confirming the matters set forth in paragraphs (a) and (b) of this Section 8. (c) There shall have been furnished to you, on each Closing Date, in form and substance satisfactory to you, (and there shall have been furnished to the Selling Stockholders the documents set forth in paragraphs (i), (iv) and (vi) below, provided, however that you shall have the sole discretion as to the form and substance of such documents) except as otherwise expressly provided below: (i) An opinion of Paul, Weiss, Rifkind, Wharton & Garrison, counsel for the Company, addressed to the Underwriters and the Selling Stockholders, dated the First Closing Date or the Second Closing Date, as the case may be, to the effect that: 19 (1) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation, is duly qualified to do business as a foreign corporation and is in good standing in all other jurisdictions where, to the best of such counsel's knowledge, the ownership or leasing of properties or the conduct of its business requires such qualification, except for jurisdictions in which the failure to so qualify would not have a material adverse effect on the Company, and has full corporate power and authority to own its properties and conduct its business as described in the Registration Statement; (2) The authorized, and, based on our examination of stock books and corporate records, the issued and outstanding capital stock of the Company is as set forth under the caption "Description of Capital Stock" in the Prospectus (subject to the exercise of outstanding stock options after the date of the Prospectus); all necessary and proper corporate proceedings have been taken in order to authorize validly such authorized Common Stock; all outstanding shares of Common Stock (including the Firm Common Shares and any Optional Common Shares) have been duly and validly issued, are fully paid and nonassessable, have been issued in compliance with federal and state securities laws (except that no such opinion related to state securities laws is given as to any shares of Common Stock issued in the Company's initial public offering in May 1996), were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase any securities created by operation of law or under the Company's certificate of incorporation or by-laws or any agreement known to such counsel to which the Company is a party or by which it is bound and conform to the description thereof contained in the Prospectus; (3) The certificates evidencing the Common Shares to be delivered hereunder are in due and proper form under Delaware law; (4) Except as disclosed in or specifically contemplated by the Prospectus, to the best of such counsel's knowledge, there are no outstanding options, warrants or other rights calling for the issuance of, any shares of capital stock of the Company or any security convertible into or exchangeable for capital stock of the Company; 20 (5)(a) The Registration Statement has become effective under the Act, and, to the best of such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement or preventing the use of the Prospectus has been issued and no proceedings for that purpose have been instituted or are pending or contemplated by the Commission; any required filing of the Prospectus and any supplement thereto pursuant to Rule 424(b) of the Rules and Regulations has been made in the manner and within the time period required by such Rule 424(b); (b) The Registration Statement (including any Registration Statement filed under 462(b) of the Act, if any), the Prospectus and each amendment or supplement thereto (except for the financial statements and schedules included therein as to which such counsel need express no opinion), as of their respective issue dates, complied as to form in all material respects with the requirements of the Act and the Rules and Regulations, provided, however, that in passing upon such compliance as to form, such counsel may assume that the statements made in such Registration Statement and Prospectus are complete and correct; (c) To the best of such counsel's knowledge, there are no franchises, leases, contracts, agreements or documents of a character required to be disclosed in the Registration Statement or Prospectus or to be filed as exhibits to the Registration Statement which are not disclosed or filed, as required; (d) To the best of such counsel's knowledge, there are no legal or governmental actions, suits or proceedings pending or threatened against the Company which are required to be described in the Prospectus which are not described as required; and (6) The Company has the corporate power and authority to enter into this Agreement; this Agreement has been duly and validly authorized by all necessary corporate action by the Company, has been duly and validly executed and delivered by and on behalf of the Company; and no approval, authorization, order, consent, registration, filing, qualification, license or permit of or with any court, regulatory, administrative or other governmental body of the United States or the State of New York or under the Delaware General Corporation Law is required for 21 the execution and delivery of this Agreement by the Company or the consummation of the transactions contemplated by this Agreement, except such as have been obtained and are in full force and effect under the Act and such as may be required under applicable Blue Sky laws in connection with the purchase and distribution of the Common Shares by the Underwriters and the clearance of such offering with the NASD; (7) The execution and performance of this Agreement and the consummation of the transactions herein contemplated will not violate any provisions of the certificate of incorporation or bylaws, or other organizational documents, of the Company, and, so far as is known to such counsel, will not conflict with, result in the breach or violation of, or constitute, either by itself or upon notice or the passage of time or both, a default under any agreement, mortgage, deed of trust, lease, franchise, license, indenture, permit or other instrument known to such counsel to which the Company is a party or by which the Company or any of its properties may be bound or affected, any statute or any authorization, judgment, decree, order, rule or regulation of any court or any regulatory body, administrative agency or other governmental body applicable to the Company or any of its properties, except for any violation, breach or default that would not have a material adverse effect on the Company or on the consummation of the transactions contemplated by this Agreement; (8) The Company is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended; (9) To the best of such counsel's knowledge, all leases to which the Company is a party are valid and binding and no default has occurred or is continuing thereunder, which might result in any material adverse change in the business or results of operation of the Company taken as a whole, and the Company enjoys peaceful and undisturbed possession under all such leases to which it is a party as lessee with such exceptions as do not materially interfere with the use made by the Company; (10) Under the law of the State of New York and the federal law of the United States, no transfer taxes are required to be paid by the Company in connection with the sale and delivery of the Common Shares to the Underwriters hereunder. 22 The opinion set forth in paragraph (10) may be rendered by Marvin Gardner of the Company instead of by Paul, Weiss, Rifkind, Wharton & Garrison. In rendering such opinion, such counsel may rely, as to matters of local law, on opinions of local counsel, and as to matters of fact, the representations and warranties of the Company set forth in paragraphs (a), (c), (h), (i), (j), (n), (o), (p), (q), (s), (t), (u) (w), (x), (y) and (z) of Section 2 hereunder, on certificates of the Selling Stockholders and of officers of the Company and of governmental officials, in which case copies of said opinions or certificates are to be attached to the opinion. Such counsel shall also include a statement to the effect that nothing has come to such counsel's attention that would lead such counsel to believe that either at the effective date of the Registration Statement or at the applicable Closing Date, the Registration Statement or the Prospectus, or any such amendment or supplement, contains any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein (in light of the circumstances under which they were made, in the case of the Prospectus or any amendment or supplement thereto) not misleading, provided that in each case such counsel shall not be required to make any statement with respect to the financial statements or other financial or statistical data included in the Registration Statement, the Prospectus or any such amendment or supplement; (ii) An opinion of the following counsel: Carter, Ledyard & Milburn, counsel for Sefinco Ltd., Trust U/D Paul J. Pinto, Trust U/D John J. Pinto; Michael Boyd, counsel for Sprout Capital V, Sprout Growth, L.P., DLJ Venture Capital Fund II, L.P., Donaldson, Lufkin & Jenrette Securities Corporation; Maples & Calder, counsel for Sprout Growth, Ltd.; and Proskauer Rose Goetz & Mendelsohn LLP, counsel for Allan Bogner, dated the First Closing Date or the Second Closing Date, as the case may be, to the effect that: (1) To the best of such counsel's knowledge, this Agreement and the Stockholders Agreement have been duly authorized, executed and delivered by or on behalf of the Selling Stockholder; the Agent has been duly and validly authorized to act as the custodian of the Common Shares to be sold by such Selling Stockholder; and the performance of this Agreement and the Stockholders Agreement and the consummation of the transactions herein contemplated by the Selling Stockholder will not result in a breach of or constitute a default under, any material indenture, mortgage, deed of trust, trust (constructive or other), loan agreement, lease, franchise, license or other agreement or instrument to which the Selling Stockholder is a party or by which the Selling Stockholder or any of its properties may be bound, or violate any statute, judgment, decree, order, rule or 23 regulation known to such counsel of any court or governmental body having jurisdiction over the Selling Stockholder or any of its properties, except (x) for any violation, breach, or default that could not have an adverse effect on the Selling Stockholder's sale of the Common Shares to be sold by it, him or her hereunder or its performance of any of its, his or her other obligations hereunder or under the Stockholders Agreement and (y) that no opinion is given with respect to federal or state securities or Blue Sky laws; and to the best of such counsel's knowledge, no approval, authorization, order or consent of any court, regulatory body, administrative agency or other governmental body is required for the execution and delivery of this Agreement or the Stockholders Agreement or the consummation by the Selling Stockholder of the transactions contemplated by this Agreement, except such as are required to be obtained; (2) To the best of such counsel's knowledge, the Selling Stockholder has full right, power and authority to enter into this Agreement and the Stockholders Agreement and to sell, transfer and deliver the Common Shares to be sold on such Closing Date by such Selling Stockholder hereunder and good and marketable title to such Common Shares so sold, free and clear of all liens, encumbrances, equities, claims, restrictions, security interests, voting trusts, or other defects of title whatsoever, has been transferred to the Underwriters (whom counsel may assume to be bona fide purchasers) who have purchased such Common Shares hereunder; and (3) To the best of such counsel's knowledge, this Agreement and the Stockholders Agreement are valid and binding agreements of the Selling Stockholder in accordance with their terms except as enforceability may be limited by general equitable principles, bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally and except with respect to those provisions relating to indemnities or contributions for liabilities under the Act, as to which no opinion need be expressed. (iii) An opinion of Morgan, Lewis & Bockius, counsel to Equity Linked Investors, L.P. and Equity Linked Investors, Inc. (the "Desai Selling Stockholders"), dated the First Closing Date or the Second Closing Date, as the case may be, to the effect that: (1) To such counsel's knowledge, this Agreement and the Stockholders Agreement have been duly 24 authorized, executed and delivered by or on behalf of each of the Desai Selling Stockholders; the Agent has been duly and validly authorized to act as the custodian of the Common Shares to be sold by such Desai Selling Stockholder; and the performance of this Agreement and the Stockholders Agreement and the consummation of the transactions herein contemplated by the Selling Stockholder will not result in a breach of or constitute a default under, any material indenture, mortgage, deed of trust, trust (constructive or other), loan agreement, lease, franchise, license or other agreement or instrument to which the Desai Selling Stockholder is a party or by which the Desai Selling Stockholder or any of its properties may be bound, or violate any statute, judgment, decree, order, rule or regulation known to such counsel of any court or governmental body having jurisdiction over the Selling Stockholder or any of its properties, except (x) for any violation, breach, or default that could not have an adverse effect on the Selling Stockholder's sale of the Common Shares to be sold by it, him or her hereunder or its performance of any of its, his or her other obligations hereunder or under the Stockholders Agreement and (y) that no opinion is given with respect to federal or state securities or Blue Sky laws; and to the best of such counsel's knowledge, no approval, authorization, order or consent of any court, regulatory body, administrative agency or other governmental body is required for the execution and delivery of this Agreement or the Stockholders Agreement or the consummation by the Selling Stockholder of the transactions contemplated by this Agreement, except such as are required to be obtained and are in full force and effect under federal and state securities or Blue Sky laws and such as may be required under the rules of the NASD; (2) To such counsel's knowledge, each Desai Selling Stockholder has full right, power and authority to enter into this Agreement and the Stockholders Agreement and to sell, transfer and deliver the Common Shares to be sold by it on such Closing Date hereunder. Each Desai Selling Stockholder has conveyed good title to such Common Shares so sold, free and clear of all liens, encumbrances, equities, claims, restrictions, security interests, voting trusts, or other defects of title whatsoever to the Underwriters (whom counsel may assume to be bona fide purchasers) who have purchased such Common Shares hereunder; and (3) To such counsel's knowledge, this Agreement and the Stockholders Agreement are valid and 25 binding agreements of the Desai Selling Stockholders enforceable in accordance with their terms except as enforceability may be limited by general equitable principles, bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally and except with respect to those provisions relating to indemnities or contributions for liabilities under the Act, as to which no opinion need be expressed. (iv) An opinion of Ropes & Gray, counsel for Putnam Diversified Income Trust, Putnam Master Intermediate Income Trust, Putnam Managed High Yield Trust, Putnam Master Income Trust, Putnam Capital Manager Trust--PCM High Yield Fund, Putnam High Income Convertible and Bond Fund, Putnam High Yield Managed Trust, Putnam Premier Income Trust, Ameritech Corp. Pension Trust (collectively, the "Putnam Funds"), dated the First Closing Date, to the effect that: (1) To the best of such counsel's knowledge, this Agreement, and the Power of Attorney, have been duly authorized, executed and delivered by or on behalf of each of the Putnam Funds; and the performance of this Agreement and the Power of Attorney or and the consummation of the transactions herein contemplated by each of the Putnam Funds will not result in a breach of or constitute a default under, any material indenture, mortgage, deed of trust, trust (constructive or other), loan agreement, lease, franchise, license or other agreement of instrument to which any of the Putnam Funds is a party or by which any of the Putnam Funds or any of their properties may be bound, or violate any statute, judgment, decree, order, rule or regulation known to such counsel of any court or governmental body having jurisdiction over any of the Putnam Funds or any of their properties, except (x) for any violation, breach, or default that could not have an adverse effect on the Selling Stockholder's sale of the Common Shares to be sold by it, him or her hereunder or its performance of any of its, his or her other obligations hereunder or under the Stockholders Agreement and (y) that no opinion is given with respect to federal or state securities or Blue Sky laws; and to the best of such counsel's knowledge, no approval, authorization, order or consent of any court, regulatory body, administrative agency or other governmental body is required for the execution and delivery of this Agreement or the Stockholders Agreement or the consummation by the Selling Stockholder of the transactions contemplated by this Agreement, except such as are required to be obtained and are in full force and effect under federal and state securities or Blue Sky laws and such as may be required under the rules of the NASD; and 26 (2) To the best of such counsel's knowledge, each of the Putnam Funds has full right, power and authority to enter into this Agreement and the Power of Attorney and to sell, transfer and deliver the Common Shares to be sold on such Closing Date by such Putnam Fund hereunder. Immediately prior to the date hereof, each of the Putnam Funds was the sole registered owner of the Shares to be sold by such Putnam Fund pursuant to the Underwriting Agreement; upon transfer of such Shares to the Underwriters in compliance with Section 8- 302(1)(a)-(c), assuming the Underwriters purchased the Shares in good faith and without notice of any adverse claim within the meaning of Section 8-302 of the Massachusetts Uniform Commercial Code, the Underwriters will have acquired all rights of such Putnam Fund in such Shares free of any adverse claim, any lien in favor of the Company, and any restrictions on transfer imposed by the Company; and the owner of the Shares, if other than such Putnam Fund, is precluded from asserting against the Underwriters the ineffectiveness of any unauthorized endorsement. (v) An opinion of Paul, Weiss, Rifkind, Wharton & Garrison, counsel to Norman Matthews, Robert Friedman, and Philip Kaplan and for the purposes of this opinion, with respect to the Putnam Funds, dated the First Closing Date or the Second Closing Date, as the case may be, to the effect that, to the best of such counsel's knowledge, upon payment for and delivery of the respective Selling Stockholder's Shares in accordance with the Agreement, the Underwriters will own such Shares free and clear of any adverse claim (assuming the Underwriters are bona fide purchasers within the meaning of the Uniform Commercial Code of the State of New York). (vi) Such opinion or opinions of Fried, Frank, Harris, Shriver & Jacobson (a partnership including professional corporations) ("Fried, Frank"), counsel for the Underwriters, dated the First Closing Date or the Second Closing Date, as the case may be, with respect to the incorporation of the Company, the sufficiency of all corporate proceedings and other legal matters relating to this Agreement, the validity of the Common Shares, the Registration Statement and the Prospectus and other related matters as you may reasonably require, and the Company and the Selling Stockholders shall have furnished to such counsel such documents and shall have exhibited to them such papers and records as they may reasonably request for the purpose of enabling them to pass upon such matters. In connection with such opinions, such counsel may rely on 27 representations or certificates of officers of the Company and governmental officials. (vii) A certificate of the Company executed by the Chairman of the Board or President and the chief financial or accounting officer of the Company, dated the First Closing Date or the Second Closing Date, as the case may be, to the effect that: (1) The representations and warranties of the Company set forth in Section 2 of this Agreement are true and correct as of the date of this Agreement and as of the First Closing Date or the Second Closing Date, as the case may be, and the Company has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied on or prior to such Closing Date; (2) The Commission has not issued any order preventing or suspending the use of the Prospectus or any Preliminary Prospectus filed as a part of the Registration Statement or any amendment thereto; no stop order suspending the effectiveness of the Registration Statement has been issued; and to the best of the knowledge of the respective signers, no proceedings for that purpose have been instituted or are pending or contemplated under the Act; (3) Each of the respective signers of the certificate has carefully examined the Registration Statement and the Prospectus; in his opinion and to the best of his knowledge, the Registration Statement and the Prospectus and any amendments or supplements thereto contain all statements required to be stated therein regarding the Company; and neither the Registration Statement nor the Prospectus nor any amendment or supplement thereto includes any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading; (viii) On the First Closing Date or the Second Closing Date, as the case may be, a certificate, dated such Closing Date and addressed to you, signed by or on behalf of each of the Selling Stockholders to the effect that the representations and warranties of such Selling Stockholder in this Agreement are true and correct, as if made at and as of the First Closing Date or the Second Closing Date, as the case may be, and such Selling Stockholder has complied with all the agreements and satisfied all 28 the conditions on his part to be performed or satisfied prior to the First Closing Date or the Second Closing Date, as the case may be. (ix) On the date this Agreement is executed and also on the First Closing Date and the Second Closing Date a letter addressed to you, as Underwriters, from Ernst & Young LLP, independent accountants, the first one to be dated the date of this Agreement, the second one to be dated the First Closing Date and the third one (in the event of a Second Closing) to be dated the Second Closing Date, in form and substance satisfactory to you with respect to the financial statements and certain financial information contained in the Registration Statement and the Prospectus. (x) On or before the First Closing Date, letters from each of the Selling Stockholders and each director and officer (except Robert Glass) of the Company, in the forms attached hereto as Exhibit A, confirming that for a period of 120 days after the date of the Prospectus, such person will not directly or indirectly sell or offer to sell or otherwise dispose of any shares of Common Stock or any right to acquire such shares without the prior written consent of Montgomery Securities. All such opinions, certificates, letters and documents shall be in compliance with the provisions hereof only if they are reasonably satisfactory to you and to Fried, Frank, counsel for the Underwriters. The Company shall furnish you with such manually signed or conformed copies of such opinions, certificates, letters and documents as you request. Any certificate signed by any officer of the Company and delivered to the Underwriters or to counsel for the Underwriters shall be deemed to be a representation and warranty by the Company to the Underwriters as to the statements made therein. If any condition to the Underwriters' obligations hereunder to be satisfied prior to or at the First Closing Date is not so satisfied, this Agreement at your election will terminate upon notification by you as Underwriters to the Company and the Selling Stockholders without liability on the part of any Underwriter or the Company or the Selling Stockholders except for the expenses to be paid or reimbursed by the Company and by the Selling Stockholders pursuant to Sections 7 and 9 hereof and except to the extent provided in Section 11 hereof. SECTION 9. Reimbursement of Underwriters' Expenses. Notwithstanding any --------------------------------------- other provisions hereof, if this Agreement shall be terminated by you pursuant to Section 8, or if the sale to the Underwriters of the Common Shares at the First Closing is not consummated because of any refusal, inability or failure on the part of the Company or the Selling Stockholders to perform any agreement herein or to comply with any provision hereof, the Company and the Selling Stockholders agree to reimburse you and the other Underwriters upon demand for all out-of-pocket expenses that shall have been reasonably incurred by you and them in connection with the proposed purchase and the sale of the Common Shares (the "Underwriters Expenses"), including but not limited to fees and disbursements of counsel, printing expenses, travel expenses, postage, telegraph charges and telephone charges relating 29 directly to the offering contemplated by the Prospectus. Any such termination shall be without liability of any party to any other party except that the provisions of this Section, Section 7 and Section 11 shall at all times be effective and shall apply. SECTION 10. Effectiveness of Registration Statement. You and the --------------------------------------- Company will use your and its best efforts to cause the Registration Statement to become effective, to prevent the issuance of any stop order suspending the effectiveness of the Registration Statement and, if such stop order be issued, to obtain as soon as practicable the lifting thereof. SECTION 11. Indemnification. (a) The Company and each of the Selling --------------- Stockholders (subject to the limitations set forth in clauses (i) through (v), inclusive, of the proviso to this sentence) agree to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of the Act against any losses, claims, damages, liabilities or expenses, joint or several, to which such Underwriter or such controlling person may become subject, under the Act, the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of the Company), insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof as contemplated below) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, or any untrue statement or alleged untrue statement of any material fact contained in any Preliminary Prospectus, or the Prospectus or any amendment or supplement thereto, in light of the circumstances under which they were made, or arise out of or are based upon the omission or alleged omission to state in any of them a material fact required to be stated therein or necessary to make the statements in any of them not misleading, or arise out of or are based in whole or in part on any inaccuracy in the representations and warranties of the Company or the Selling Stockholders contained herein or any failure of the Company or the Selling Stockholders to perform their respective obligations hereunder; and will reimburse each Underwriter and each such controlling person for any legal and other expenses as such expenses are reasonably incurred by such Underwriter or such controlling person in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action; provided, however, that (i) neither the Company nor any Selling Stockholder will be liable in any such case to the extent that any such loss, claim, damage, liability or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto in reliance upon and in conformity with the information furnished to the Company pursuant to Section 4 hereof; (ii) with respect to any untrue statement or omission or alleged untrue statement or omission made in any Preliminary Prospectus, the indemnity agreement contained in this paragraph shall not inure to the benefit of any Underwriter from whom the person asserting any such losses, 30 claims, damages, liabilities or expenses purchased the Common Shares concerned (or to the benefit of any person controlling such Underwriter) to the extent that any such loss, claim, damage, liability or expense of such Underwriter or controlling persons results from the fact that a copy of the Prospectus was not sent or given to such person at or prior to the written confirmation of sale of such Common Shares to such person as required by the Act and if the untrue statement or omission has been corrected in the Prospectus, unless such failure to deliver the Prospectus was a result of noncompliance by the Company with its obligations under Section 6(f) hereof; (iii) in no event shall any Selling Stockholder, other than Sefinco Ltd., Donaldson, Lufkin & Jenrette Securities Corporation, Sprout Capital V, Sprout Growth, L.P., DLJ Venture Capital Fund II, L.P. and Sprout Growth, Ltd., Norman Mathews, Robert Friedman and Philip Kaplan be liable in respect of such loss, claim, damage, liability or expense to the extent not (x) attributable to information included or reflected in any Preliminary Prospectus, Prospectus or the Registration Statement with respect to such Selling Stockholder, (y) arising out of any inaccuracy in the representations and warranties of such Selling Stockholder or (z) arising out of any failure of such Selling Stockholder to perform its respective obligations hereunder; (iv) each Selling Stockholder's liability hereunder shall in any event be limited to the amount of net proceeds received by such Selling Stockholder from the sale of the Common Shares sold by it hereunder; (v) no Selling Stockholder shall be required to provide indemnification hereunder unless (A) the Underwriter or controlling person seeking indemnification shall have first made a demand for payment on the Company with respect any such loss, claim, damage, liability or expense, (B) the Company shall have failed to make such requested payment within 60 days after receipt of such demand and (C) the Company shall be the subject of a pending bankruptcy proceeding or shall have been dissolved or liquidated or the Underwriter or controlling person seeking indemnification can demonstrate that the Company is insolvent; furthermore, no Selling Stockholder shall be required to provide indemnification hereunder unless the Underwriter or controlling person seeking indemnification shall have made a claim against each other Selling Stockholder subject to an indemnification obligation for the matter in question under this Section 11(a) and shall have pursued each such claim with vigor reasonably comparable under the circumstances, taking into account each such Selling Stockholder's financial ability to satisfy any portion of its potential indemnification obligation relating to such matter. 31 In addition to their other obligations under this Section 11(a), the Company and each Selling Stockholder (subject to the limitations set forth in clauses (i) through (v), inclusive, of the proviso of the preceding sentence) agrees that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding arising out of or based upon any statement or omission, or any alleged statement or omission, or any inaccuracy in the representations and warranties of the Company or the Selling Stockholders herein or failure to perform their obligations hereunder, all as described in this Section 11(a), it will reimburse each Underwriter on a quarterly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Company's or each Selling Stockholder's obligation to reimburse each Underwriter for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, each Underwriter shall promptly return it to the Company and such Selling Stockholders together with interest, compounded daily, determined on the basis of the prime rate (or other commercial lending rate for borrowers of the highest credit standing) announced from time to time by Bank of America NT&SA, San Francisco, California (the "Prime Rate"). Any such interim reimbursement payments which are not made to an Underwriter within 30 days of a request for reimbursement, shall bear interest at the Prime Rate from the date of such request. This indemnity agreement will be in addition to any liability which the Company or each Selling Stockholder may otherwise have. (b) Each Underwriter will severally indemnify and hold harmless the Company, each of its directors, each of its officers who signed the Registration Statement, the Selling Stockholders and each person, if any, who controls the Company or any Selling Stockholder within the meaning of the Act, against any losses, claims, damages, liabilities or expenses to which the Company, or any such director, officer, Selling Stockholder or controlling person may become subject, under the Act, the Exchange Act, or other federal or state statutory law or regulation, or at common law or otherwise (including the settlement of any litigation, if such settlement is effected with the written consent of such Underwriter), insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof as contemplated below) arise out of or are based upon any untrue or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto, in reliance upon and in conformity with the information furnished to the Company pursuant to Section 4 hereof; and will reimburse the Company, or any such director, officer, Selling Stockholder or controlling person for any legal and other expense reasonably incurred by the Company, or any such director, officer, Selling Stockholder or controlling person in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action. In addition to its other obligations under this Section 11(b), each Underwriter severally agrees that, as an 32 interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding arising out of or based upon any statement or omission, or any alleged statement or omission, described in this Section 11(b) which relates to information furnished to the Company pursuant to Section 4 hereof, it will reimburse the Company (and, to the extent applicable, each officer, director, Selling Stockholder or controlling person) on a quarterly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Underwriters' obligation to reimburse the Company (and, to the extent applicable, each officer, director, Selling Stockholder or controlling person) for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, the Company (and, to the extent applicable, each officer, director, Selling Stockholder or controlling person) shall promptly return it to the Underwriters together with interest, compounded daily, determined on the basis of the Prime Rate. Any such interim reimbursement payments which are not made to the Company (and, to the extent applicable, each officer, director, Selling Stockholder or controlling person) within 30 days of a request for reimbursement, shall bear interest at the Prime Rate from the date of such request. This indemnity agreement will be in addition to any liability which such Underwriter may otherwise have. (c) Promptly after receipt by an indemnified party under this Section of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party under this Section, notify the indemnifying party in writing of the commencement thereof; but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party for contribution or otherwise than under the indemnity agreement contained in this Section or to the extent it is not prejudiced as a proximate result of such failure. In case any such action is brought against any indemnified party and such indemnified party seeks or intends to seek indemnity from an indemnifying party, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with all other indemnifying parties similarly notified, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party; provided, however, if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be a conflict between the positions of the indemnifying party and the indemnified party in conducting the defense of any such action or that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties. Upon receipt of notice from the indemnifying party to such indemnified party of its election so to assume the defense of such action and approval by the indemnified party of counsel, the indemnifying party will not be liable to such indemnified party under this Section for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof unless (i) the indemnified party shall have employed such counsel in connection with the assumption of legal defenses in accordance with the proviso to the next preceding sentence (it being understood, however, that 33 the indemnifying party shall not be liable for the expenses of more than one separate counsel, approved by the Underwriters in the case of paragraph (a), representing the indemnified parties who are parties to such action) or (ii) the indemnifying party shall not have employed counsel reasonably satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of commencement of the action, in each of which cases the fees and expenses of counsel shall be at the expense of the indemnifying party. (d) If the indemnification provided for in this Section 11 is required by its terms but is for any reason held to be unavailable to or otherwise insufficient to hold harmless an indemnified party under paragraphs (a), (b) or (c) in respect of any losses, claims, damages, liabilities or expenses referred to herein, then each applicable indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of any losses, claims, damages, liabilities or expenses referred to herein (i) in such proportion as is appropriate to reflect the relative benefits received by the Company, each of the Selling Stockholders and the Underwriters from the offering of the Common Shares or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company, each of the Selling Stockholders and the Underwriters in connection with the statements or omissions or inaccuracies in the representations and warranties herein which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The respective relative benefits received by the Company, each of the Selling Stockholders and the Underwriters shall be deemed to be in the same proportion, in the case of the Company and each Selling Stockholder as the total price paid to the Company and to each Selling Stockholder, respectively, for the Common Shares sold by them to the Underwriters (net of underwriting commissions but before deducting expenses), and in the case of the Underwriters as the underwriting commissions received by them bears to the total of such amounts paid to the Selling Stockholders and received by the Underwriters as underwriting commissions. The relative fault of the Company, each Selling Stockholder and the Underwriters shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact or the inaccurate or the alleged inaccurate representation and/or warranty relates to information supplied by the Company, each Selling Stockholder or the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include, subject to the limitations set forth in subparagraph (c) of this Section 11, any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim. The provisions set forth in subparagraph (c) of this Section 11 with respect to notice of commencement of any action shall apply if a claim for contribution is to be made under this subparagraph (d); provided, however, that no additional notice shall be required with respect to any action for which notice has been given under subparagraph (c) for purposes of indemnification. The Company, each Selling Stockholder and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 11 were determined solely by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the 34 equitable considerations referred to in the preceding provisions of this paragraph. Notwithstanding the provisions of this Section 11, no Underwriter shall be required to contribute any amount in excess of the amount of the total underwriting commissions received by such Underwriter in connection with the Common Shares underwritten by it and distributed to the public, and no Selling Stockholder shall be required to contribute any amount in excess of the net proceeds received by such Selling Stockholder from the sale of Common Shares hereunder. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this Section 11 are several in proportion to their respective underwriting commitments and not joint. (e) It is agreed that any controversy arising out of the operation of the interim reimbursement arrangements set forth in Sections 11(a) and 11(b) hereof, including the amounts of any requested reimbursement payments and the method of determining such amounts, shall be settled by arbitration conducted under the provisions of the Constitution and Rules of the Board of Governors of the New York Stock Exchange, Inc. or pursuant to the Code of Arbitration Procedure of the NASD or pursuant to the procedures of the American Arbitration Association, as selected by the indemnifying party. Any such arbitration must be commenced by service of a written demand for arbitration or written notice of intention to arbitrate, therein electing the arbitration tribunal. In the event the party demanding arbitration does not make such designation of an arbitration tribunal in such demand or notice, then the party responding to said demand or notice is authorized to do so. Such an arbitration would be limited to the operation of the interim reimbursement provisions contained in Sections 11(a) and 11(b) hereof and would not resolve the ultimate propriety or enforceability of the obligation to reimburse expenses which is created by the provisions of such Sections 11(a) and 11(b) hereof. SECTION 12. Default of Underwriters. It shall be a condition to ----------------------- this Agreement and the obligation of the Company and the Selling Stockholders to sell and deliver the Common Shares hereunder, and of each Underwriter to purchase the Common Shares in the manner as described herein, that, except as hereinafter in this paragraph provided, each of the Underwriters shall purchase and pay for all the Common Shares agreed to be purchased by such Underwriter hereunder upon tender to the Underwriters of all such shares in accordance with the terms hereof. If any Underwriter or Underwriters default in their obligations to purchase Common Shares hereunder on either the First or Second Closing Date and the aggregate number of Common Shares which such defaulting Underwriter or Underwriters agreed but failed to purchase on such Closing Date does not exceed 10% of the total number of Common Shares which the Underwriters are obligated to purchase on such Closing Date, the non-defaulting Underwriters shall be obligated severally, in proportion to their respective commitments hereunder, to purchase the Common Shares which such defaulting Underwriters agreed but failed to purchase on such Closing Date. If any Underwriter or Underwriters so default and the aggregate number of Common Shares with respect to which such default occurs is more than the above percentage and arrangements satisfactory to the Underwriters and the Company for the purchase of such Common Shares by other persons are not made within 48 hours after such default, this Agreement will terminate without liability on the part of any non- 35 defaulting Underwriter or the Company or the Selling Stockholders except for the expenses to be paid by the Company and the Selling Stockholders pursuant to Section 7 hereof and except to the extent provided in Section 11 hereof. In the event that Common Shares to which a default relates are to be purchased by the non-defaulting Underwriters or by another party or parties, the Underwriters or the Company shall have the right to postpone the First or Second Closing Date, as the case may be, for not more than five business days in order that the necessary changes in the Registration Statement, Prospectus and any other documents, as well as any other arrangements, may be effected. As used in this Agreement, the term "Underwriter" includes any person substituted for an Underwriter under this Section. Nothing herein will relieve a defaulting Underwriter from liability for its default. SECTION 13. Effective Date. This Agreement shall become effective -------------- immediately as to Sections 7, 9, 11, 14 and 16 and, as to all other provisions, (i) if at the time of execution of this Agreement the Registration Statement has not become effective, at 2:00 P.M., California time, on the first full business day following the effectiveness of the Registration Statement, or (ii) if at the time of execution of this Agreement the Registration Statement has been declared effective, at 2:00 P.M., California time, on the first full business day following the date of execution of this Agreement; but this Agreement shall nevertheless become effective at such earlier time after the Registration Statement becomes effective as you may determine on and by notice to the Company or by release of any of the Common Shares for sale to the public. For the purposes of this Section 13, the Common Shares shall be deemed to have been so released upon the release for publication of any newspaper advertisement relating to the Common Shares or upon the release by you of telegrams (i) advising Underwriters that the Common Shares are released for public offering, or (ii) offering the Common Shares for sale to securities dealers, whichever may occur first. SECTION 14. Termination. Without limiting the right to terminate this ----------- Agreement pursuant to any other provision hereof: (a) This Agreement may be terminated by the Company by notice to you and the Selling Stockholders or by you by notice to the Company and the Selling Stockholders at any time prior to the time this Agreement shall become effective as to all its provisions, and any such termination shall be without liability on the part of the Company or the Selling Stockholders to any Underwriter (except for the expenses to be paid or reimbursed by the Company and the Selling Stockholders pursuant to Sections 7 and 9 hereof and except to the extent provided in Section 11 hereof) or of any Underwriter to the Company or the Selling Stockholders (except to the extent provided in Section 11 hereof). (b) This Agreement may also be terminated by you prior to the First Closing Date by notice to the Company (i) if additional material governmental restrictions, not in force and effect on the date hereof, shall have been imposed upon trading in securities generally or minimum or maximum prices shall have 36 been generally established on the New York Stock Exchange or in the over the counter market by the NASD, or trading in securities generally shall have been suspended on such Exchange or in the over the counter market by the NASD, or a general banking moratorium shall have been established by federal, New York or California authorities, (ii) if an outbreak of major hostilities or other national or international calamity or any substantial change in political, financial or economic conditions shall have occurred or shall have escalated to such an extent, as, in the judgment of the Underwriters, to materially and adversely affect the marketability of the Common Shares, (iii) if any adverse event shall have occurred or shall exist which makes untrue or incorrect in any material respect any statement or information contained in the Registration Statement or Prospectus or which is not reflected in the Registration Statement or Prospectus but should be reflected therein in order to make the statements or information contained therein not misleading in any material respect, or (iv) if there shall be any action, suit or proceeding pending or threatened, or there shall have been any development or prospective development involving particularly the business or properties or securities of the Company or the transactions contemplated by this Agreement, which, in the reasonable judgment of the Underwriters, may materially and adversely affect the Company's business or earnings and makes it impracticable or inadvisable to offer or sell the Common Shares. Any termination pursuant to this subsection (b) shall be without liability on the part of any Underwriter to the Company or the Selling Stockholders or on the part of the Company or the Selling Stockholders to any Underwriter (except for expenses to be paid or reimbursed by the Company and the Selling Stockholders pursuant to Sections 7 and 9 hereof and except to the extent provided in Section 11 hereof). (c) This Agreement shall also terminate at 5:00 P.M., California Time, on the tenth full business day after the Registration Statement shall have become effective if the initial public offering price of the Common Shares shall not then as yet have been determined as provided in Section 5 hereof. Any termination pursuant to this subsection (c) shall be without liability on the part of any Underwriter to the Company or the Selling Stockholders or on the part of the Company or the Selling Stockholders or on the part of the Company or the Selling Stockholders to any Underwriter (except for expenses to be paid or reimbursed by the Company and the Selling Stockholders pursuant to Sections 7 and 9 hereof and except to the extent provided in Section 11 hereof). SECTION 15. Representations and Indemnities to Survive Delivery. The --------------------------------------------------- respective indemnities, agreements, representations, warranties and other statements of the Company, of its officers, of the Selling Stockholders and of the several Underwriters set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of any Underwriter or the Company or any of its or their partners, officers or directors, or the Selling Stockholders, or any controlling person, as the case may be, and will survive delivery of and payment for the Common Shares sold hereunder, regardless of (i) any investigation, or statement as to the results thereof, made by or on behalf of 37 any Underwriter or by or on behalf of the Selling Stockholders, the officers or directors of the Company or any controlling person of the Selling Stockholders, (ii) acceptance of the Shares and payment for them hereunder and (iii) termination of this Agreement. SECTION 16. Notices. All communications hereunder shall be in writing ------- and, if sent to the Underwriters shall be mailed, delivered or telegraphed and confirmed to you at 600 Montgomery Street, San Francisco, California 94111, Attention: John Berg, with a copy to Fried, Frank, Harris, Shriver & Jacobson, 725 S. Figueroa Street, Suite 3890, Los Angeles, CA 90017, Attention: Edward S. Rosenthal; if sent to the Company, shall be mailed, delivered or telegraphed and confirmed to the Company at 2500 Halsey Street, Bronx, New York 10461 with a copy to Paul, Weiss, Rifkind, Wharton & Garrison, 1285 Avenue of the Americas, New York, New York 10019-6064, Attention: Robert B. Schumer and if sent to the Selling Stockholders, shall be mailed, delivered or telegraphed and confirmed to the addresses set forth next to the names of such Selling Stockholders listed in Schedule B. The Company, the Selling Stockholders or you may change the address for receipt of communications hereunder by giving notice to the others. SECTION 17. Successors. This Agreement will inure to the benefit of and ---------- be binding upon the parties hereto, including any substitute Underwriters pursuant to Section 12 hereof, and to the benefit of the officers and directors and controlling persons referred to in Section 11, and in each case their respective successors, personal representatives and assigns, and no other person will have any right or obligation hereunder. No such assignment shall relieve any party of its obligations hereunder. The term "successors" shall not include any purchaser of the Common Shares as such from any of the Underwriters merely by reason of such purchase. SECTION 18. Partial Unenforceability. The invalidity or ------------------------ unenforceability of any Section, paragraph or provision of this Agreement shall not affect the validity or enforceability of any other Section, paragraph or provision hereof. If any Section, paragraph or provision of this Agreement is for any reason determined to be invalid or unenforceable, there shall be deemed to be made such minor changes (and only such minor changes) as are necessary to make it valid and enforceable. SECTION 19. Applicable Law. This Agreement shall be governed by and -------------- construed in accordance with the internal laws (and not the laws pertaining to conflicts of laws) of the State of New York. SECTION 20. General. This Agreement constitutes the entire agreement of ------- the parties to this Agreement and supersedes all prior written or oral and all contemporaneous oral agreements, understandings and negotiations with respect to the subject matter hereof. This Agreement may be executed in several counterparts, each one of which shall be an original, and all of which shall constitute one and the same document. In this Agreement, the masculine, feminine and neuter genders and the singular and the plural include one another. The section headings in this Agreement are for the 38 convenience of the parties only and will not affect the construction or interpretation of this Agreement. This Agreement may be amended or modified, and the observance of any term of this Agreement may be waived, only by a writing signed by the Company, the Selling Stockholders and you. Any person executing and delivering this Agreement as Attorney-in-fact for a Selling Stockholder represents by so doing that he has been duly appointed as Attorney-in-fact by such Selling Stockholder pursuant to a validly existing and binding Power of Attorney which authorizes such Attorney-in-fact to take such action. Any action taken under this Agreement by any of the Attorneys-in- fact will be binding on all the Selling Stockholders. To the extent that the sale of shares pursuant to this Agreement would violate the provisions of a lock-up agreement dated April 4, 1996 between a Selling Stockholder and the underwriters for the Company's initial public offering, Montgomery Securities hereby waives the provisions of such lock-up agreement. 39 If the foregoing is in accordance with your understanding of our agreement, kindly sign and return to us the enclosed copies hereof, whereupon it will become a binding agreement among the Company, the Selling Stockholders and the several Underwriters including you, all in accordance with its terms. Very truly yours, Loehmann's, Inc. By: --------------------------------- President SELLING STOCKHOLDERS By: --------------------------------- (Attorney-in-fact) The foregoing Underwriting Agreement is hereby confirmed and accepted by us in San Francisco, California as of the date first above written. MONTGOMERY SECURITIES ROBERTSON STEPHENS & COMPANY SALOMON BROTHERS INC By MONTGOMERY SECURITIES By: -------------------------------- Managing Director 40 SCHEDULE A Number of Firm Common Shares Name of Underwriter to be Purchased - ------------------- --------------- Montgomery Securities . . . . . . . . . . . . . . Salomon Brothers Inc . . . . . . . . . . . . . . Robertson Stephens & Company LLC . . . . . . . . . . . . . . . . . ---------- TOTAL . . . . . . . . . . . . . . . . . . . . . . 1,970,000 ========== A-1 SCHEDULE B Number of Firm Common Shares to be Sold by Address of Selling Selling Name of Selling Stockholder Stockholder Stockholders --------------------------- ----------------- ------------ Sprout Growth, Ltd. Richard E. Kroon 18,701 277 Park Avenue New York, NY 10172 Sprout Capital V Richard E. Kroon 138,920 277 Park Avenue New York, NY 10172 Sprout Growth, L.P. Richard E. Kroon 167,973 277 Park Avenue New York, NY 10172 DLJ Venture Capital Fund, II Richard E. Kroon 8,349 LP 277 Park Avenue New York, NY 10172 Donaldson, Lufkin and Richard E. Kroon 87,292 Jenrette Securities 277 Park Avenue Corporation New York, NY 10172 Sefinco, Ltd. 767 Fifth Avenue, 5th Floor 511,609 New York, NY 10153 Equity-Linked Investors, Desai Capital Management, Inc. 273,954 L.P. 540 Madison Avenue New York, NY 10022 Equity-Linked Investors II Desai Capital Management Inc. 53,328 540 Madison Avenue New York, NY 10022 Mr. Allan Bogner 7 Palliser Road 80,000 Irvington, NY 10533 B-1 Number of Firm Common Shares to be Sold by Address of Selling Selling Name of Selling Stockholder Stockholder Stockholders --------------------------- ----------------- ------------ Putnam Funds c/o Putnam Investment Management, Inc. The Putnam Advisory Company, 373,586 Inc., and Putnam Fiduciary Trust Company, One Post Office Square Boston, MA 02109 Trust U/D Paul J. Pinto 10,827 Trust U/D John J. Pinto 10,827 Mr. Philip Kaplan 78,991 Mr. Robert Friedman 109,371 Mr. Norman S. Matthews 650 Madison Avenue, 23rd Floor 46,272 New York, NY 10022 ________ TOTAL 1.970,000 ========= B-2 SCHEDULE C Number of Optional Common Shares to be Sold by Address of Selling Selling Name of Selling Stockholder Stockholder Stockholders --------------------------- ----------------- ------------ Sprout Growth, Ltd. Richard E. Kroon 3,414 277 Park Avenue New York, NY 10172 Sprout Capital V Richard E. Kroon 25,358 277 Park Avenue New York, NY 10172 Sprout Growth, L.P. Richard E. Kroon 30,661 277 Park Avenue New York, NY 10172 DLJ Venture Capital Fund, II LP Richard E. Kroon 1,524 277 Park Avenue New York, NY 10172 Donaldson, Lufkin and Jenrette Richard E. Kroon 15,934 Securities Corporation 277 Park Avenue New York, NY 10172 Sefinco, Ltd. 767 Fifth Avenue, 5th Floor 93,387 New York, NY 10153 Equity-Linked Investors II Desai Capital Management Inc. 59,741 540 Madison Avenue New York, NY 10022 C-1 Number of Optional Common Shares to be Address of Selling Sold by Selling Name of Selling Stockholder Stockholder Stockholders --------------------------- ----------------- ------------ Mr. Allan Bogner 7 Palliser Road 14,603 Irvington, NY 10533 Trust U/D Paul J. Pinto 1,976 Trust U/D John J. Pinto 1,976 Mr. Philip Kaplan 15,798 Mr. Robert Friedman 21,874 Mr. Norman S. Matthews 650 Madison Avenue, 23rd Floor 9,254 New York, NY 10022 ______ TOTAL 295,500 ======= C-2 EX-4.2 3 Exhibit 4.2 U.S. $35,000,000 SECOND AMENDED AND RESTATED CREDIT AGREEMENT dated as of September 19, 1988 as amended and restated as of May 6, 1996 Among LOEHMANN'S, INC., THE BANKS FROM TIME TO TIME PARTY HERETO, and BANKAMERICA BUSINESS CREDIT, INC., as Agent for the Banks TABLE OF CONTENTS Section Page - ------- ---- ARTICLE I DEFINITIONS AND ACCOUNTING TERMS 1.1. Certain Defined Terms.............................................. 2 1.2. Computation of Time Periods........................................ 25 1.3. Interpretive Provisions............................................ 25 ARTICLE II AMOUNTS AND TERMS OF THE FACILITY 2.1. Revolving Credit Loans............................................. 26 2.2. Letters of Credit.................................................. 27 2.3. Notice of Borrowing; Notice of Conversion/Continuation............. 28 2.4. Fees............................................................... 31 2.5. [INTENTIONALLY OMITTED.]........................................... 31 2.6. Repayment.......................................................... 31 2.7. Settlement......................................................... 32 2.8. Interest........................................................... 32 2.9. [INTENTIONALLY OMITTED]............................................ 33 2.10. Optional Prepayments and Repayments; Early Termination Fee................................................................ 33 2.11. Payments and Computations.......................................... 33 2.12. Taxes.............................................................. 34 2.13. Maximum Interest Rate.............................................. 36 2.14. Notation........................................................... 37 2.15. Yield Protection and Illegality.................................... 37 2.16. Inability to Determine Rates....................................... 39 2.17. Sharing of Payments, Etc........................................... 39 2.18. Receipt and Application of Monies.................................. 40 2.19. Agent's and Banks' Books and Records; Monthly Statements......................................................... 41 ARTICLE III CONDITIONS PRECEDENT 3.1. Conditions Precedent to Effectiveness of Agreement, Making of Initial Loan and Issuance of Letters of Credit on the Effective Date.............................................. 42 3.2. Additional Conditions Precedent to Effectiveness of Agreement, Making of Initial Loan and Issuance of Letters of Credit on the Effective Date............................ 44 3.3. Conditions Precedent to Each Borrowing............................. 47 3.4. Conditions Precedent to the Issuance of the Letters of Credit............................................................. 48 i Section Page - ------- ---- ARTICLE IV REPRESENTATIONS AND WARRANTIES 4.1. Corporate Existence; Compliance with Law........................... 49 4.2. Corporate Power; Authorization..................................... 50 4.3. Enforceable Obligations............................................ 51 4.4. Taxes.............................................................. 51 4.5. Full Disclosure; Offering Documents................................ 52 4.6. Financial Matters.................................................. 53 4.7. Litigation......................................................... 53 4.8. Capitalization of Borrower; Ownership of Subsidiaries; No Other Ventures.................................................. 54 4.9. ERISA.............................................................. 55 4.10. Liens.............................................................. 56 4.11. Related Documents.................................................. 56 4.12. No Burdensome Restrictions; No Defaults............................ 56 4.13. Investment Company Act............................................. 57 4.14. Margin Regulations................................................. 57 4.15. Use of Proceeds.................................................... 58 4.16. Title and Condition of Assets; Inventory........................... 58 4.17. Insurance.......................................................... 58 4.18. Labor Matters...................................................... 59 4.19. Certain Debt....................................................... 59 4.20. Leases............................................................. 59 4.21. Solvency........................................................... 59 4.22. Intellectual Property.............................................. 59 4.23. Environmental Matters.............................................. 60 4.24. Certain Obligations................................................ 61 4.25. Note Covenant Defeasance........................................... 62 ARTICLE V REPORTING COVENANTS 5.1. Financial Statements............................................... 62 5.2. Reporting Requirements............................................. 64 ARTICLE VI FINANCIAL COVENANTS 6.1. Minimum EBDAIT..................................................... 67 6.2. Capital Expenditures............................................... 68 6.3. Minimum Interest Coverage Ratio.................................... 69 6.4. Minimum Net Worth.................................................. 69 6.5. [INTENTIONALLY OMITTED.]........................................... 70 6.6. [INTENTIONALLY OMITTED.]........................................... 70 ii Section Page - ------- ---- ARTICLE VII ADDITIONAL AFFIRMATIVE COVENANTS OF BORROWER 7.1. Compliance with Laws, Etc.......................................... 70 7.2. Conduct of Business................................................ 71 7.3. Solvency........................................................... 71 7.4. Maintenance of Insurance........................................... 71 7.5. Application of Proceeds............................................ 71 7.6. Payment of Taxes, Etc.............................................. 71 7.7. Preservation of Corporate Existence, Etc........................... 72 7.8. Access and Inspections............................................. 72 7.9. Keeping of Books................................................... 72 7.10. Maintenance of Properties, Etc..................................... 72 7.11. [INTENTIONALLY OMITTED]............................................ 72 7.12. [INTENTIONALLY OMITTED]............................................ 72 7.13. Collection Accounts and Blocked Accounts........................... 72 7.14. Key-Man Life Insurance............................................. 73 7.15. Maintenance of Licenses and Permits................................ 73 7.16. Employee Plans..................................................... 73 7.17. Fiscal Year........................................................ 73 7.18. Appraisals......................................................... 73 7.19. Consents........................................................... 73 7.20. [INTENTIONALLY OMITTED.]........................................... 74 7.21. [INTENTIONALLY OMITTED.]........................................... 74 7.22. Mortgage........................................................... 74 7.23. Landlord Waivers................................................... 74 7.24. Lease Security..................................................... 74 7.25. Further Assurances................................................. 75 7.26. Dissolution of Ware Lo............................................. 75 iii Section Page - ------- ---- ARTICLE VIII NEGATIVE COVENANTS OF BORROWER 8.1. Liens, Etc......................................................... 75 8.2. Indebtedness....................................................... 77 8.3. [INTENTIONALLY OMITTED.]........................................... 78 8.4. Stock Payments, Etc................................................ 78 8.5. Mergers, Etc....................................................... 78 8.6. Investments in Other Persons....................................... 79 8.7. Contingent Obligations............................................. 79 8.8. Sale of Assets; Maintenance of Ownership of Stock; Sale Leasebacks; Transfers of Real Property; Transfers of Assets........ 80 8.9. Change in Nature of Business....................................... 80 8.10. Capital Structure.................................................. 80 8.11. No Modifications to Related Documents.............................. 80 8.12. Transactions with Affiliates....................................... 81 8.13. Adverse Transactions............................................... 81 8.14. Accounting Changes................................................. 81 8.15. Speculative Transactions........................................... 82 8.16. Compliance with ERISA.............................................. 82 8.17. Limitation on the Formation of Subsidiaries After the Effective Date..................................................... 82 8.18. Internal Revenue Code Section 338.................................. 82 8.19. [INTENTIONALLY OMITTED.]........................................... 82 8.20. [INTENTIONALLY OMITTED.]........................................... 83 8.21. Prepayments........................................................ 83 8.22. Investment Company Act............................................. 83 ARTICLE IX EVENTS OF DEFAULT 9.1. Events of Default.................................................. 83 ARTICLE X THE AGENT 10.1. Authorization and Action........................................... 87 10.2. Agent's Reliance, Etc.............................................. 88 10.3. BABC and Affiliates................................................ 88 10.4. Bank Credit Decision............................................... 89 10.5. Indemnification.................................................... 89 10.6. Successor Agent.................................................... 89 iv Section Page - ------- ---- ARTICLE XI MISCELLANEOUS 11.1. Amendments, Etc.................................................... 90 11.2. Notices, Etc....................................................... 90 11.3. No Waiver; Remedies................................................ 91 11.4. Costs and Expenses; Indemnification................................ 91 11.5. Right of Set-off................................................... 92 11.6. Assignments and Participations..................................... 93 11.7. Binding Effect..................................................... 95 11.8. GOVERNING LAW...................................................... 95 11.9. Execution in Counterparts.......................................... 95 11.10. WAIVER OF JURY TRIAL............................................... 95 11.11. Waiver of Permitted Exceptions..................................... 95 11.12. Severability....................................................... 95 v TABLE OF EXHIBITS AND SCHEDULES INDEX OF EXHIBITS EXHIBIT [Intentionally omitted] A Notice of Conversion/Continuation B Form of Notice of Borrowing C Form of Letter of Credit Request D Form of Security Agreement E Form of Landlord Lien Waiver F [Intentionally omitted] G Form of Intellectual Property Security Agreement H Form of Opinion of Counsel to Borrower and its Subsidiaries I [Intentionally omitted] J Form of Assignment and Acceptance K [Intentionally omitted] L [Intentionally omitted] M [Intentionally omitted] N [Intentionally omitted] O Form of Loss Payee Endorsement P Form of Negative Pledge Agreement Q [Intentionally omitted] R [Intentionally omitted] S [Intentionally omitted] T INDEX OF SCHEDULES SCHEDULE List of Domestic Lending Offices 1 Depositary Accounts 2.18 Leases conditionally assigned 3.1(v) Taxes 4.4 Litigation 4.7 Ownership of Borrowers; Subsidiaries; No other Ventures 4.8 ERISA 4.9 Certain Debt 4.19 Leases 4.20 Intellectual Property 4.22 Environmental Matters 4.23 Existing Liens 8.1(i) vi SECOND AMENDED AND RESTATED CREDIT AGREEMENT, dated as of September 19, 1988, as amended and restated as of May 6, 1996, among Loehmann's, Inc. ("Loehmann's"), a Delaware corporation; the Banks (as defined below) from time to time party hereto; and BankAmerica Business Credit, Inc. ("BABC"), as agent for the Banks (in that capacity, the "Agent"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, on August 26, 1988, Loehmann's Acquisition Corp., a Delaware corporation ("LAC"), entered into a Stock Purchase Agreement (the "Stock Purchase Agreement") with Associated Dry Goods Corporation, pursuant to which LAC acquired (the "Acquisition"), on the Initial Closing Date (as hereinafter defined), all of the issued and outstanding shares of common stock, no par value, of Loehmann's; and WHEREAS, immediately following the consummation of the Acquisition, LAC was merged with and into Loehmann's (the "LAC Merger"); and WHEREAS, Loehmann's Holdings, Inc., a Maryland corporation ("Holdings Maryland"); Loehmann's, as successor in interest to LAC; the Banks then party thereto, and Citibank, N.A. ("Citibank"), as predecessor Agent to BABC, entered into a Credit Agreement (the "Original Credit Agreement") dated as of September 19, 1988, pursuant to which Borrower (as hereinafter defined) and Holdings (as defined below) requested at that time that the Banks provide funds to enable Borrower and Holdings to consummate the Acquisition, to pay certain expenses of the Acquisition and to provide for future working capital requirements of Loehmann's; and WHEREAS, Loehmann's agreed at that time to secure its obligations to the Banks in connection with such financing with, inter alia, a ----- ---- first perfected security interest in all of its and its Subsidiaries' present and future tangible and intangible personal property and interests therein and an assignment of Loehmann's present and future interests in certain leaseholds; and WHEREAS, all of Loehmann's obligations to the Banks in connection with such financing were, and continue to be, guaranteed by all of its Subsidiaries; and WHEREAS, in connection with a refinancing by Loehmann's and Holdings of certain of their respective obligations incurred at the time of the Acquisition, this Agreement was amended and restated as of October 14, 1993 (the "1993 Closing Date"), pursuant to an Amended and Restated Credit Agreement dated as of September 19, 1988 as amended and restated as of October 14, 1993 (as amended, the "1993 Amended Credit Agreement"); and 1 WHEREAS, Holdings Maryland is about to be merged (the "Maryland Merger") with and into New Loehmann's Holdings, Inc., a Delaware corporation which, after such merger, will change its name to Loehmann's Holdings, Inc. ("Holdings Delaware"), with Holdings Delaware being the corporation surviving the Maryland Merger; and WHEREAS, Loehmann's has been a wholly owned Subsidiary of Holdings; and WHEREAS, Holdings is about to be merged (the "Holdings Merger") with and into Borrower, with Borrower being the corporation surviving the Holdings Merger; and WHEREAS, in connection with a refinancing by Borrower of certain of its obligations, Borrower has requested that this Agreement be amended and restated to, among other things, (i) increase the aggregate Revolving Credit Loan Commitments hereunder to $35,000,000, (ii) amend provisions relating to payment dates, interest calculation, fees or expenses and certain financial and other covenants, (iii) reflect the Maryland Merger and the Holdings Merger, (iv) reflect the refinancing of certain debt obligations of Borrower and the issuance by Borrower of the Senior Notes and the New Common Stock (as such terms are defined below), and (v) amend certain other terms, conditions and other provisions of this Agreement; and WHEREAS, BABC, as Agent and the sole Bank, has agreed, subject to satisfaction of certain conditions set forth herein, to amend and restate this Agreement as described above; NOW, THEREFORE, in consideration of the premises and the covenants and agreements contained herein, the parties hereto hereby agree as follows: ARTICLE I DEFINITIONS AND ACCOUNTING TERMS 1.1. Certain Defined Terms. As used in this Agreement, the following --------------------- terms have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Account" means the right of Borrower or any of its Subsidiaries to ------- payment for sale or lease and delivery of goods or rendition of services in the ordinary course of business, including, without limitation, rights to payment from VISA, MasterCard and Discover and other credit card companies. "Acquisition" has the meaning specified in the first Whereas clause of ----------- this Agreement. 2 "Adjusted Consolidated Net Income (Loss)" means the Consolidated Net --------------------------------------- Income (Loss) of Borrower and its Consolidated Subsidiaries, plus any amount deducted therefrom to amortize (i) the excess of the purchase price of the assets acquired by Holdings in connection with the transactions contemplated by the Stock Purchase Agreement and the documents related thereto over their book value at the time of such acquisition and (ii) the book value of the leasehold interests acquired by Holdings in connection with the transactions contemplated by the Stock Purchase Agreement and the documents related thereto. "Affiliate" means, as to any Person, any Subsidiary of such Person and --------- any other Person which, directly or indirectly, controls, is controlled by, or is under common control with, such Person and with respect to Borrower, includes each officer or director or shareholder of Borrower. For purposes of this definition: (1) "control" means the possession of the power to direct or cause the direction of management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise and (2) direct or indirect ownership of securities representing 10% or more of the total voting power of the voting securities of any Person shall be deemed to be "control" of such Person. "Agent" has the meaning specified in the first paragraph of this ----- Agreement. "Agent Account" means the collection account, No. 910-2-640704, ------------- established by the Agent at Chase Manhattan Bank, N.A. pursuant to documentation satisfactory to the Agent. "Agreement" means this Second Amended and Restated Credit Agreement --------- together with all exhibits and schedules hereto, as the same has been and may be amended, restated, supplemented or otherwise modified from time to time in accordance with the terms hereof. "Applicable Margin" means ----------------- (i) with respect to Reference Rate Loans, 0.75%; and (ii) with respect to LIBOR Rate Loans, 2.20%. "Asset Sale" means any sale or other disposition, or series of sales or ---------- other dispositions (including by merger or consolidation, and whether by operation of law or otherwise) made after the Effective Date by Borrower or any of its Subsidiaries to any Person (other than Borrower or any of its Subsidiaries) of (i) all or substantially all of the stock of any of Borrower's Subsidiaries, (ii) all or substantially all of the assets of Borrower or any of its Subsidiaries or any division of any of them, (iii) any Intellectual Property owned by Borrower or any of its subsidiaries, or (iv) any other asset or assets of Borrower or any 3 of its Subsidiaries yielding net proceeds in excess of $100,000 not made in the ordinary course of business. "Assignment and Acceptance" means an assignment and acceptance, in ------------------------- substantially the form of Exhibit K hereto, entered into by an assigning Bank and an assignee. "Availability" means, at any time, an amount equal to the lesser of ------------ (a) the excess of (i) the Borrowing Base at such time over (ii) the sum of the aggregate amount of (x) all Revolving Credit Loans outstanding at such time and any unpaid reimbursement obligations in respect of Letters of Credit, (y) the aggregate undrawn amount of all Letters of Credit which the Agent has, or has caused to be, issued or obtained for Borrower's account and which are outstanding at such time, and (z) all accounts payable of Borrower and its Subsidiaries more than 30 days past due at such time, and (b) the excess of (i) the aggregate Revolving Credit Loan Commitments at such time over (ii) the sum of the aggregate amount of (x) all Revolving Credit Loans outstanding at such time and any unpaid reimbursement obligations in respect of Letters of Credit, (y) the aggregate undrawn amount of all Letters of Credit which the Agent has, or has caused to be, issued or obtained for Borrower's account and which are outstanding at such time, and (z) all accounts payable of Borrower and its Subsidiaries more than 30 days past due at such time. "BABC" has the meaning specified in the first paragraph of this ---- Agreement. "Bank of America" means Bank of America National Trust and Savings --------------- Association, a national banking association, or any successor entity thereto. "Banks" means BABC and any assignee thereof of an interest in any Loan ----- pursuant to an assignment permitted by Section 11.6. "Borrower" means Loehmann's. -------- "Borrowing" means a borrowing consisting of Revolving Credit Loans made --------- on the same day by the Banks ratably according to their respective Commitments. 4 "Borrowing Base" means, on any date, -------------- (a) the sum of: (i) 60% of Eligible Inventory as of such date not covered by any outstanding Merchandise Letter of Credit; and (ii) 50% of Eligible Inventory as of such date covered by any outstanding Merchandise Letter of Credit, less ---- (b) the sum of: (i) the Environmental Compliance Reserve; and (ii) all other reserves which the Agent in good faith and exercising its reasonable credit judgment deems necessary or desirable to maintain with respect to Borrower's account, including, without limitation, reserves for any amounts which Agent may be obligated to pay in the future for the account of Borrower and reserves against landlord liens; provided that any such reserve created pursuant to this clause (ii) shall not be effective until the fourth day after the Agent has sent notice thereof to Loehmann's. "Business Day" means (a) any day that is not a Saturday, Sunday, or a day ------------ on which banks in New York, New York or San Francisco, California, are required or permitted to be closed, and (b) with respect to all notices, determinations, fundings and payments in connection with the LIBOR Rate or LIBOR Rate Loans, any day that is a Business Day pursuant to clause (a) above and that is also a day on which trading is carried on by and between banks in the London interbank market. "Capital Adequacy Regulation" means any guideline, request or directive --------------------------- of any central bank or other Governmental Authority, or any other law, rule or regulation, whether or not having the force of law, in each case, regarding capital adequacy of any bank or of any corporation controlling a bank which is generally applicable to banks. "Capital Expenditure" means, for any period, with respect to Borrower and ------------------- its Consolidated Subsidiaries, the aggregate of all expenditures by Borrower and its Consolidated Subsidiaries (except interest capitalized during construction) for property, plant and equipment (including renewals, improvements, replacements and capitalized repairs) during such period which would be reflected as additions to property, plant or equipment on a consolidated balance sheet of Borrower and its Consolidated Subsidiaries prepared in accordance with GAAP; provided, however, that Capital Expenditures shall not include any -------- ------- payments made during such period pursuant to Capitalized Leases. For the purpose of this definition, the purchase price of equipment which is purchased simultaneously with the trade-in of existing equipment owned by Borrower or any of its Consolidated Subsidiaries or with insurance proceeds shall be included in Capital Expenditures only 5 to the extent of the gross amount of such purchase price less the reduction in purchase price granted by the seller of such equipment for the existing equipment being traded in at such time or the amount of such insurance proceeds. "Capitalized Lease" means, as applied to any Person, any lease of ----------------- property by such Person as lessee which would be capitalized on a balance sheet of such Person prepared in accordance with GAAP. "Capitalized Lease Obligations" means the capitalized amount of the ----------------------------- obligations of Borrower or any of its Consolidated Subsidiaries under any Capitalized Lease. "Cash Flow" means, for any period, (i) Borrower's EBDAIT for such period --------- less (ii) the sum of (a) Borrower's Consolidated Interest Expense for such period and (b) all Capital Expenditures made during such period. "Change in Control" means the occurrence of either of the following ----------------- events: (i) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act), other than (A) any of Sefinco, Ltd., Donaldson, Lufkin & Jenrette, Inc. and Desai Capital Management, Incorporated; (B) general partners or Affiliates of any of the Persons described in clause (A); (C) family members or relatives of the Persons described in Clause (B); (D) any trusts created for the benefit of the Persons described in clause (B) or (C); (E) in the event of incompetence or death of any of the Persons described in clause (B) or (C), such Person's estate, executor, administrator, committee or other personal representative or beneficiaries, is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a Person shall be deemed to have beneficial ownership of all shares that such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 50% of the total outstanding Voting Stock of the Company; (ii) at any time during the term of this Agreement, individuals who at the beginning of such period constituted the board of directors of the Company (together with any new directors whose election to such board or whose nomination for election by the stockholders of the Company, was approved by a vote of 66-2/3% of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of such board of directors then in office; (iii) Borrower consolidates with or merges with or into any Person or conveys, transfers or leases all or substantially all of its assets to any Person, or any corporation consolidates with or merges into or with Borrower, in any such event pursuant to a transaction in which the outstanding Voting Stock of Borrower is changed into or exchanged for cash, securities or other property, other than any such transaction where the outstanding Voting Stock of Borrower is not changed or 6 exchanged at all (except to the extent necessary to reflect a change in the jurisdiction of incorporation of Borrower) or where (A) the outstanding Voting Stock of the Company is changed into or exchanged for (x) Voting Stock of the surviving corporation which is not Redeemable Capital Stock (as defined in the Senior Note Indenture) or (y) cash, securities and other property (other than Stock of the surviving corporation) in an amount which could be paid by Borrower as a Restricted Payment (as defined in the Senior Note Indenture) as described under Section 1009 of the Senior Note Indenture (and such amount shall be treated as a Restricted Payment (as defined in the Senior Note Indenture) subject to the provisions described under Section 1009 of the Senior Note Indenture) and (B) no "person" or "group" owns immediately after such transaction, directly or indirectly, more than 50% of the total outstanding Voting Stock of the surviving corporation; or (iv) Borrower is liquidated or dissolved or adopts a plan of liquidation or dissolution other than in a transaction which complies with the provisions described under Article Eight of the Senior Note Indenture. "Code" means the Internal Revenue Code of 1986 (or any successor ---- legislation thereto), as amended from time to time. "Collateral" means all property and interests in property and proceeds ---------- thereof now owned or hereafter acquired by any Loan Party in or upon which a Lien is granted to the Agent for the benefit of the Agent and the Banks under any of the Loan Documents. "Collateral Documents" means, collectively, the Subsidiary Guaranty, the -------------------- Loehmann's Pledge Agreement, the Security Agreement, the Mortgage, the Intellectual Property Security Agreement, the Conditional Assignments of Lease and all amendments, supplements, modifications, renewals, replacements, consolidations, substitutions and extensions of any of the foregoing. "Collection Account" means the account titled "Concentration Account, ------------------ Funding", account No. 000999392295, established by Borrower at The Fifth Third Bank pursuant to documentation satisfactory to the Agent, or such other collection account as may be established by Borrower, provided that the documentation pursuant to which such account is opened and the bank at which such account is opened (if a different bank) shall both be satisfactory to the Agent. "Commission" means the Securities and Exchange Commission. ---------- "Commitment Termination Date" means the earlier of (i) the Stated --------------------------- Termination Date and (ii) the date of termination in whole of the Commitments pursuant to Section 9.1. 7 "Commitments" means, collectively, the Revolving Credit Loan Commitments ----------- of the Banks, and the "Commitment" of any Bank means the Revolving Credit Loan Commitment of such Bank. "Conditional Assignments of Lease" means the conditional assignments of -------------------------------- lease executed by Loehmann's on the Initial Closing Date, the 1993 Closing Date and thereafter in favor of the Agent and the Banks. "Consolidated Fixed Charges" means, for any period, the sum of (i) -------------------------- Consolidated Interest Expense for such period, and (ii) the interest component of Capitalized Leases for such period. "Consolidated Interest Expense" means, for any period, gross cash ----------------------------- interest expense for such period determined in conformity with GAAP, less the sum of (i) interest capitalized during construction for such period and (ii) interest income for such period. "Consolidated Net Income (Loss)" means, for any period, the aggregate of ------------------------------ net income (or loss) from continuing operations of Borrower and its Consolidated Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP; provided, however, that there shall be excluded from such net income (or loss): (i) all gains and all losses realized upon Asset Sales, purchase of the Discount Notes, the 1993 Notes or the Senior Notes or upon the sale or other disposition of any capital stock of any of Borrower's Consolidated Subsidiaries, less all reasonable fees and expenses attributable thereto, including any expense for taxes attributable thereto included in the computation of such net income (or loss), (ii) the net income (or loss) of any Person that is accounted for by the equity method of accounting, except to the extent of the amount of dividends or distributions paid to Borrower during such period, (iii) the net income (or loss) of any Person acquired by Borrower or any of its Consolidated Subsidiaries in a transaction accounted for as a pooling of interests for any period prior to the date of such acquisition, (iv) the net income (or loss) of any of Borrower's Consolidated Subsidiaries to the extent that the declaration or payment of dividends or similar distribution is prohibited under the terms of its certificate of incorporation or any agreement (other than this Agreement), instrument, judgment, decree, order, statute, rule or governmental regulation applicable to such Subsidiary, such exclusion under this clause (iv) to be effective for so long as such prohibition continues, with the net income (or loss) previously excluded on account of such prohibition to be again included and to form part of "Consolidated Net Income (Loss)" for the purpose of any determination, with respect to the period in which such income (or loss) is incurred, made after the expiration of such restriction, and (v) all other income or gain or loss from extraordinary items, less all reasonable fees and expenses attributable thereto, including any expense for taxes attributable thereto included in 8 the computation of such net income (loss), to the extent not excluded pursuant to clause (i) above. "Consolidated Subsidiary" means any Subsidiary of any Person the ----------------------- financial statements of which are, or should be, consolidated with the financial statements of such Person in accordance with GAAP. "Contaminant" means any waste, pollutant, hazardous substance, toxic ----------- substance, hazardous waste, special waste, petroleum or petroleum-derived substance or waste, or any constituent of any such substance or waste, including any such substance regulated under any Environmental Law. "Contingent Obligation" means, as applied to any Person, any direct or --------------------- indirect liability, contingent or otherwise, of that Person with respect to any Indebtedness or Contractual Obligation of another Person, if the purpose or intent thereof by the Person incurring the Contingent Obligation is to provide assurance to the obligee of such Indebtedness or Contractual Obligation that such Indebtedness or Contractual Obligation will be paid or discharged, or that any agreement relating thereto will be complied with, or that any holder of such Indebtedness or Contractual Obligation will be protected (in whole or in part) against loss in respect thereof. Contingent Obligations include, without limitation: (a) the direct or indirect guarantee, endorsement (other than for collection or deposit in the ordinary course of business), co-making, discounting with recourse or sale with recourse by such Person of the obligation of another Person and (b) any liability of such Person for the obligations of another Person through any agreement (contingent or otherwise) (i) to purchase, repurchase or otherwise acquire such obligation or any security therefor, or to provide funds for the payment or discharge of such obligation (whether in the form of loans, advances, stock purchases, capital contributions or otherwise), (ii) to maintain the solvency or any balance sheet item, level of income or financial condition of another, or (iii) to make take-or-pay or similar payments, if required, regardless of non-performance by any other party or parties to an agreement, if in the case of any agreement described under subclause (i), (ii) or (iii) of this sentence the primary purpose or intent thereof is as described in the preceding sentence. The amount of any Contingent Obligation shall be equal to the present value of the portion of the obligation so guaranteed or otherwise supported, in the case of known recurring obligations, and the maximum amount of the portion of the obligation so guaranteed or otherwise supported, in all other cases. "Contractual Obligation" of any Person means any obligation, agreement, ---------------------- undertaking or similar provision of any security issued by such Person or of any agreement, undertaking, contract, indenture, mortgage, deed of trust or other instrument to 9 which such Person is a party or by which it or any of its property is bound or to which any of its properties is subject. "Controlled Group" means, as to any Person, all members of a controlled ---------------- group of corporations and all trades or businesses (whether or not incorporated) which are under common control with such Person and which, together with such Person, are treated as a single employer under Section 414(b), (c), (m) or (o) of the Code. "Conversion/Continuation Date" means the date on which a Notice of ---------------------------- Conversion/Continuation becomes effective pursuant to Section 2.3. "Depositary Accounts" means all of the deposit accounts established by ------------------- Borrower and its Subsidiaries and listed on Schedule 2.18 hereto and any deposit accounts established by Borrower or any of its Subsidiaries in the future. "Depositary Banks" means all of the banks at which there are Depositary ---------------- Accounts. "Default" means an event which with the passing of time or the giving of ------- notice or both would become an Event of Default. "Default Rate" means a fluctuating per annum interest rate at all times ------------ equal to the sum of (a) the otherwise applicable Interest Rate plus (b) two percent (2.0%). Each Default Rate shall be adjusted simultaneously with any change in the applicable Interest Rate. "Discount Notes" means the 13.75% senior subordinated discount notes of -------------- Holdings due 1999. "Discount Notes Indenture" means the Indenture dated as of February 15, ------------------------ 1989 between Holdings and Bankers Trust Company as the trustee for the holders of Discount Notes. "Discount Note Redemption" means the redemption in full of the Discount ------------------------ Notes at an aggregate redemption price of not more than 101.0% of the face amount of such notes, plus accrued and unpaid interest on such notes. "Dollars" and the sign "$" each mean the lawful money of the United ------- States of America. "Domestic Lending Office" means, with respect to any Bank, the office of ----------------------- such Bank specified as its "Domestic Lending Office" opposite its name on Schedule 1 hereto or such other office of such Bank as such Bank may from time to time specify to Borrower and the Agent. "Early Termination Fee" has the meaning specified in Section 2.10. --------------------- 10 "EBDAIT" means, for any period or Person, the Consolidated Net Income ------ (Loss) of such Person for such period, plus the sum of the following expenses of a Person and its Consolidated Subsidiaries for such period: (i) Consolidated Fixed Charges, (ii) consolidated tax expense, (iii) Non-Cash Charges, (iv) employee stock option plan expenses, and (v) amortization of deferred compensation. "Effective Date" means the date on which this Second Amended and Restated -------------- Credit Agreement becomes effective and the initial Loan is made or the initial Letter of Credit is issued under this Second Amended and Restated Credit Agreement; provided, however, that the Effective Date shall occur on or before June 30, 1996. "Eligible Inventory" means the lower of the book value (calculated under ------------------ the retail cost method of accounting) or market value (as determined by Agent, in its reasonable discretion) of Inventory that constitutes first quality finished goods, and: (a) is not, in the Agent's reasonable judgment, obsolete or unmerchantable; (b) upon which the Agent has a first priority perfected security interest; and (c) that the Agent otherwise deems eligible as the basis for Revolving Credit Loans based on such other credit and collateral considerations as the Agent may from time to time establish in its reasonable discretion; provided that Agent shall not establish any new category of inventory excluded from Eligible Inventory until seven days after notice thereof has been sent to Loehmann's. Without intending to limit the Agent's discretion to establish other criteria of eligibility, at no time shall Eligible Inventory include (i) packaging and shipping material, supplies, returned or defective Inventory or Inventory delivered to Borrower on consignment, (ii) more than 25% of Reserve Inventory or (iii) more than 25% of the cost value of merchandise credits and gift certificates outstanding. The Agent does not intend to treat an item of Inventory as eligible if any warranty or representation contained in this Agreement or any of the Loan Documents applicable either to Eligible Inventory in general or to any such specific inventory has been breached with respect to such inventory. "Employment Agreements" means, collectively, the employment agreement --------------------- between Holdings, Loehmann's and Philip Kaplan dated as of September 19, 1988 and amended as of November 1, 1995 and April 5, 1996, and the employment agreement between Holdings, Loehmann's and Robert N. Friedman dated April 12, 1992 and amended as of April 5, 1996, as each such agreement may be amended from time to time. "Environmental Compliance Reserve" means all reserves which the Agent -------------------------------- from time to time establishes for amounts that are reasonably required to be expended in order for Borrower and Borrower's operations and properties to comply with Environmental 11 Laws or in order to correct any violation by Borrower or Borrower's operations or properties of Environmental Laws. "Environmental Law" means the Comprehensive Environmental Response, ----------------- Compensation, and Liability Act (42 U.S.C. ss. 9601 et seq.), the Hazardous Material Transportation Act (49 U.S.C. ss. 1801 et seq.), the Resource Conservation and Recovery Act (42 U.S.C. ss. 6901 et seq.), the Federal Water Pollution Control Act (33 U.S.C. ss. 1251 et seq.), the Clean Air Act (42 U.S.C. ss. 7401 et seq.), the Toxic Substances Control Act (15 U.S.C. ss. 2601 et seq.) and the Occupational Safety and Health Act (29 U.S.C. ss. 651 et seq.), each as amended or supplemented from time to time, and any analogous future federal, or present or future state or local, statutes and the regulations promulgated pursuant thereto. "Environmental Liabilities and Costs" means all liabilities, obligations, ----------------------------------- responsibilities, Remedial Actions, losses, damages, punitive damages, consequential damages, treble damages, costs and expenses (including all reasonable fees, disbursements and expenses of counsel, expert and consulting fees and costs of investigation and feasibility studies), interest, fines, penalties, sanctions and interest incurred as a result of any claim or demand, by any Person, whether based in contract, tort, implied or express warranty, strict liability, criminal or civil statute, including any Environmental Law, Permit, order or agreement with a Governmental Authority or other Person, arising from environmental, health or safety conditions or a Release or threatened Release resulting from the past, present or future operations of Borrower or any of their Subsidiaries. "Environmental Lien" means any Lien in favor of any Governmental ------------------ Authority for Environmental Liabilities and Costs. "ERISA" means the Employee Retirement Income Security Act of 1974, as ----- amended from time to time and any regulations promulgated thereunder. "ERISA Event" means: (i) the occurrence of a Reportable Event with ----------- respect to a Plan other than a Multiemployer Plan, (ii) the withdrawal of the Borrower, Holdings or any member of their Controlled Group from a Plan during a plan year in which it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA or cessation of operations described in Section 4062(e) with respect to any Plan, (iii) the filing of a notice of intent to terminate a Plan or the treatment of a Plan amendment as a termination under Section 4041 of ERISA, (iv) the institution of proceedings to terminate a Plan by the PBGC, (v) the existence of an accumulated funding deficiency under Section 412 of the Code or Section 302 of ERISA with respect to any Plan, whether or not waived, or the filing of an application for an extension of an authorization period pursuant to Section 412(e) of the Code or 304 of ERISA with respect to any Plan, (vi) the withdrawal by the Borrower, Holdings or any member of their Controlled Group from a 12 Multiemployer Plan, or (vii) any other event or condition which might reasonably be expected in the judgment of the Majority Banks to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan or the imposition of any material liability under Title IV of ERISA other than PBGC premiums due but not delinquent under Section 4007 of ERISA. No event described with respect to any Plan, including a Multiemployer Plan, shall constitute an "ERISA Event" unless either of Borrower, Holdings or any member of their Controlled Group could have any liability with respect to such Plan. "Event of Default" has the meaning specified in Section 9.1. ---------------- "Federal Funds Rate" means, for any period, a fluctuating interest rate ------------------ per annum equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Agent from three Federal funds brokers of recognized standing selected by it. "Exchange Act" means the Securities and Exchange Act of 1934, and ------------ regulations promulgated thereunder. "Federal Reserve Board" means the Board of Governors of the Federal --------------------- Reserve System or any successor thereto. "Fiscal Quarter" means any three month accounting period in a Fiscal -------------- Year. "Fiscal Year" means the twelve month period ending on the Saturday ----------- nearest to January 31 in each year. "Funding Date" means the date on which a Borrowing occurs. ------------ "GAAP" means generally accepted accounting principles in the United ---- States of America as in effect from time to time; provided, however, that for the purpose of Article VI GAAP shall be determined on the basis of such principles in effect on the Effective Date and consistent with those used in the preparation of the audited financial statements referred to in Section 4.6. In the event that GAAP changes during the term of this Agreement such that the covenants contained in Article VI would then be calculated in a different manner or with different components or with components which are calculated differently, (i) the parties hereto agree to enter into negotiations with respect to amendments to this 13 Agreement or conforming those covenants as criteria for evaluating the Borrower's financial condition to substantially the same criteria as were effective prior to such change in GAAP, and (ii) the Borrower shall be deemed to be in compliance with the affected covenants contained in Article VI during the 60 days following any change in GAAP if and to the extent that the Borrower would have been in compliance therewith under GAAP as in effect immediately before such change; provided, however, that this paragraph shall not be deemed -------- ------- to require the Borrower, the Agent or the Banks to agree to modify any provision of this Agreement or any of the other Loan Documents to reflect any such change to GAAP and, if, after such 60 days, the parties, in their sole discretion, fail to reach agreement on such modifications, the terms of this Agreement will remain unchanged and the compliance by the Borrower with the covenants contained in Article VI will be calculated in accordance with GAAP as in effect immediately before such change. "Governmental Authority" means any nation or government, any state or ---------------------- other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Holdings" means, before the Maryland Merger, Holdings Maryland and, from -------- and after the Maryland Merger, Holdings Delaware. "Holdings Delaware" has the meaning specified in the seventh Whereas ----------------- clause of this Agreement. "Holdings Maryland" has the meaning specified in the third Whereas clause ----------------- of this Agreement. "Holdings Merger" has the meaning specified in the ninth Whereas clause --------------- of this Agreement. "Holdings Merger Agreement" means the Agreement of Merger between ------------------------- Holdings Delaware and the Borrower. "Indebtedness" of any Person means (i) all indebtedness of such Person ------------ for borrowed money or for the deferred purchase price of property or services, (ii) all reimbursement and other obligations with respect to surety bonds, letters of credit and bankers' acceptances, whether or not matured, (iii) all obligations evidenced by notes, bonds, debentures or similar instruments, (iv) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property, but in such case only in an amount equal to the value of such property), (v) all obligations which have been or should be, in accordance with GAAP, Capitalized Lease Obligations, (vi) Contingent Obligations and all obligations (contingent or otherwise) to purchase or otherwise acquire, or 14 otherwise to assure a creditor against loss in respect of, indebtedness or obligations of others of the kinds referred to in clause (i), (ii), (iii), (iv) or (v) above, (vii) all Indebtedness referred to in clause (i), (ii), (iii), (iv) or (v) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien upon or in property (including, without limitation, accounts and contract rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such indebtedness, but in such case only in an amount equal to the value of such property, and (viii) the Obligations; provided, however, that Indebtedness shall not include trade payables arising in the ordinary course of business of such Person. "Initial Closing Date" means September 19, 1988. -------------------- "Intellectual Property" has the meaning specified in the Intellectual --------------------- Property Security Agreement. "Intellectual Property Security Agreement" means the amended and restated ---------------------------------------- intellectual property security agreement originally entered into by Borrower on the Initial Closing Date in favor of the Agent and the Banks, as the same has been and may hereafter be amended, restated, supplemented or otherwise modified from time to time in accordance with its terms, including, without limitation, as the same is amended and restated as of the Effective Date. "Intercompany Accounts" means all assets and liabilities, however --------------------- arising, which are due to Borrower from, which are due from Borrower to, or which otherwise arise from any transaction by Borrower with, any Affiliate. "Interest Coverage Ratio" means, for any period, the ratio obtained by ----------------------- dividing (i) Borrower's EBDAIT for such period by (ii) Borrower's Consolidated Interest Expense (other than interest accreted on the 1993 Notes) accrued for such period, whether or not paid. "Interest Period" means, as to any LIBOR Rate Loan, the period commencing --------------- on the Funding Date of such Loan or on the Conversion/Continuation Date on which the Loan is converted into or continued as a LIBOR Rate Loan, and ending on the date one, two, or three months thereafter as selected by the Borrower in its Notice of Borrowing or Notice of Conversion/Continuation; provided that: (i) if any Interest Period would otherwise end on a day that is not a Business Day, that Interest Period shall be extended to the following Business Day unless the result of such extension would be to carry such Interest Period into another calendar month, in which event such Interest Period shall end on the preceding Business Day; 15 (ii) any Interest Period pertaining to a LIBOR Rate Loan that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of the calendar month at the end of such Interest Period; and (iii) no Interest Period for any Revolving Loan shall extend beyond the Commitment Termination Date. "Interest Rate" means each or any of the interest rates set forth in ------------- Section 2.8 "Inventory" means all of Borrower's now owned and hereafter acquired --------- inventory, goods, merchandise, and other personal property, wherever located, to be furnished under any contract of service or held for sale or lease, all raw materials, work-in-process, finished goods, returned and repossessed goods, and materials and supplies of any kind, nature or description which are or might be used or consumed in Borrower's business or used in connection with the manufacture, packing, shipping, advertising, selling or finishing of such inventory goods, merchandise and such other personal property, and all documents of title or other documents representing them. "Investments" has the meaning specified in Section 8.6. ----------- "IRS" means the Internal Revenue Service. --- "LAC" has the meaning specified in the first paragraph of this Agreement. --- "LAC Merger" has the meaning specified in the Second Whereas clause of ---------- this Agreement. "Leases" has the meaning specified in Section 4.20. ------ "Letter of Credit" means a Standby Letter of Credit or a Merchandise ---------------- Letter of Credit issued or caused to be issued for the account of a Borrower pursuant to Article 2. "Letter of Credit Request" has the meaning specified in Section 2.2. ------------------------ "LIBOR Interest Payment Date" means, with respect to a LIBOR Rate Loan, --------------------------- the last day of each Interest Period applicable to such Loan. "LIBOR Interest Rate Determination Date" means each date of calculating -------------------------------------- the LIBOR Rate for purposes of determining the interest rate with respect to an Interest Period. The LIBOR Interest Rate Determination Date for any LIBOR Rate Loan shall be 16 the second Business Day prior to the first day of the related Interest Period for such LIBOR Rate Loan. "LIBOR Rate" means, for any Interest Period, with respect to LIBOR Rate ---------- Loans comprising part of the same Borrowing, the rate of interest per annum (rounded upward to the next 1/16th of 1.0%) determined by the Agent as follows: LIBOR Rate = LIBOR -------------------------------------------- 1.00 - Eurodollar Reserve Percentage Where, "Eurodollar Reserve Percentage" means for ----------------------------- any day for any Interest Period the maximum reserve percentage (expressed as a decimal, rounded upward to the next 1/100th of 1.0%) in effect on such day (whether or not applicable to any Bank) under regulations issued from time to time by the Federal Reserve Board for determining the maximum reserve requirement (including any emergency, supplemental or other marginal reserve requirement) with respect to Eurocurrency funding (currently referred to as "Eurocurrency liabilities"); and "LIBOR" means the rate of interest per annum ----- (rounded upward to the next 1/16 of 1%) notified to the Agent by Bank of America as the rate of interest at which dollar deposits in the approximate amount of the Loan to be made or continued as, or converted into, a LIBOR Rate Loan and having a maturity comparable to such Interest Period would be offered by Bank of America's applicable lending office to major banks in the London eurodollar market at approximately 11:00 a.m. (London time) two Business Days prior to the commencement of such Interest Period. "LIBOR Rate Loan" means a Revolving Credit Loan during any period in --------------- which it bears interest at the LIBOR Rate. "Lien" means, with respect to any asset, any mortgage, deed of trust, ---- lien, pledge, collateral or conditional assignment, charge, security interest or encumbrance of any kind in respect of such asset. For the purpose of this Agreement, any Person shall be deemed to own, subject to a Lien, any asset which it has acquired or holds subject to the interest of a vendor or lessor under any 17 conditional sale agreement, capital lease or other title retention agreement relating to such asset. "Loan Documents" means this Agreement, the Collateral Documents, the -------------- Negative Pledge Agreement. "Loan Party" means Borrower and each Subsidiary of Borrower which is a ---------- party to any Loan Document. "Loan(s)" means, collectively, the Revolving Credit Loans. ------- "Loehmann's" has the meaning specified in the first paragraph of this ---------- Agreement. "Loehmann's Pledge Agreement" means the amended and restated pledge --------------------------- agreement made by Loehmann's on the Initial Closing Date in favor of the Agent and the Banks, as the same may be amended, supplemented or otherwise modified from time to time in accordance with its terms, including, without limitation, as the same is amended and restated as of the Effective Date. "Majority Banks" means at any time Banks holding at least 66-2/3% of the -------------- then aggregate unpaid principal amount of the Notes held by Banks, or, if no such principal amount is then outstanding, Banks having at least 66-2/3% of the Commitments. "Management Shareholders" means, collectively, Philip Kaplan and Robert ----------------------- N. Friedman. "Margin Stock" means "margin stock" as such term is defined in Regulation ------------ U of the Federal Reserve Board. "Maryland Merger" has the meaning specified in the seventh Whereas clause --------------- of this Agreement. "Maryland Merger Agreement" means the Agreement of Merger between ------------------------- Holdings Maryland and Holdings Delaware. "Material Adverse Change" means a material adverse change in any of (i) ----------------------- the financial condition, business or properties of Borrower and its Consolidated Subsidiaries taken as a whole, or (ii) the legality, validity or enforceability of any Loan Document or any Related Document. "Material Adverse Effect" means an effect that would result in a Material ----------------------- Adverse Change. "Maximum Rate" has the meaning given to such term in Section 2.13. ------------ "Merchandise Letter of Credit" means a documentary Letter of Credit ---------------------------- issued for the account of the Borrower to provide 18 the intended means of making payment when due by the Borrower for the purchase of Inventory and available for drawing against presentation of, inter alia, negotiable documents of title covering such Inventory. "Merger Agreement" means the Holdings Merger Agreement and the Maryland ---------------- Merger Agreement, collectively. "Mortgage" has the meaning specified in Section 7.22. -------- "Multiemployer Plan" means, as to any Person, at any time, a ------------------ "multiemployer plan" within the meaning of Section 4001(a)(3) of ERISA and to which such Person or any member of its Controlled Group is making, or is obligated to make, contributions or has made, or been obligated to make, contributions. "Negative Pledge Agreement" means the negative pledge agreement entered ------------------------- into by the Management Shareholders on the 1993 Closing Date in favor of the Agent and the Banks. "Net Worth" means, as at any date of determination and without --------- duplication, an amount equal to the sum of: (a) the net worth of Borrower and its Consolidated Subsidiaries as at February 3, 1996, plus (b) the cumulative pre-tax net income (or loss) of Borrower and its Consolidated Subsidiaries from February 3, 1996 through the date of determination; provided, that in determining net income (or loss), no non-cash writeoffs (except those taken for Inventory) will be included, plus (c) the cumulative amount of all contributions to capital of Borrower from February 3, 1996 through the date of determination, minus (d) the cumulative amount of all Stock Payments made by Borrower from February 3, 1996 through the date of determination. "New Common Stock" means the 4,107,800 shares of common stock of the ---------------- Borrower (including 535,800 shares issuable upon exercise of the over-allotment option by the underwriters of the Offering), par value $.01 per share, of Borrower offered and issued by Borrower pursuant to the Offering Documents. "1993 Amended Credit Agreement" has the meaning specified in the sixth ----------------------------- Whereas clause of this Agreement. "1993 Amended Credit Agreement Default" means any Event of Default (as ------------------------------------- defined in the 1993 Amended Credit Agreement) and event which with the passing of time or the giving of notice or both would become an Event of Default (as defined in the 1993 Amended Credit Agreement). "1993 Closing Date" has the meaning specified in the sixth Whereas clause ----------------- of this Agreement. 19 "1993 Notes" means the $55,700,000 aggregate principal amount of 10 1/2% ---------- senior secured notes due 1997 issued by Holdings on the 1993 Closing Date. "1993 Notes Indenture" means the Indenture, dated as of October 14, 1993, -------------------- between Holdings and United States Trust Company of New York as the trustee for the holders of the 1993 Notes. "1993 Note Purchase Agreement" means the Purchase Agreement in the form ---------------------------- delivered to the Banks pursuant to Section 3.1(e), to be entered into by Holdings and the Purchasers listed therein, with respect to the sale of the 1993 Notes and 3,285,671 shares of Holdings Common Stock, $.008403361 par value per share. "1993 Note Redemption" means the redemption in full of the 1993 Notes at -------------------- an aggregate redemption price of not more than 103.5% of the face amount of such notes, plus accrued and unpaid interest on such notes. "Non-Cash Charges" means, for any accounting period, the sum of (i) all ---------------- amounts treated as an expense for depreciation for such period, plus (ii) all amounts treated as an expense for the amortization of leaseholds, deferred transaction costs, goodwill and other intangibles of any kind for such period, in each case for a Person and its Consolidated Subsidiaries determined on a consolidated basis in accordance with GAAP. "Notice of Borrowing" means a notice of borrowing substantially in the ------------------- form of Exhibit C hereto, delivered by Borrower to the Agent pursuant to Section 2.3. "Notice of Conversion/Continuation" means a notice of --------------------------------- conversion/continuation substantially in the form of Exhibit B hereto, delivered by Borrower to the Agent pursuant to Section 2.3 "Obligations" means all loans, advances, debts, liabilities, obligations, ----------- covenants and duties, including all obligations of Borrower or any of its Subsidiaries under or in respect of Letters of Credit, owing by Borrower to any Bank, the Agent, any Affiliate of any Bank or the Agent, or any Person entitled to indemnification pursuant to Section 11.4, of any kind or nature, present or future, whether or not evidenced by any note, guaranty or other instrument, arising under this Agreement or under any other Loan Document, whether or not for the payment of money, whether arising by reason of an extension of credit, loan, guaranty, indemnification, foreign exchange or interest rate swap transaction or in any other manner, whether direct or indirect (including those acquired by assignment), absolute or contingent, due or to become due, now existing or hereafter arising and however acquired. The term includes all interest (including interest accruing after the occurrence of an event described in Section 9.1(f) and interest accruing at the Default Rate), charges, expenses, fees, attorneys' fees and disbursements and any other sum 20 chargeable to Borrower or any of its Subsidiaries under this Agreement or any other Loan Document. "Offering" means Borrower's offer to issue the Senior Notes and the New -------- Common Stock to the public pursuant to the Offering Documents. "Offering Documents" means (i) the Form S-1 Registration Statement No. ------------------ 33-97100 filed by Borrower with the Commission on September 19, 1995, as amended by Amendment No. 1 to Form S-1 filed by Borrower with the Commission on April 8, 1996, and Amendment No. 2 to Form S-1 filed by Borrower on May 3, 1996 pursuant to which Borrower will offer the Senior Notes and the New Common Stock to the public, (ii) all documents filed by or on behalf of Borrower or any of its Affiliates with the Commission in connection with the Offering, and (iii) all amendments and supplements to any of the foregoing. "Other Taxes" shall have the meaning given to such term in Section ----------- 2.12(b). "PBGC" means the Pension Benefit Guaranty Corporation or any entity ---- succeeding to any or all of its functions under ERISA. "Permit" means any permit, approval, authorization, license, variance, or ------ permission required from a Governmental Authority under an applicable Requirement of Law. "Permitted Exceptions" shall mean such 1993 Amended Credit Agreement -------------------- Defaults as shall have occurred and exist prior to the Effective Date solely as a result of the Maryland Merger, the Holdings Merger, the Offering or the Redemption. "Person" means an individual, partnership, corporation (including a ------ business trust), joint stock company, trust, unincorporated association, joint venture or other entity, or a Governmental Authority. "Plan" means any employee pension benefit plan as defined in Section 3(2) ---- of ERISA (including a Multiemployer Plan) that is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code or Section 302 of ERISA and is maintained for the employees of Borrower or Holdings or any member of their Controlled Group or with respect to which Borrower or Holdings or any member of their Controlled Group may incur any liability. "Pledged Shares" means, collectively, the securities which are pledged as -------------- security for the Obligations pursuant to the Loehmann's Pledge Agreement. 21 "Qualified Issuer" means any commercial bank (i) which has capital and ---------------- surplus in excess of $500,000,000, (ii) which is in compliance with minimum capitalization requirements of all applicable regulators, and (iii) the outstanding long term debt securities of which are rated at least A by Standard & Poor's Corporation or at least A-1 by Moody's Investors Service, Inc., or carry an equivalent rating by a nationally recognized rating agency if both of the two named rating agencies cease publishing ratings of investments. "Ratable Portion" means, with respect to any Bank, the quotient obtained --------------- by dividing the Revolving Credit Loan Commitment of such Bank by the Revolving Credit Loan Commitments of all of the Banks. "Redemption" means the Discount Note Redemption, the 1993 Note Redemption ---------- and the Series A Preferred Stock Redemption, collectively. "Reference Rate" means, for any day, the higher of: (a) the rate of -------------- interest in effect for such day as publicly announced from time to time by Bank of America in San Francisco, California, as its "reference rate" (the "reference rate" being a rate set by Bank of America based upon various factors including Bank of America's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above, or below such announced rate), or (b) one-half percent (0.50%) per annum above the latest Federal Funds Rate. Any change in the reference rate announced by Bank of America shall take effect at the opening of business on the day specified in the public announcement of such change. Each Interest Rate based upon the Reference Rate shall be adjusted simultaneously with any change in the Reference Rate. "Reference Rate Loan" means a Revolving Credit Loan during any period in ------------------- which it bears interest at the Reference Rate. "Related Documents" means the Negative Pledge Agreement, the Employment ----------------- Agreements, the Discount Notes Indenture, the Discount Notes, the 1993 Notes Indenture, the 1993 Notes, the 1993 Note Purchase Agreement, the Merger Agreement, the Offering Documents, the New Common Stock, the Senior Notes and the Senior Note Indenture. "Release" means any release, spill, emission, leaking, pumping, ------- injection, deposit, disposal, discharge, dispersal, leaching or migration of a Contaminant into the indoor or outdoor environment or into or out of any property owned by Borrower or any of its Subsidiaries, including the movement of Contaminants through or in the air, soil, surface water, groundwater or property. "Release Direction" has the meaning specified in Section 2.18(b). ----------------- 22 "Remedial Action" means all actions required to (i) clean up, remove, --------------- treat or in any other way address Contaminants in the indoor or outdoor environment; (ii) prevent a Release or threatened Release or minimize further release of Contaminants so they do not migrate or endanger or threaten to endanger public health or welfare or the indoor or outdoor environment, or (iii) perform preremedial studies and investigations and post-remedial monitoring and care. "Reportable Event" means any of the events set forth in Section 4043(c) ---------------- of ERISA or the regulations thereunder but excluding those events as to which the 30 day notice requirement has been waived. "Requirement of Law" means, as to any Person, the charter and bylaws or ------------------ other organizational or governing documents of such Person, and all federal, state and local laws, rules, regulations, orders, decrees or other determinations of an arbitrator, court or other Governmental Authority, including all disclosure requirements of ERISA and the requirements of Environmental Laws, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. "Reserve Inventory" means, as of any time, inventory held as reserve ----------------- inventory by Borrower for sale in future periods in accordance with current practice. "Responsible Officer" means with respect to any Person, an officer of ------------------- such Person who is a signatory to any Loan Document or any other document delivered hereunder. "Revolving Credit Loan Commitment" means, as to each Bank, the commitment -------------------------------- of such Bank to make Revolving Credit Loans to Borrower pursuant to Section 2.1(b) in the aggregate principal amount at any time outstanding not to exceed the amount set forth opposite such Bank's name on the signature pages hereof under the caption "Commitment." "Revolving Credit Loans" means loans made by a Bank to Borrower pursuant ---------------------- to Section 2.1(b). "Security Agreement" means the amended and restated security agreement, ------------------ originally entered into on the Initial Closing Date by Borrower and Ware Lo in favor of the Agent and the Banks, as the same has been and may hereafter be amended, restated, supplemented or otherwise modified from time to time in accordance with its terms, including, without limitation, as the same is amended and restated as of the Effective Date. "Senior Note Indenture" means the Indenture, to be entered into between --------------------- Borrower and United States Trust Company of New York, as Trustee for the holders of the Senior Notes, relating 23 to the Senior Notes, in form and substance satisfactory to the Agent. "Senior Notes" means the $100 million aggregate principal amount of ------------ senior notes due 2003 to be issued by Borrower. "Series A Preferred Stock" means the Series A Preferred Stock, par value ------------------------ $0.005602241 per share, of Holdings, before the Holdings Merger, and of Borrower, after the Holdings Merger. "Series A Preferred Stock Redemption" means the redemption of all issued ----------------------------------- and outstanding shares of Series A Preferred Stock at an aggregate redemption price of not more than $0.56 per share. "Shareholders' Agreement" means the agreement among Holdings and certain ----------------------- of its shareholders, dated as of September 19, 1988, as amended. "Solvent" means, with respect to any Person, that the present fair ------- saleable value of the assets of such Person is, on the date of determination, greater than the total amount of liabilities (including contingent and unliquidated liabilities) of such Person as of such date and that, as of such date, such Person is able to pay all liabilities of such Person as such liabilities mature and does not have unreasonably small capital with which to carry on its business. In computing the amount of contingent or unliquidated liabilities at any time, such liabilities will be computed at the amount which, in light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability. "Standby Letter of Credit" means any Letter of Credit other than a ------------------------ Merchandise Letter of Credit. "Stated Termination Date" means the fourth anniversary of the Effective ----------------------- Date. "Stock" means all shares, options, interests, participations or other ----- equivalents (regardless of how designated) of or in a corporation or equivalent entity, whether voting or non-voting, and including, without limitation, common stock, preferred stock or warrants or options for any of the foregoing. "Stock Payment" means, with respect to any Person, any dividend payment ------------- or other distribution of assets, properties, cash, rights, warrants, equity interests, obligations or securities made by such Person on account of its Stock or any purchase, redemption, defeasance or other acquisition for value or other payment made by such Person in respect of its Stock (other than solely through the issuance of such Person's own capital stock), now or hereafter outstanding, or any management incentive or similar fee payable to a shareholder of such Person in its capacity as a shareholder. 24 "Stock Purchase Agreement" has the meaning described in the first Whereas ------------------------ clause of this Agreement. "Subsidiary" means, with respect to any Person, any corporation of which ---------- an aggregate of 50% or more of the outstanding stock having ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether, at the time, stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is, directly or indirectly, now owned or hereafter acquired by such Person and/or one or more Subsidiaries of such Person. "Subsidiary Guaranty" means the guaranties of the Obligations of Borrower ------------------- by each Subsidiary of Borrower, originally entered into as of the Initial Closing Date and in favor of the Agent and the Banks, as the same may be amended, supplemented or otherwise modified from time to time in accordance with its terms, including, without limitation, as the same is amended and restated as of the Effective Date. "Taxes" has the meaning specified in Section 2.12(a). ----- "Voting Stock" means capital stock of the class or classes pursuant to ------------ which the holders thereof have general voting power under ordinary circumstances to elect at least a majority of the board of directors, managers or trustees of a corporation (irrespective of whether or not at the time capital stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency). "Ware Lo" means Ware Lo, Inc., a New York corporation and a wholly- owned ------- Subsidiary of Borrower. 1.2. Computation of Time Periods. In this Agreement, in the computation of --------------------------- periods of time from a specified date to a later specified date, the word "from" means "from and including," and the words "to" and "until" each means "to but excluding." 1.3. Interpretive Provisions (a) The words "herein," "hereof" and ----------------------- "hereunder" and other words of similar import refer to this Agreement as a whole, including the Exhibits and Schedules hereto, as the same may from time to time be amended or supplemented and not to any particular article, section, subsection or clause in this Agreement. (b) References herein to an article, section, subsection or clause shall refer to the appropriate article, section, subsection or clause in this Agreement. (c) The word "including" as used herein means including without limitation. 25 (d) The meanings of defined terms are equally applicable to the singular and plural forms of the defined terms. (e) The term "documents" includes any and all instruments, documents, agreements, certificates, indentures, notices and other writings, however evidenced. (f) Unless otherwise expressly provided herein, (i) references to agreements (including this Agreement) and other contractual instruments shall be deemed to include all subsequent amendments and other modifications thereto, but only to the extent such amendments and other modifications are not prohibited by the terms of any Loan Document, and (ii) references to any statute or regulation are to be construed as including all statutory and regulatory provisions consolidating, amending, replacing, supplementing or interpreting the statute or regulation. (g) The captions and headings of this Agreement are for convenience of reference only and shall not affect the interpretation of this Agreement. (h) This Agreement and other Loan Documents may use several different limitations, tests or measurements to regulate the same or similar matters. All such limitations, tests and measurements are cumulative and shall each be performed in accordance with their terms. (i) This Agreement and the other Loan Documents are the result of negotiations among and have been reviewed by counsel to the Agent, the Borrower and the other parties, and are the products of all parties. Accordingly, they shall not be construed against the Banks or the Agent merely because of the Agent's or Banks' involvement in their preparation. ARTICLE II AMOUNTS AND TERMS OF THE FACILITY 2.1. Revolving Credit Loans. ---------------------- (a) [Intentionally omitted.] (b) Each Bank severally agrees, on the terms and subject to the conditions hereinafter set forth, to make revolving credit loans to Borrower (each, a "Revolving Credit Loan") from time to time on any Business Day during the period from the Effective Date until the Commitment Termination Date in the aggregate principal amount at any time outstanding not to exceed such Bank's Revolving Credit Loan Commitment, as such amount may be modified pursuant to Section 11.6; provided, however, that in no event shall the aggregate amount of ----------------- all outstanding Letters of Credit, the then outstanding Revolving Credit Loans and unpaid 26 delinquent Obligations and the principal amount of the Revolving Credit Loan to be made exceed the lesser of (i) the aggregate Revolving Credit Loan Commitments and (ii) the Borrowing Base. The aggregate Revolving Credit Loan Commitments shall not exceed $35,000,000. Within the limits of each Bank's Revolving Credit Loan Commitment and subject to the mandatory and voluntary reductions required or permitted herein, amounts of the Revolving Credit Loans prepaid may be reborrowed pursuant to this Section 2.1(b); provided, however, that with respect ----------------- to any LIBOR Rate Loans prepaid by the Borrower prior to the expiration date of the Interest Period applicable thereto, the Borrower agrees to pay to the Banks the amounts described in Section 2.15(c). 2.2. Letters of Credit. ----------------- (a) BABC agrees on the terms and subject to the conditions hereinafter set forth to cause one or more letters of credit (the "Letters of Credit") to be issued from time to time during the period commencing on the Effective Date and ending 30 days prior to the Commitment Termination Date in an aggregate amount of up to $10,000,000, at the request of Borrower and in favor of the beneficiary specified by Borrower in accordance with the provisions set forth below; provided, however, that in no event shall the aggregate amount of ----------------- all outstanding Letters of Credit, the face amount of the Letter of Credit to be issued and the then outstanding Revolving Credit Loans and unpaid Obligations, at any time exceed the lesser of (A) the aggregate Revolving Credit Loan Commitments and (B) the Borrowing Base: (i) Borrower shall give to the Agent one (1) Business Day's prior written notice in substantially the form of Exhibit D hereto (a "Letter of Credit Request") of any requested issuance of a Letter of Credit under this Agreement; such notice shall be irrevocable and shall specify the stated amount of the Letter of Credit requested, the effective date (which shall be a Business Day) of issuance of the Letter of Credit, whether such Letter of Credit may be drawn in a single or in partial draws, the day such Letter of Credit is to expire (which shall be a Business Day and (A) shall not be more than 180 days after the effective date in the case of a Merchandise Letter of Credit; (B) shall not be more than one year after the effective date in the case of a Standby Letter of Credit; and (C) in any event, clauses (A) and (B) notwithstanding, shall not be later than the Business Day preceding the Commitment Termination Date), and the Person (including such Person's address) for whose benefit the Letter of Credit is to be issued; (ii) if BABC is not then the Agent, the Agent shall give BABC prompt notice of its receipt of each Letter of Credit Request and the details thereof; and 27 (iii) Borrower shall pay to BABC (A) a nonrefundable fee on the aggregate amount of all outstanding Letters of Credit at a rate per annum equal to one and one-half percent (1.5%) of the aggregate amount so outstanding, which shall be payable monthly in arrears on the first day of each month during the term that any Letter of Credit remains outstanding, and (B) sums equal to the reasonable charges BABC may assess, and expenses that BABC may pay or incur, relative to the issuance of the Letters of Credit or to presentment to or to a payment by BABC thereunder, which shall be payable on demand. Such fee is in addition to any other standard fees, costs and expenses charged by BABC in connection with arranging any Letter of Credit. All such fees, charges and expenses payable to or by BABC will be charged to Borrower as Revolving Credit Loans. During the continuance of an Event of Default, the fee payable pursuant to clause (A) above shall be increased to three and one-half percent (3.5%) per annum. (b) Concurrently with the issuance of each Letter of Credit, BABC shall be deemed to have sold and transferred to each Bank, and each Bank shall be deemed to have purchased and received from BABC, in each case without any further action on the part of any party, an undivided interest and participation, to the extent of such Bank's Ratable Portion of the aggregate Revolving Credit Loan Commitments, in and to each Letter of Credit and the obligations of Borrower under this Agreement in respect of each Letter of Credit. The amount available to be drawn under each Letter of Credit at the time outstanding (assuming compliance with all conditions to drawing) shall be deemed to be outstanding Revolving Credit Loans for purposes of determining (v) the availability of additional Letters of Credit under Section 2.2(a), (w) the amount of any repayment required to be made pursuant to Section 2.6(c), (x) compliance with the conditions precedent to Borrowings under Article III, (y) compliance with covenants under Article VI and (z) the occurrence of an Event of Default under Article IX. Upon each drawing or payment under a Letter of Credit, the amount of such drawing or payment shall become and be deemed to be, without any further action on the part of any Person, a Revolving Credit Loan by Borrower (subject to later adjustments pursuant to paragraph (c) below) made on the date of such drawing or payment for all purposes under this Agreement. 2.3. Notice of Borrowing; Notice of Conversion/Continuation. ------------------------------------------------------ (a) (i) Whenever Borrower desires to borrow Revolving Credit Loans under Section 2.1(b) or to convert or continue any Revolving Credit Loan pursuant to this Section 2.3(a), Borrower, shall deliver to the Agent a Notice of Borrowing or Notice of Conversion/Continuation, as the case may be, signed by an authorized officer of Borrower, not later than (a) 11:00 a.m. (New York time) on the requested Funding Date of such proposed Borrowing, continuation or conversion, in the case of a Borrowing 28 of Reference Rate Loans, or (b) 11:00 a.m. (New York time) on the third Business Day before the date of such proposed Borrowing, continuation or conversion, in the case of a Borrowing or continuation of Libor Rate Loans or a conversion of Reference Rate Loans into Libor Rate Loans. Notwithstanding any other provision hereof to the contrary, no more than four (4) Borrowing(s) of Revolving Credit Loans consisting of Libor Rate Loans may be outstanding at any time, and no Borrowing(s) of Revolving Credit Loans consisting of Libor Rate Loans shall be in an aggregate principal amount of less than $3,000,000 or any greater amount which is an integral multiple of $1,000,000. In lieu of delivering the above-described Notice of Borrowing or Notice of Conversion/Continuation, as the case may be, the Borrower may give the Agent telephonic notice of any requested Borrowing or conversion or continuation, as the case may be, by the required time; provided, however, that such notice shall be confirmed in writing by ----------------- delivery to the Agent (A) immediately of a telecopy of a Notice of Borrowing or Notice of Conversion/Continuation, as the case may be, which has been signed by an authorized officer of the Borrower, and (B) promptly (and in no event later than three (3) Business Days after the Funding Date in respect of the applicable Revolving Credit Loans) of a Notice of Borrowing or Notice of Conversion/Continuation, as the case may be, containing the original signature of an authorized officer of the Borrower. In the event that the terms of any confirmatory Notice of Borrowing or Notice of Conversion/Continuation, as the case may be, referred to in the proviso contained in the immediately preceding sentence shall conflict with the telephonic notice with respect to which it was delivered, the terms of the telephonic notice, as understood by the Agent, shall govern. Notwithstanding anything in this Section 2.3(a) to the contrary, any Revolving Credit Loans to be made to Borrower on the Effective Date shall initially be made as Reference Rate Loans. (ii) The Agent shall charge all Revolving Credit Loans and other Obligations to a loan account of Borrower to be maintained by the Agent. Each Bank shall, before 2:00 P.M. (New York City time) on the Funding Date applicable thereto, make available for the account of its Domestic Lending Office to the Agent at its address referred to in Section 11.2, in immediately available funds, such Bank's Ratable Portion of such Borrowing. After the Agent's receipt of such funds and upon fulfillment of the applicable conditions set forth in Article III, the Agent will make such funds available to Borrower on the applicable Funding Date at the Agent's aforesaid address. (iii) Any Notice of Borrowing and Notice of Conversion/Continuation (or telephonic notice in lieu thereof) made pursuant to this Section 2.3(a) shall be irrevocable. Promptly after receipt of a Notice of Conversion/Continuation under this Section 2.3(a), the Agent shall notify each Bank by telex, telecopy, telegram, telephone or other similar means of 29 transmission, of the proposed conversion or continuation, as the case may be. (iv) Unless otherwise specified in a Notice of Borrowing, each Loan to be made as part of a Borrowing shall be made as a Reference Rate Loan. If a timely Notice of Conversion/Continuation as specified in Section 2.3(a)(i) is not received from Borrower prior to the expiration of any Interest Period for any outstanding Libor Rate Loan, Borrower shall be deemed to have elected to convert such Libor Rate Loan into a Reference Rate Loan on the last day of the expiring Interest Period; provided that if any Default or Event of Default shall -------- have occurred and be continuing, Borrower shall be deemed to have converted, on the last day of the applicable Interest Period, the Libor Rate Loan with respect to which the Interest Period is ending into a Reference Rate Loan in a principal amount equal to the principal amount of such Libor Rate Loan. (v) During the existence of a Default or Event of Default, the Borrower may not request a new LIBOR Rate Loan or elect to have a Loan converted into or continued as a LIBOR Rate Loan. (vi) Subject to the terms and conditions hereof and in accordance with the procedures for conversions and continuations and the other provisions set forth in this Section 2.3(a) and, in the case of any conversion into, or continuation of, a Libor Rate Loan, provided that no Default or Event of Default has occurred and is continuing, each Bank agrees (i) to convert outstanding Revolving Credit Loans that are Reference Rate Loans into Libor Rate Loans and (ii) to continue outstanding Revolving Credit Loans that are Libor Rate Loans as Libor Rate Loans, in each case in an aggregate principal amount not to exceed the principal amount of the Reference Rate Loans or Libor Rate Loans, as the case may be, then outstanding. Each Bank will make such conversion without an exchange of funds; provided that the Borrower shall pay to the Agent -------- for the account of each Bank on the date of each such conversion accrued and unpaid interest on the Libor Rate Loans of such Bank converted on such date. (b) Unless the Agent shall have received notice from a Bank prior to the date of any proposed Borrowing that such Bank will not make available to the Agent such Bank's Ratable Portion of such proposed Borrowing, the Agent may assume that such Bank has made such portion available to the Agent on the date of such Borrowing in accordance with subsection (a) of this Section 2.3 and the Agent may, in reliance upon such assumption, make available to Borrower on such date a corresponding amount. If and to the extent that such Bank shall not have so made such Ratable Portion available to the Agent, such Bank and Borrower severally agree to repay to the Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to Borrower until the date such amount is 30 repaid to the Agent, at (i) in the case of Borrower, the Interest Rate applicable to the Loans comprising such Borrowing as set forth in this Agreement, and (ii) in the case of such Bank, the Federal Funds Rate. If such Bank shall repay to the Agent such corresponding amount, such amount so repaid shall constitute such Bank's Loan as part of such Borrowing for purposes of this Agreement. If Borrower shall repay to the Agent such corresponding amount, such payment shall not relieve such Bank of any obligation it may have to Borrower hereunder. (c) The failure of any Bank to make the Loan to be made by it as part of any Borrowing shall not relieve any other Bank of its obligation, if any, hereunder to make its Loan on the date of such Borrowing, but no Bank shall be responsible for the failure of any other Bank to make the Loan to be made by such other Bank on the date of any Borrowing. 2.4. Fees. ---- (a) Borrower agrees to pay to each Bank a facility fee on the average daily unused portion of such Bank's Revolving Credit Loan Commitment from the Effective Date to the Commitment Termination Date at the rate of three- eighths of one percent (0.375%) per annum on the unused portion of such Bank's Revolving Credit Loan Commitment, which fee shall be payable monthly in arrears on the first day of each month after the Effective Date during the term of such Bank's Revolving Credit Loan Commitment, commencing with the first day of the first full calendar month following the Effective Date and on the Commitment Termination Date. All payments received by Agent on account of Accounts or as proceeds of other Collateral shall be deemed to be credited to Borrower's loan account immediately upon receipt for purposes of calculating the facility fee pursuant to this Section 2.4. (b) Borrower agrees to pay BABC a closing fee of $150,000 on the Effective Date. (c) Borrower agrees to pay BABC the fees in respect of Letters of Credit referred to in Section 2.2(a)(iii). (d) All fees payable hereunder shall be charged to Borrower's loan account as Revolving Credit Loans. 2.5. [Intentionally omitted.] ------------------------ 2.6. Repayment. --------- (a) [Intentionally omitted.] (b) Borrower shall repay the aggregate unpaid principal amount of the Revolving Credit Loans, the aggregate undrawn amount of all outstanding Letters of Credit and the aggregate amount of any unpaid reimbursement obligations in respect 31 of all outstanding Letters of Credit on the Commitment Termination Date. (c) If, at any time, the outstanding principal amount of the Revolving Credit Loans, together with the aggregate amount of all outstanding Letters of Credit and all other unpaid delinquent Obligations, shall exceed either (i) the aggregate Revolving Credit Loan Commitments or (ii) the Borrowing Base, then Borrower immediately shall repay the applicable Loans by the amount of such excess. (d) In connection with any repayment pursuant to this Section 2.6, if any LIBOR Rate Loans are repaid prior to the expiration date of the Interest Period applicable thereto, the Borrower shall also pay to the Banks the amounts described in Section 2.15(c). 2.7. Settlement. The Agent will notify the Banks of the aggregate ---------- amount of Revolving Credit Loans outstanding at such times and at such frequencies as the Agent in its sole discretion may determine, but in any event not less frequently than weekly (the date of each such notice being a "Settlement Date"). Upon receipt of any such notice, BABC or each of the other Banks, as the case may be, will forthwith unconditionally pay to the Agent (for distribution by the Agent to BABC or each of the other Banks, as the case may be) such amount (a "Settlement Amount"), if any, as is necessary to cause the aggregate unpaid principal amount of the Revolving Credit Loans to be shared by the Banks in accordance with their Ratable Portions of the aggregate Revolving Credit Loan Commitments. Upon each payment and distribution pursuant to the preceding sentence, each Bank will be deemed from the date of such payment and distribution for all purposes under the Loan Documents (including without limitation in respect of interest accruing from such date on the principal amount of such Revolving Credit Loans) to have outstanding Revolving Credit Loans owed to it in the amount of its Ratable Portion of such Revolving Credit Loans as aforesaid. 2.8. Interest. -------- (a) Borrower shall pay interest on the aggregate unpaid principal amount of the Loans at a rate determined by reference to the Reference Rate or the LIBOR Rate and Sections 2.8(a)(i) or (ii), as applicable, but such rate shall not exceed the Maximum Rate described in Section 2.13. Subject to the provisions of Section 2.3, any of the Loans may be converted into, or continued as, Reference Rate Loans or LIBOR Rate Loans in the manner provided in Section 2.3. Interest shall be computed daily on the basis of a year of 360 days and actual days elapsed and will be payable monthly in arrears on the first day of each month after the Effective Date. Except as otherwise provided herein, the outstanding Obligations shall bear interest as follows: 32 (i) for all Revolving Credit Loans and other Obligations which are not LIBOR Rate Loans, then at a fluctuating per annum rate equal to the Reference Rate plus the Applicable Margin; and (ii) for all Revolving Credit Loans and other Obligations which are LIBOR Rate Loans, then at a per annum rate equal to the Libor Rate plus the Applicable Margin. (b) During the continuance of an Event of Default, including the failure to pay any amount of principal when due hereunder (whether at the stated maturity thereof or by acceleration or otherwise), all Obligations shall bear interest, from the date of the occurrence of such Event of Default, payable on demand, at the Default Rate applicable thereto. 2.9. [Intentionally omitted]. ----------------------- 2.10. Optional Prepayments and Repayments; Early Termination Fee. Borrower ---------------------------------------------------------- may, at any time, repay the Revolving Credit Loans or prepay the Revolving Credit Loans and permanently reduce the Revolving Credit Loan Commitments to zero ($0) by tendering (i) an amount equal to the aggregate outstanding Revolving Credit Loans to Agent together with written notice of Borrower's intent to reduce such commitments, together with accrued interest to the date of such repayment on the principal amount repaid and (ii) with respect to any LIBOR Rate Loans to be prepaid prior to the expiration date of the Interest Period applicable thereto, the amounts described in Section 2.15(c); provided, however, that in such event, the Revolving Credit Loans and all unpaid interest and Obligations must be immediately repaid in full and all outstanding Letters of Credit shall be immediately cash collateralized to the satisfaction of BABC. In the event of prepayment in full and reduction to zero ($0) of all Revolving Credit Loans and Revolving Credit Loan Commitments prior to the Stated Termination Date, Borrower agrees to pay to the Banks an early termination fee (the "Early Termination Fee") determined in accordance with the following table: Period during which early Early Termination Fee termination occurs On or prior to the first 2.0% of the Revolving Credit anniversary of the Effective Loan Commitments Date After the first anniversary of 1.0% of the Revolving Credit the Effective Date but prior Loan Commitments to the Stated Termination Date 2.11. Payments and Computations. ------------------------- (a) Borrower shall make each payment hereunder and under the Obligations not later than 11:00 a.m. (New York City 33 time) on the day when due in U.S. dollars to the Agent at its address referred to in Section 11.2 in immediately available funds. If any payment of principal is made by a Borrower after such time, such payment shall be deemed to have been made on the next Business Day. The Agent will promptly thereafter cause to be distributed like funds relating to the payment of principal or interest or fees ratably (other than amounts payable pursuant to Section 2.12) to the Banks in accordance with their Ratable Portions for the account of their respective Domestic Lending Offices, and like funds relating to the payment of any other amount payable to any Bank to such Bank for the account of its Domestic Lending Office, in each case to be applied in accordance with the terms of this Agreement. (b) Borrower hereby authorizes each Bank, if and to the extent payment owed by Borrower to such Bank is not made when due hereunder or under any Obligations, after giving Borrower one day's prior notice stating the account to be charged and the amount, to charge from time to time against any or all of Borrower's accounts with such Bank any amount so due. (c) [Intentionally omitted.] (d) Whenever any payment hereunder or under the Obligations shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day and such extension of time shall in such case be included in the computation of payment of interest or fee, as the case may be. (e) Unless the Agent shall have received notice from Borrower prior to the date on which any payment is due to the Banks hereunder that Borrower will not make such payment in full, the Agent may assume that Borrower has made such payment in full to the Agent on such date and the Agent may, in reliance upon such assumption, cause to be distributed to each Bank on such due date an amount equal to the amount then due such Bank. If and to the extent Borrower shall not have so made such payment in full to the Agent, each Bank shall repay to the Agent forthwith on demand such amount distributed to such Bank together with interest thereon, for each day from the date such amount is distributed to such Bank until the date such Bank repays such amount to the Agent, at the Federal Funds Rate. 2.12. Taxes. ----- (a) Any and all payments by Borrower hereunder shall be made, in accordance with Section 2.11, free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of each Bank and the Agent, taxes measured by net income and franchise taxes (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as 34 "Taxes"). If Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder to any Bank or the Agent, (i) the sum payable shall be increased as may be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 2.12) such Bank or the Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) Borrower shall make such deductions, and (iii) Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law. (b) In addition, Borrower agrees to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies which arise from any payment made hereunder or from the execution, delivery or registration of, or otherwise with respect to, this Agreement or the other Loan Documents (hereinafter referred to as "Other Taxes"). (c) Except if caused by a Bank's failure to supply a Form 1001 or Form 4224 (or successor form) to the extent required by Section 2.12(e) or 2.12(f), Borrower will indemnify each Bank and the Agent for the full amount of Taxes and Other Taxes (including any Taxes or Other Taxes imposed on amounts payable under this Section 2.12) paid by such Bank or the Agent (as the case may be) and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto, and will make payment under this indemnification within 30 days from the date such Bank or the Agent (as the case may be) makes written demand therefor. (d) Within 30 days after the date of any payment of Taxes, Borrower will furnish to the Agent, at its address referred to in Section 11.2, the original or a certified copy of a receipt evidencing payment thereof. (e) If Borrower is required to make any payment referred to in paragraphs (a) and (c) above, upon the written request of Borrower, each relevant Bank shall (consistent with legal and regulatory restrictions) designate a different Domestic Lending Office if such designation will avoid the need for such payment or reimbursement and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. If Borrower fails to perform its obligations under (a) and (c) above, Borrower shall indemnify such Bank for any incremental taxes, interest or penalties that may become payable as a result of any such failure; provided, however, that Borrower will not be required to ----------------- make any payment to any Bank under this Section 2.12 with respect to the withholding of United States federal income taxes if such withholding is required in respect of such Bank by reason of such Bank's inability to furnish under subparagraph (f) immediately below an extension or renewal of a Form 1001 or Form 4224 (or successor form), as applicable, unless such inability results from 35 an amendment to or a change in any applicable law or regulation or in the interpretation thereof by any regulatory authority (including without limitation any change in an applicable tax treaty), which amendment or change becomes effective after the Effective Date. (f) Each Bank agrees that it shall deliver to Borrower (i) at least three Business Days prior to the date such Bank (other than BABC) becomes a Bank hereunder either (A) a statement that it is incorporated in the United States of America or (B) if it is not so incorporated, two duly completed copies of United States Internal Revenue Service Form 1001 or 4224 (or any successor form), as appropriate, promulgated pursuant to the Code, indicating that such Bank is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes as permitted by the Code, (ii) from time to time, such extensions or renewals of such forms (or successor forms) as may reasonably be requested by Borrower, but only to the extent such Bank determines that it may properly effect such extensions or renewals under applicable tax treaties, laws, regulations and directives and (iii) in the event of a transfer of any Loan to a Subsidiary or Affiliate of such Bank, two new duly completed copies of Internal Revenue Service Form 1001 or 4224 (or any successor form), as the case may be, for such Subsidiary or Affiliate. Borrower shall be entitled to rely on such forms in its possession until receipt of any revised or successor form pursuant to the preceding sentence. (g) Without prejudice to the survival of any other agreement of Borrower hereunder, the agreements and obligations of Borrower contained in this Section 2.12 shall survive the payment in full of principal and interest hereunder. 2.13. Maximum Interest Rate. In no event shall any interest rate provided --------------------- for hereunder exceed the maximum rate permissible for corporate borrowers under applicable law for loans of the type provided for hereunder (the "Maximum Rate"). If, in any month, any interest rate, absent such limitation, would have exceeded the Maximum Rate, then the interest rate for that month shall be the Maximum Rate, and, if in future months, that interest rate would otherwise be less than the Maximum Rate, then that interest rate shall remain at the Maximum Rate until such time as the amount of interest paid hereunder equals the amount of interest which would have been paid if the same had not been limited by the Maximum Rate. In the event that, upon payment in full of the Obligations under this Agreement, the total amount of interest paid or accrued under the terms of this Agreement is less than the total amount of interest which would, but for this Section 2.13, have been paid or accrued if the interest rates otherwise set forth in this Agreement had at all times been in effect, then the Borrower shall, to the extent permitted by applicable law, pay the Agent, for the account of the Banks, an amount equal to the difference between (a) the lesser of (i) the amount of interest which would have been charged 36 if the Maximum Rate had, at all times, been in effect or (ii) the amount of interest which would have accrued had the interest rates otherwise set forth in this Agreement, at all times, been in effect and (b) the amount of interest actually paid or accrued under this Agreement. In the event that a court determines that the Agent and/or any Bank has received interest and other charges hereunder in excess of the Maximum Rate, such excess shall be deemed received on account of, and shall automatically be applied to reduce, the Obligations other than interest, in the inverse order of maturity, and if there are no Obligations outstanding, the Agent and/or such Bank shall refund to the Borrower such excess. 2.14. Notation. The Agent shall record on its books, and upon Borrower's -------- request, shall promptly advise Borrower of, the principal amount of the Loans owing to each Bank from time to time. In addition, each Bank is authorized, at such Bank's option, to note the date and amount of each payment or prepayment of principal of such Bank's Loans in its books and records, including computer records, such books and records constituting rebuttably presumptive evidence, absent manifest error, of the accuracy of the information contained therein so long as such records of the Banks match those of the Agent. 2.15. Yield Protection and Illegality. ------------------------------- (a) (i) If any Bank determines that the introduction of any Requirement of Law, or any change in any Requirement of Law, or in the interpretation or administration of any Requirement of Law, has made it unlawful, or that any central bank or other Governmental Authority has asserted that it is unlawful, for any Bank or its applicable Domestic Lending Office to make LIBOR Rate Loans, then, on notice thereof by such Bank to the Borrower through the Agent, any obligation of that Bank to make LIBOR Rate Loans shall be suspended until the Bank notifies the Agent and the Borrower that the circumstances giving rise to such determination no longer exist. (ii) If a Bank determines that it is unlawful to maintain any LIBOR Rate Loan, the Borrower shall, upon its receipt of reasonable notice of such fact and demand from such Bank (with a copy to the Agent), prepay in full such LIBOR Rate Loans of that Bank then outstanding, together with interest accrued thereon and amounts required under Section 2.15(c), either on the last day of the Interest Period thereof, if such Bank may lawfully continue to maintain such LIBOR Rate Loans to such day, or immediately, if such Bank may not lawfully continue to maintain such LIBOR Rate Loan. If the Borrower is required to so prepay any LIBOR Rate Loan, then concurrently with such prepayment, the Borrower shall borrow from the affected Bank, in the amount of such repayment, a Reference Rate Loan. (b) (i) If any Bank determines that, due to either (A) the introduction of or any change in the interpretation of any 37 law or regulation or (B) the compliance by that Bank with any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law), there shall be any increase in the cost to such Bank of agreeing to make or making, funding or maintaining any LIBOR Rate Loans, then the Borrower shall be liable for, and shall from time to time, upon demand (with a copy of such demand to be sent to the Agent), pay to the Agent for the account of such Bank, additional amounts as are sufficient to compensate such Bank for such increased costs. (ii) If any Bank shall have determined that (A) the introduction of any Capital Adequacy Regulation, (B) any change in any Capital Adequacy Regulation, (C) any change in the interpretation or administration of any Capital Adequacy Regulation by any central bank or other Governmental Authority charged with the interpretation or administration thereof, or (D) compliance by the Bank or any corporation controlling such Bank with any Capital Adequacy Regulation, affects or would affect the amount of capital required or expected to be maintained by such Bank or any corporation controlling the Bank and (taking into consideration such Bank's or such corporation's policies with respect to capital adequacy and such Bank's desired return on capital) determines that the amount of such capital is increased as a consequence of its Commitment[s], loans, credits or obligations under this Agreement, then, upon demand of such Bank to the Borrower through the Agent, the Borrower shall pay to the Bank, from time to time as specified by the Bank, additional amounts sufficient to compensate such Bank for such increase. (c) The Borrower shall reimburse each Bank and hold each Bank harmless from any loss or expense which such Bank may sustain or incur as a consequence of: (i) the failure of the Borrower to make on a timely basis any payment of principal of any LIBOR Rate Loan; (ii) the failure of the Borrower to borrow, continue or convert a Loan after the Borrower has given (or is deemed to have given) a Notice of Borrowing or a Notice of Conversion/ Continuation; (iii) the prepayment or other payment (including after acceleration thereof) of a LIBOR Rate Loan on a day that is not the last day of the relevant Interest Period; including any such loss or expense arising from the liquidation or reemployment of funds obtained by it to maintain its LIBOR Rate Loans or from fees payable to terminate the deposits from which such funds were obtained. (d) Any Bank claiming reimbursement or compensation under this Section 2.15 shall deliver to the Borrower (with a copy to the Agent) a certificate setting forth in reasonable detail the 38 amount payable to such Bank hereunder and the basis for such calculation, and such certificate shall be conclusive and binding on the Borrower in the absence of manifest error. (e) Without prejudice to the survival of any other agreement of Borrower hereunder, the agreements and obligations of the Borrower in this Section 2.15 shall survive the payment of all other Obligations. (f) If any Bank is unable to make or continue a LIBOR Rate Loan due to any of the events described in subsections (a) or (b) of this Section 2.15, Borrower shall be entitled to prepay the Revolving Credit Loans in full and permanently reduce the Revolving Loan Commitment to zero ($0) within 90 days after receiving demand for payment pursuant to subsection (a)(ii) or (b)(i), as the case may be, of this Section 2.15, without having to pay the Early Termination Fee; provided that (x) such prepayment and early termination shall comply in all other respects with all other terms of this Agreement and (y) such prepayment in full shall be made by Borrower solely from the proceeds of a loan to Borrower from one or more financial institutions that are not, at the time of such prepayment, subject to the event or circumstances that caused such Bank to have exercised the provisions of subsection (a)(ii) or (b)(i), as the case may be, of this Section 2.15. 2.16. Inability to Determine Rates. If the Agent determines that for any ---------------------------- reason adequate and reasonable means do not exist for determining the LIBOR Rate for any requested Interest Period with respect to a proposed LIBOR Rate Loan, or that the LIBOR Rate for any requested Interest Period with respect to a proposed LIBOR Rate Loan does not adequately and fairly reflect the cost to the Banks of funding such Loan, the Agent will promptly so notify the Borrower and each Bank. Thereafter, the obligation of the Banks to make or continue LIBOR Rate Loans hereunder shall be suspended until the Agent revokes such notice in writing. Upon receipt of such notice, the Borrower may revoke any Notice of Borrowing or Notice of Conversion/Continuation then submitted by it. If the Borrower does not revoke such notice, the Banks shall make, convert or continue the Loans, as proposed by the Borrower, in the amount specified in the applicable notice submitted by the Borrower, but such Loans shall be made, converted or continued as Reference Rate Loans instead of LIBOR Rate Loans. 2.17. Sharing of Payments, Etc. If, with respect to Borrower, any Bank ------------------------ shall obtain any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) on account of the Loans made by it to Borrower (other than pursuant to Section 2.2, 2.12 or 2.15) in excess of its Ratable Portion of payments on account of such Loans obtained by all the Banks, such Bank shall forthwith purchase from the other Banks such participations in the Loans made by them as shall be necessary to cause such purchasing Bank to share the excess payment ratably with each of them; provided, however, that if ----------------- all or any 39 portion of such excess payment is thereafter recovered from such purchasing Bank, such purchase from each Bank shall be rescinded and such Bank shall repay to the purchasing Bank the purchase price to the extent of such recovery together with an amount equal to such Bank's ratable share (according to the proportion of (i) the amount of such Bank's required repayment to (ii) the total amount so recovered from the purchasing Bank) of any interest or other amount paid or payable by the purchasing Bank in respect of the total amount so recovered. The relevant Borrower agrees that any Bank so purchasing a participation from another Bank pursuant to this Section 2.17 may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off) with respect to such participation as fully as if such Bank were the direct creditor of Borrower in the amount of such participation. 2.18. Receipt and Application of Monies. Borrower and its Subsidiaries --------------------------------- shall cause any monies paid in respect of any Account to be deposited, in kind, directly by the Account debtor in a Depositary Account, and in the event Borrower or any Subsidiary of Borrower (or any of their respective Affiliates, stockholders, directors, officers, employees, agents or those Persons acting for or on behalf of Borrower or a Subsidiary of Borrower with respect to any debts owed to Borrower or a Subsidiary of Borrower) shall receive any monies (whether consisting of cash and other receipts from retail stores, proceeds from the sale or other disposal of any Inventory or other Collateral, credit card receipts or otherwise), with reasonable promptness following receipt thereof, Borrower or such Subsidiary shall deposit or cause the same (other than advances consisting of Revolving Credit Loans) to be deposited, in kind, in the regular course of Borrower's or such Subsidiary's business in a Depositary Account. The Borrower shall instruct each bank that maintains a Depositary Account of the Borrower to transfer, prior to the close of each Business Day, all amounts on deposit in such account to the Collection Account. Borrower shall forward to BABC, in the normal course of business, copies of a collection report, in form and substance satisfactory to BABC, with respect to all such items of payment and the deposit in the Depositary Accounts and transfers to the Collection Account thereof. The Collection Account shall be maintained pursuant to an agreement ("Collection Account Agreement") among the Borrower, the Agent and the relevant financial 40 institution, which shall provide, among other things, that amounts on deposit in the Collection Account may be withdrawn by the Company until such time as such financial institution shall have received written notice from the Agent upon the occurrence of any of the circumstances described in the succeeding sentence. Upon the occurrence and during the continuance of an Event of Default, or if average daily Availability for any period of 60 consecutive days falls below $13,000,000, or if at any time Availability is less than $10,000,000, all funds in the Collection Account shall become subject to the sole dominion and control of the Agent and the Agent shall have the right, upon written notice to the relevant financial institution, to instruct any such financial institution to remit all amounts deposited in the Collection Account to the Agent Account on a daily basis. The Borrower agrees to indemnify each Bank and the Agent against, and reimburse each on demand for, all costs (without duplication) incurred by the Agent or any Bank in connection with the Collection Account Agreement. Notwithstanding the termination of this Agreement, until all of the Obligations shall have been fully paid and satisfied, the Borrower shall continue to deposit, or cause to be deposited, into the Depositary Account all collections of Accounts and other proceeds of Collateral. All payments received by the Agent as proceeds of Accounts or other Collateral whether through deposit into the Agent Account or otherwise will be the sole property of the Agent, for the ratable benefit of the Banks, and will be credited to the Agent Account as follows: (i) all cash payments received by the Agent at the Agent Account in New York, New York, including, without limitation, payments made by wire transfer of immediately available funds received by the Agent at or prior to 2:00 p.m. (New York time) on any Business Day will be credited to the Agent Account as of the date received, provided that Borrower shall have notified the Agent of its intention to repay such amount on such day no later than 2:00 p.m. (New York time); (ii) all cash payments received by the Agent at the Agent Account in New York, New York, including, without limitation, payments made by wire transfer of immediately available funds received by the Agent after 2:00 p.m. (New York time) on any Business Day will be credited to the Agent Account as of the next succeeding Business Day; and (iii) all payments in the form of checks and other instruments received by the Agent at the Agent Account in New York, New York will be credited to the Agent Account upon collection of immediately available funds in connection therewith. 2.19. Agent's and Banks' Books and Records; Monthly Statements. The -------------------------------------------------------- Borrower agrees that the Agent's books and records showing the Obligations and the transactions pursuant to this Agreement and the other Loan Documents shall be admissible in any action or proceeding arising therefrom, and shall consti tute rebuttably presumptive proof thereof, irrespective of whether any Obligation is also evidenced by a promissory note or other instrument. The Agent will provide to the Borrower a monthly statement of Loans, payments, and other transactions pursuant to this Agreement. Such statement shall be deemed correct, accurate, and binding on the Borrower and an account stated (except for corrections of errors discovered by the Agent), unless the Borrower notifies the Agent in writing to the contrary within thirty (30) days after such statement is received. In the event a timely written notice of objections is given by the Borrower, only the items to which exception is expressly made will be considered to be disputed by the Borrower. 41 ARTICLE III CONDITIONS PRECEDENT 3.1. Conditions Precedent to Effectiveness of Agreement, Making of Initial Loan and Issuance of Letters of Credit on the Effective Date. The effectiveness of this Agreement, the obligation of BABC to make its initial Loan on the Effective Date, the obligation of BABC to cause to be issued any Letter of Credit on the Effective Date and the obligation of the Banks to participate in Letters of Credit issued on the Effective Date, are subject to satisfaction of the conditions precedent that the Agent shall have received on the Effective Date the following, each dated such day except as indicated below, in form and substance satisfactory to BABC: (a) A counterpart of this Agreement, together with all Schedules and Exhibits hereto, executed by Borrower. (b) A letter, dated the Effective Date, signed by each Loan Party, the Agent and each Bank, acknowledging the date of the Effective Date. (c) Certified copies of (i) the resolutions of the Board of Directors of each Loan Party approving each Loan Document and each Related Document to which it is a party and the consummation of the transactions contemplated thereby, and (ii) all documents evidencing other necessary corporate action and required governmental and third party approvals with respect to each Loan Document and each Related Document. (d) A certificate of the Secretary or an Assistant Secretary of each Loan Party certifying the names and true signatures of the Responsible Officers of such Loan Party. (e) A copy, certified as being complete and correct by a Responsible Officer, of each Related Document and each document required to be delivered thereunder or in connection therewith, including copies of all opinions of counsel delivered thereunder. In the case of any opinions relating to any of the Offering Documents, the New Common Stock, the Redemption, the Senior Notes and the Senior Note Indenture, such opinions shall include written authorization from such counsel stating that the Agent and the Banks may rely on such counsel's opinion as though it were addressed to the Agent and the Banks. (f) A copy of the articles or certificate of incorporation of each Loan Party certified as of a recent date by the Secretary of State of the state of incorporation of such Loan Party, together with (A) certificates of such official attesting to the good standing of such Loan Party, (B) certificates or telegrams (or telephonic confirmation in those jurisdictions where a telegram is unavailable) from an official in each state in which such Loan 42 Party is qualified to do business, and (C) a copy of the bylaws of each Loan Party, certified as of the Effective Date by the secretary or an assistant secretary of such Loan Party. (g) Evidence that the Receivables, Purchase and Service Agreement among Citicorp Retail Services, Inc. ("CRS"), Holdings and Borrower dated May 7, 1993, as amended, has been terminated and is no longer in effect, that Holdings and Borrower have no further liability thereunder, and that all Liens in favor of CRS thereunder have been terminated. (h) The Security Agreement, duly executed by Borrower and the Agent, together with: (i) evidence satisfactory to BABC that Financing Statements (Forms UCC-1 and UCC-3) shall have been filed in all jurisdictions as may be necessary or, in the opinion of the Agent, desirable to perfect the Liens created by the Security Agreement; and (ii) evidence of the insurance required by the terms of the Security Agreement and Section 7.4 hereof. (i) The Intellectual Property Security Agreement, duly executed by Borrower. (j) The audited financial statements of Holdings and its Consolidated Subsidiaries as at February 3, 1996, certified by Ernst & Young LLP, required to be furnished pursuant to Section 5.1(c) of the 1993 Amended Credit Agreement, together with all other items and reports required to be furnished pursuant to such section and a report, in reasonable detail, reconciling all differences between such audited financial statements and the unaudited financial statements of Holdings and its Consolidated Subsidiaries as at February 3, 1996, heretofore furnished to BABC. (k) A favorable opinion of Paul, Weiss, Rifkind, Wharton & Garrison, special counsel to each Loan Party, in substantially the form of Exhibit I, and as to such other matters as BABC may reasonably request. (l) A letter agreement from Borrower and each of its Subsidiaries providing such collection accounts and cash management system as shall be satisfactory to the Agent. (m) Copies of the articles or certificates of merger filed with respect to the Maryland Merger, certified by the Secretary of State of the States of Maryland and Delaware. (n) A copy of the articles or certificate of merger filed with respect to the Holdings Merger, certified by the Secretary of State of the State of Delaware. 43 (o) Such other financial and other information regarding Borrower and its Subsidiaries as any Bank may request. (p) Evidence satisfactory to Agent that all Liens (other than Liens permitted pursuant to Section 8.1(b)(ii) hereof) on property of Borrower for the benefit of the holders of the Discount Notes and the 1993 Notes have been terminated, together with copies of such termination statements, mortgage satisfactions and other lien release documents as Agent may require. (q) The Negative Pledge Agreement, duly executed by the Management Shareholders. (r) The Agent shall have received for the account of BABC a certificate, signed by a Responsible Officer of Borrower, dated the date of such Loan stating that the conditions specified in this Article 3 have been met. (s) [Intentionally omitted.] (t) [Intentionally omitted.] (u) [Intentionally omitted.] 3.2. Additional Conditions Precedent to Effectiveness of Agreement, Making of Initial Loan and Issuance of Letters of Credit on the Effective Date. The effectiveness of this Agreement, the obligation of BABC to make its initial Loan on the Effective Date, the obligation of BABC to cause to be issued any Letter of Credit on the Effective Date and the obligation of the Banks to participate in Letters of Credit issued on the Effective Date, are subject to the further conditions precedent that: (a) Each of the Related Documents shall be in form and substance satisfactory to BABC. (b) Borrower shall have established, and shall have caused each of its Subsidiaries to establish, with the Agent such collection accounts as shall be satisfactory to the Agent for the purpose of monitoring and managing the cash of Borrower and its Subsidiaries. (c) On the date of such Loan the following statements shall be true and correct: (i) No event has occurred and is continuing which constitutes a 1993 Amended Credit Agreement Default except the Permitted Exceptions; (ii) The Holdings Merger shall have become effective and, as a result thereof, all liabilities and indebtedness of Holdings Maryland, Holdings Delaware and 44 Loehmann's to each other that existed prior to the Holdings Merger have been extinguished; (iii) All costs and accrued and unpaid fees and expenses (including legal fees and expenses) referred to in Sections 2.4 and 11.4 to the extent then due and payable shall have been paid; (iv) The dollar amount required to fund the Redemption does not exceed $160,000,000 in the aggregate, consisting of not more than $82,600,000, $56,250,000 and $21,150,000 to fund each of the Discount Note Redemption, the 1993 Note Redemption and the Series A Preferred Stock Redemption, respectively; deposit of such amounts into trust accounts for the exclusive benefit of the holders of the Discount Notes and the 1993 Notes will defease the obligations of the Borrower contained in Article Eight and Sections 1007 through 1018 of the Discount Notes Indenture and the obligations of the Borrower contained in Article Eight, Sections 1007 through 1018 and Clauses (a) through (c) and (j) through (m) of Section 501 of the 1993 Notes Indenture, and such amounts have been deposited into such trust accounts for the exclusive benefit of the holders of the Discount Notes and the 1993 Notes; and the Series A Preferred Stock Redemption will render the shares of Series A Preferred Stock to be no longer outstanding; (v) all Liens for the benefit of the holders of the Discount Notes and the 1993 Notes (other than the security interest in the trust funds created for purposes of defeasing the Discount Notes and the 1993 Notes) have been terminated; (vi) The 1993 Amended Credit Agreement and all Loan Documents and Related Documents (as such terms are defined in the 1993 Amended Credit Agreement) shall not have been terminated and shall be in full force and effect; (vii) All necessary governmental and third party approvals in connection with the financing provided hereunder, the Maryland Merger, the Holdings Merger, the Offering and the Redemption have been obtained and remain in effect, and all applicable waiting periods have expired without any action being taken by any competent authority which restrains, prevents or imposes materially adverse conditions upon, the consummation of such financing, Holdings Merger, Offering and Redemption; (viii) No judgment, order, injunction or other restraint prohibiting or imposing materially adverse conditions upon the consummation of the Maryland Merger, the Holdings Merger, the Offering, the Redemption or the other transactions contemplated hereby exists; 45 (ix) Since February 3, 1996, there has not occurred any Material Adverse Change, any development likely to have a Material Adverse Effect, on the ability of Borrower, Holdings or any of their respective Subsidiaries to perform their respective obligations, under the Loan Documents or the Related Documents; there has not occurred any default or an event which with the passage of time or the giving of notice would constitute a default under any existing debt instrument of either of Borrower or Holdings; there has been no commencement of or development in litigation and there is no claim, action, suit, investigation or proceeding (including shareholder or derivative litigation) pending or threatened in any court or before any arbitrator or Governmental Authority which has any reasonable likelihood of having a Material Adverse Effect; (x) The Offering shall have become effective; pursuant to the Offering, Borrower shall have sold $100 million aggregate principal amount of the Senior Notes for a net consideration consisting of cash in an amount of not less than $95 million and shall have sold the New Common Stock for a net consideration consisting of cash in an amount of not less than $40 million; and all of such cash proceeds shall have been applied to fund in part the Redemption; and (xi) After giving effect to the transactions to be effected on the Effective Date, including the Offering and the Redemption, the making of the initial Loans and Letters of Credit hereunder and the payment or accrual of all fees and expenses related to the foregoing, Borrower shall have Availability hereunder of at least $10 million. (d) Since February 3, 1996, there has occurred no material adverse change in, and no development likely to have a material adverse effect on, the markets for loan syndications generally or in capital markets generally or otherwise, which would materially impair the syndication of or sale of interests in the Loans by BABC. (e) Since February 3, 1996, (i) there has occurred no material adverse change or development likely to have a material adverse effect on the rights and remedies of BABC or on the ability of Borrower to perform its obligations to BABC, as determined by BABC, and (ii) BABC has not become aware of any information or analysis which results in a material change in BABC's understanding of Borrower and its Subsidiaries taken as a whole, or the proposed transactions. (f) BABC remains satisfied that the values of the assets, amount of anticipated cash flow of Borrower, working capital requirements and total liabilities including contingent liabilities, are not different in any material and adverse respect from those determined by BABC from a review of the unaudited 46 financial statements of Holdings and its Consolidated Subsidiaries as at February 3, 1996, heretofore furnished to BABC, including contingent liabilities in respect of environmental matters and ERISA and benefit plans. (g) BABC shall be satisfied with the procedures and arrangements for defeasing the covenants in respect of the Discount Notes and the 1993 Notes and that such covenants will be defeased in accordance with Section 402 of the Discount Notes Indenture and Section 1203 of the 1993 Notes Indenture, respectively, and will be redeemed in accordance with Article IX of the Discount Notes Indenture and Article IX of the 1993 Notes Indenture, respectively, on or before June 25, 1996. (h) BABC shall be satisfied that all of the operations of Borrower and its Subsidiaries comply in all material respects with all applicable trade regulation, environmental, health and safety rules and regulations. (i) BABC's review of and satisfaction with the final structure for and the terms and conditions of, the documentation and the consummation of, and all other matters relating to, the Maryland Merger, the Holdings Merger, the Offering, the Redemption and the transactions to be effected in connection therewith, including the aggregate principal amount of and terms and provisions in respect of the Senior Notes, including the amortization, nature of covenants, events of default, absence of security, and limitations on acceleration and remedies, relating thereto, and any other financing obligations (absolute or contingent) to be continued, incurred or guaranteed by Borrower and other intercreditor arrangements, and the aggregate amount and timing of transaction fees payable by or on behalf of Borrower. (j) All other documentation entered into in connection with the Maryl and Merger, the Holdings Merger, the Offering, the Redemption and the transactions to be effected in connection therewith shall be in form and substance reasonably satisfactory to BABC and all conditions precedent thereunder shall have been satisfied (except to the extent such conditions have been waived with the prior consent of the Majority Banks). (k) all Schedules referred to in this Agreement shall be delivered to the Agent prior to the Effective Date, and such Schedules shall be in all respects in form and substance satisfactory to the Agent. (l) the form of all Exhibits referred to in this Agreement shall be mutually agreed upon by Agent and Borrower prior to the Effective Date. 3.3. Conditions Precedent to Each Borrowing. The obligation of each Bank to -------------------------------------- make any Loan (including BABC's initial Loan on the 47 Effective Date) shall be subject to the further conditions precedent that: (a) The following statements shall be true and correct on the date of such Loan, before and after giving effect thereto and to the application of the proceeds from the Loans being made on such date: (i) The representations and warranties contained in Article IV and in each of the Collateral Documents are true and correct in all material respects on and as of such date as though made on and as of such date; (ii) No event has occurred and is continuing, or would result from the Loans being made on such date, which constitutes a Default or an Event of Default; and (iii) The outstanding principal amount of the Revolving Credit Loans (including the proposed Loan), together with the aggregate amount of all outstanding Letters of Credit and unpaid Obligations does not exceed either (i) the aggregate Revolving Credit Loan Commitments, or (ii) the Borrowing Base. (b) Each request for a Revolving Credit Loan shall be deemed to be an affirmation that the statements in Section 3.3(a) hereof are true as of the date of such request. The Agent shall have received for the account of each Bank a certificate, signed by a Responsible Officer of Borrower, dated the date of such Loan, stating that the conditions specified in Section 3.3(a) above have been met. (c) BABC shall have received a Notice of Borrowing in accordance with Section 2.3 hereof; (d) The Agent shall have received such other approvals, opinions or documents as any Bank through the Agent may reasonably request upon reasonable notice. 3.4. Conditions Precedent to the Issuance of the Letters of Credit. The ------------------------------------------------------------- obligation of BABC to issue any Letters of Credit shall be subject to the fulfillment (to the satisfaction of BABC) of the following conditions precedent: (a) BABC shall have received a Letter of Credit Request in accordance with Section 2.2 hereof; (b) The following statements shall be true and correct on the date such Letter of Credit is issued, before and after the issuance of such Letter of Credit: (i) The representations and warranties contained in Article IV and in each of the Collateral 48 Documents are true and correct in all material respects on and as of such date as though made on and as of such date; and (ii) No event has occurred and is continuing, or would result from the Letters of Credit being issued on such date, which constitutes a Default or an Event of Default; and (iii) The amount of such Letter of Credit, together with the outstanding principal amount of the Revolving Credit Loans and the aggregate amount of all other outstanding Letters of Credit and unpaid Obligations, does not exceed either (i) the aggregate Revolving Credit Loan Commitments, or (ii) the Borrowing Base. (c) Each request for a Letter of Credit shall be deemed to be an affirmation that the statements in Section 3.4(b) are true and correct as of the date of such request. The Agent shall have received for the account of BABC a certificate, signed by a Responsible Officer of Borrower, dated the date of the issuance of such Letter of Credit, stating that the conditions specified in Section 3.4(b) above have been met. (d) The Agent shall have received such other approvals, opinions or documents as BABC through the Agent may reasonably request upon reasonable notice. (e) All legal matters incident to such Letter of Credit shall be satisfactory to counsel to BABC. (f) As of the date of issuance, no order of any court, arbitrator or Governmental Authority shall purport by its terms to enjoin or restrain money center banks generally from issuing letters of credit of the type and in the amount of the proposed Letter of Credit, and no law, rule or regulation applicable to money center banks generally and no request or directive (whether or not having the force of law) from any Governmental Authority with jurisdiction over money center banks generally shall prohibit, or request that the proposed issuer of such Letter of Credit refrain from, the issuance of letters of credit generally or the issuance of such Letters of Credit. ARTICLE IV REPRESENTATIONS AND WARRANTIES To induce the Banks and the Agent to enter into this Agreement and the Banks to make the Loans, Borrower represents and warrants to the Banks and the Agent as follows: 4.1. Corporate Existence; Compliance with Law. Each Loan Party (i) is a ---------------------------------------- corporation duly organized, validly existing and in 49 good standing under the laws of the jurisdiction of its incorporation; (ii) is duly qualified as a foreign corporation and in good standing under the laws of each jurisdiction in which the failure so to qualify could have a Material Adverse Effect; (iii) has all requisite corporate power and authority and the legal right to own, pledge, mortgage and operate its properties, to lease the property it operates under lease, and to conduct its business as now or currently proposed to be conducted; (iv) has all necessary licenses, permits, consents and approvals from or by, has made all necessary filings with, and has given all necessary notices to, all Governmental Authorities having jurisdiction to the extent required for such ownership, operation and conduct, except where the absence of the foregoing in this clause (iv) does not, in the aggregate, have a Material Adverse Effect; (v) is in compliance with its certificate of incorporation and bylaws; and (vi) is in compliance with all applicable Requirements of Law except such non-compliance as would not, in the aggregate, have a Material Adverse Effect. 4.2. Corporate Power; Authorization. The execution, delivery and ------------------------------ performance by each Loan Party of the Loan Documents and the Related Documents, if any, to which it is a party, the incurrance of the Obligations and the granting to the Agent of Liens upon and security interests in the Collateral, and the consummation of the Maryland Merger, the Holdings Merger, the Offering, the Redemption and the transactions to be effected on the Effective Date: (a) are within such Loan Party's respective corporate powers; (b) have been duly authorized by all necessary corporate action, including the consent of shareholders where required; (c) do not: (i) contravene any Loan Party's charter or bylaws; (ii) violate any Requirement of Law (including Regulation G, T, U or X of the Federal Reserve Board); (iii) conflict with or result in the breach of, or constitute a default under, any Contractual Obligation binding on or affecting any Loan Party, except for the Permitted Exceptions and such other conflicts, breaches and defaults which could not, in the aggregate, have a Material Adverse Effect; (iv) result in the creation or imposition of any Lien upon any of the property of any Loan Party, other than those in favor of the Agent for the ratable benefit of the Agent and the Banks and, prior to the completion of the 1993 50 Note Redemption and the Discount Note Redemption, with respect to certain assets of Borrower for the ratable benefit of the holders of the 1993 Notes and the Discount Notes pursuant to subsection 1203(a) of the 1993 Notes Indenture and subsection 404(1) of the Discount Notes Indenture; or (v) other than the consents referred to in Section 7.19, require the consent, authorization by or approval of or notice to or filing or registration with any Governmental Authority or other Person other than those which have been obtained or which are not yet required to be obtained or with respect to which extensions have been granted and, with respect to those required to be obtained as of the Effective Date, copies of which or the extensions granted with respect thereto have been delivered pursuant to Section 3.1 to the Agent, each of which is in full force and effect and none of which imposes materially adverse conditions upon the Maryland Merger, the Holdings Merger, the Offering, the Redemption or the transactions to be effected on the Effective Date. 4.3. Enforceable Obligations. This Agreement has been duly executed and ----------------------- delivered by Borrower. On and after the Effective Date, this Agreement is, and the other Loan Documents to which any Loan Party is or will be a party when delivered hereunder will be, legal, valid and binding obligations of such Loan Party, enforceable against such Loan Party in accordance with their respective terms. 4.4. Taxes. ----- (a) All federal, state and local tax returns, reports and statements required to be filed by any Loan Party (and each Affiliate with which either of Holdings or Borrower files or have filed consolidated, combined or unitary returns) have been filed with the appropriate governmental agencies in all jurisdictions in which such returns, reports and statements are required to be filed, and all taxes and other impositions due and payable have been timely paid prior to the date on which any fine, penalty, interest or late charge may be added thereto for non-payment thereof, except where contested in good faith, by appropriate proceedings, if adequate reserves therefor have been established on the books of such Loan Party (and each Affiliate with which either of Holdings or Borrower files or has filed consolidated, combined, or unitary returns) in accordance with GAAP and where such non-payment in the aggregate would not have a Material Adverse Effect. Each Loan Party has complied with all applicable laws, rules and regulations relating to the withholding and payment of taxes and has timely withheld from employee wages and paid over to the proper Governmental Authorities all amounts required to be so withheld and paid over for all prior periods and current periods to the extent due under all applicable laws except where such nonpayment in the aggregate would not have a Material Adverse Effect. No issue has 51 been raised in any such examination of Holdings' or Borrower's federal income tax returns that, by application of similar principles, reasonably may be expected to result in assertion of a material deficiency for any other taxable year not so examined that has not been accrued on Borrower's audited financial statements for its Fiscal Year ended February 3, 1996, that would be required to be so accrued in accordance with GAAP. (b) No property owned by any Loan Party is property which such Loan Party is or will be required to treat as being owned by another Person pursuant to the provisions of Section 168(f)(8) of the Internal Revenue Code of 1954, as amended and in effect immediately prior to the enactment of the Tax Reform Act of 1986 or is "tax-exempt use property" within the meaning of Section 168(h)(1) of the Code. No Loan Party has filed a consent pursuant to Section 341(f) of the Code or agreed to have Section 341(f)(2) of the Code apply to any disposition of subsection (f) assets (as such term is defined in Section 341(f)(4) of the Code) owned by any Loan Party. Except as listed on Schedule 4.4 hereto, no Loan Party has agreed to or, is required to make any adjustment pursuant to Section 481(a) of the Code by reason of a change in accounting method initiated by such Loan Party and no Loan Party has any knowledge that the IRS has proposed any such adjustment or change in accounting method. 4.5. Full Disclosure; Offering Documents. On the Effective Date and as of ----------------------------------- the date furnished, the representations and warranties of each Loan Party in the Loan Documents, and all certificates, documents and other information furnished by or on behalf of any Loan Party to the Agent, its counsel or any Bank relating to the financial condition, operations, business, properties or prospects of Borrower or any of its respective Subsidiaries, are true and correct in all material respects, and no such representations, warranties, certificates, documents or other information contains any untrue statement of a material fact or omits to state any material fact necessary to make the statements contained herein or therein not misleading. On the date of this Agreement and as of the date furnished, all assumptions made in connection with the projected financial statements, forecasts or projections furnished to the Agent or any Bank are reasonable under the circumstances and all such projected financial statements, forecasts or projections are reasonably based on such information and assumptions and on management's reasonable estimates as to the future performance of Borrower and its Subsidiaries. On the Effective Date, the Related Documents comply in all material respects with all applicable Requirements of Law (including the Exchange Act) and do not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements contained therein not misleading. There is no fact known to Borrower which it has not disclosed to the Banks which would be reasonably likely to have a Material Adverse Effect. 52 4.6. Financial Matters. ----------------- (a) The consolidated balance sheets of Holdings and its Consolidated Subsidiaries, as at January 28, 1995, April 30, 1995, July 31, 1995, October 31, 1995 and February 3, 1996, and the related statements of income, retained earnings and changes in the financial position for the fiscal year or fiscal quarter (as the case may be) then ended, certified (in the case of the January 28, 1995 and February 3, 1996 balance sheets and related statements) by Ernst & Young LLP, copies of which have been furnished to each Bank, fairly present the consolidated financial condition of Holdings and its Consolidated Subsidiaries as at such dates and the consolidated results of the operations of Holdings, Borrower and their Consolidated Subsidiaries for the periods ended on such dates. The financial statements referred to in the preceding sentence are in accordance with GAAP consistently applied. (b) Since February 3, 1996, there has been no Material Adverse Change or Effect and no development likely to have a Material Adverse Effect. (c) Neither of Holdings or Borrower nor any of their Subsidiaries had at February 3, 1996, any unrealized or anticipated loss, liability or obligation (whether contingent, matured or otherwise), including liabilities for taxes or Environmental Liabilities or Costs, loss contingency (as that term is defined in Statement of Financial Accounting Standard No. 5), long-term lease or unusual forward or long-term commitment which is not reflected in the audited balance sheets referred to in subsection (a) above or in the notes thereto and which would have a Material Adverse Effect. (d) The Discount Notes, the 1993 Notes and the Series A Preferred Stock have been redeemed in full pursuant to the Redemption, or adequate provision for such redemption satisfactory to BABC has been made; and all Liens securing the 1993 Notes have been released or provision for release of such Liens satisfactory to BABC has been made. 4.7. Litigation. On the Effective Date, except as set forth on Schedule 4.7 ---------- hereto, there are no pending or threatened actions or proceedings affecting any Loan Party or any of their respective Subsidiaries before any court, governmental agency or arbitrator in which there is a reasonable possibility of an adverse determination that would have a Material Adverse Effect. Neither the consummation of the Maryland Merger, the Holdings Merger, the Offering, the Redemption and the transactions to be effected on the Effective Date nor the performance by any Loan Party of any of the Loan Documents or Related Documents to which it is a party is restrained or enjoined (either temporarily, preliminarily or permanently) and no material adverse conditions have been imposed upon any of the foregoing transactions. 53 4.8. Capitalization of Borrower; Ownership of Subsidiaries; No Other --------------------------------------------------------------- Ventures. - -------- (a) On the Effective Date, the authorized capital stock of the Borrower consists of 25,000,000 shares of Common Stock, par value $.01 per share, 469,237 shares of Class B Common Stock, par value $.01 per share, and 41,500,000 shares of preferred stock, par value $.01 per share, of which 8,297,420 shares, 469,237 shares and 37,405,739 shares, respectively, are issued and outstanding and owned of record as set forth on Schedule 4.8 hereto. Except as set forth on Schedule 4.8 hereto, no authorized but unissued and no treasury shares of capital stock of Borrower are subject to any option, warrant, right of conversion or purchase or any similar right. (b) Set forth on Schedule 4.8 hereto is a complete and accurate list of all Subsidiaries of Borrower, showing as of the Effective Date (as to each such Subsidiary,) the jurisdiction of its incorporation, the number of shares of each class of capital stock authorized, the number outstanding, the percentage of the outstanding shares of each such class owned (directly or indirectly) by such Person and the identity of the holders of each such outstanding class of capital stock. None of the shares listed on Schedule 4.8 hereto is covered by any outstanding option, warrant, right of conversion or purchase or any similar right, except as set forth on Schedule 4.8 hereto. All of the outstanding capital stock of all such Subsidiaries has been validly issued, is fully paid and non-assessable and is owned by Borrower (except as otherwise set forth on Schedule 4.8 hereto), free and clear of all Liens. Neither Borrower nor any such Subsidiary is a party to, or has knowledge of, any agreement restricting the pledge, transfer or hypothecation (or realization of the security intended thereby) of any shares of any such Subsidiary's capital stock other than the Loan Documents. Except as set forth on Schedule 4.8 hereto, Borrower does not own or hold, directly or indirectly, any capital stock or equity security of, or any equity interest in, any Person other than such Subsidiaries. (c) Except as set forth on Schedule 4.8 hereto, no Loan Party is engaged in any joint venture or partnership with any other Person. (d) Prior to the Maryland Merger, Holdings Maryland conducted no business, had no material assets and had no material liabilities. (e) The Maryland Merger and the Holdings Merger have each become effective in compliance with all applicable Requirements of Law. (f) At all times since February 3, 1996, Ware Lo conducted no business, had no material assets and had no material liabilities. 54 4.9. ERISA. Each Plan is listed on Schedule 4.9 hereto. Each Plan, other ----- than a Multiemployer Plan, is in compliance in all material respects with the applicable provisions of ERISA, the Code and any other applicable federal or state law and rules and regulations promulgated thereunder. With respect to each Plan (other than a Multiemployer Plan), all reports required under ERISA or any other applicable law or regulation to be filed with the relevant Governmental Authority, the failure of which to file could reasonably result in liability of Borrower or any member of its Controlled Group, in excess of $500,000 have been duly filed and all such reports are true and correct in all material respects as of the date given. No Plan has been terminated (other than any Plan as to which all liabilities have been fully paid or provided for solely from such terminated Plan's assets without the requirement of any further contributions by Borrower or any member of its Controlled Group after the original date of the notice of intent to terminate given to either the Plan's participants or the PBGC) nor has any accumulated funding deficiency (as defined in Section 412 of the Code or Section 302 of ERISA) been incurred (without regard to any waiver granted under Section 412 of the Code or Section 302 of ERISA) nor has any funding waiver from the IRS been received or requested. Neither Borrower nor Holdings nor any member of their Controlled Group has failed to make any contribution or pay any amount due and owing to any Plan as required by Section 412 of the Code or Section 302 of ERISA or the terms of any such Plan prior to the due date under Section 412 of the Code and Section 302 of ERISA. Except as disclosed on Schedule 4.9 hereto, there has been no ERISA Event or any event requiring disclosure under Section 4041(c)(3)(C), 4063(a) or 4043(c) of ERISA, and the applicable regulations promulgated thereunder, with respect to any Plan, other than a Multiemployer Plan as to which neither Borrower nor any member of its Controlled Group could have any material liability. The present value of the benefit liabilities, as defined in Title IV of ERISA, of each Plan (other than a Multiemployer Plan) does not exceed the value of the assets of each such Plan as of the most recent valuation date using Plan actuarial assumptions at such date by more than $2,500,000. If the Borrower and each member of its Controlled Group were to effect a complete withdrawal from each Multiemployer Plan on the Effective Date, the aggregate withdrawal liability would not exceed $500,000. There are no pending or, to the knowledge of Borrower, threatened material claims, lawsuits or actions (other than routine claims for benefits in the ordinary course) asserted or instituted against and neither Borrower nor any of its Subsidiaries has knowledge of any threatened material litigation or claims against (i) the assets of any Plan or its related trust or, to the knowledge of the Borrower, against any fiduciary of any Plan with respect to the operation of such Plan or (ii) the assets of any employee welfare benefit plan within the meaning of Section 3(1) of ERISA or, to the knowledge of the Borrower, against any fiduciary thereof with respect to the operation of any such plan. Neither Borrower nor any of its Subsidiaries has engaged in any prohibited transaction, within the meaning of Section 406 of ERISA or Section 4975 of the Code, which 55 would be reasonably likely to result in material liability to such Person. Neither Borrower nor any member of its Controlled Group (i) has incurred or reasonably expects to incur (a) any material liability under Title IV of ERISA (other than premiums due under Section 4007 of ERISA to the PBGC) or (b) except as disclosed on Schedule 4.9 hereto, any withdrawal liability (and no event has occurred which with the giving of notice under Section 4219 of ERISA, would result in such liability) under Section 4201 of ERISA as a result of a complete or partial withdrawal (within the meaning of Section 4203 or 4205 of ERISA) from a Multiemployer Plan or (c) any liability under Section 4062 of ERISA to the PBGC or to a trustee appointed under Section 4042 of ERISA, or (ii) except as disclosed on Schedule 4.9 hereto, has withdrawn from any Multiemployer Plan. Except as listed on Schedule 4.9 hereto, neither Borrower nor Holdings nor any member of their Controlled Group nor any organization to which any of them is a successor or parent corporation within the meaning of ERISA Section 4069(b) has engaged in a transaction within the meaning of ERISA Section 4069. Except as described on Schedule 4.9 hereto, neither Borrower, nor Holdings nor any of their Subsidiaries maintains or has established any welfare benefit plan within the meaning of Section 3(1) of ERISA which provides for continuing benefits or coverage for any participant or any beneficiary of any participant after such participant's termination of employment, except pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA") and the regulations thereunder, and except as may be provided at the expense of the participant or the beneficiary of the participant. Borrower, Holdings and each member of their Controlled Group which maintains a welfare benefit plan within the meaning of Section 3(1) of ERISA has complied in all material respects with any applicable notice and continuation requirements of COBRA and the regulations thereunder. 4.10. Liens. There are no Liens of any nature whatsoever on any properties ----- of Borrower or any of its Subsidiaries other than those permitted by Section 8.1. Except as disclosed on Schedule 8.1(i), the Liens granted by each Loan Party to the Agent for the benefit of the Agent and the Banks pursuant to any Loan Document to which it is a party are perfected first priority Liens in and to the Collateral described therein. 4.11. Related Documents. None of the Related Documents has been amended or ----------------- modified in any respect and no provision therein has been waived and each of the representations and warranties therein of any Loan Party and, to the best knowledge of Borrower and Holdings, each other party thereto are true and correct in all material respects. 4.12. No Burdensome Restrictions; No Defaults. --------------------------------------- (a) No Loan Party is (i) a party to any lease, contract, indenture (other than the Senior Note Indenture), loan or credit agreement or other agreement or instrument the performance 56 of which by such Loan Party could have a Material Adverse Effect or which (except, prior to the completion of the 1993 Note Redemption and the Discount Note Redemption, the 1993 Notes Indenture and the Discount Notes Indenture, respectively), either unconditionally or upon the happening of an event, will result in the creation of a Lien on the property or assets of such Loan Party or (ii) subject to any charter or corporate restriction which could have a Material Adverse Effect. (b) No Loan Party is in violation of any provision of any Requirement of Law except where such violations would not, in the aggregate, result in a Material Adverse Effect. (c) Except for the Permitted Exceptions, no Loan Party or, to the best of Borrower's knowledge, any other party is in default under or with respect to any lease, contract, indenture, loan or credit agreement, or any other agreement or instrument to which any Loan Party is a party and which is material to the business, prospects, operations or financial condition of Borrower and its Subsidiaries considered as one enterprise. (d) No Default or Event of Default has occurred and is continuing. 4.13. Investment Company Act. Borrower is not an "investment company" or ---------------------- (except with respect to Sefinco, Ltd., Donaldson, Lufkin & Jenrette, Inc., Desai Capital Management, Incorporated and Putnam Funds and any of their Affiliates other than Borrower and its Subsidiaries) an "affiliated person" of, or "promoter" or "principal underwriter" for, an "investment company," as such terms are defined in the Investment Company Act of 1940, as amended. The making of the Loans by the Banks, the application of the proceeds and repayment thereof by Borrower and Holdings and the consummation of the transactions contemplated by the Loan Documents will not violate any provision of such Act or any rule, regulation or order issued by the Commission thereunder. Borrower has not engaged in any transaction or series of transactions with any of the affiliated investment companies referred to above or any of their Affiliates other than Borrower and its Subsidiaries which violates or will violate the Investment Company Act of 1940, as amended, including, without limitation, the execution, delivery and performance of this Agreement and the Loan Documents and the consummation of the transactions contemplated thereby. 4.14. Margin Regulations. Neither Borrower nor Holdings nor any of their ------------------ Subsidiaries is engaged in the business of extending credit for the purpose of purchasing or carrying Margin Stock. No proceeds of any Loan will be used to purchase or carry any Margin Stock. 57 4.15. Use of Proceeds. --------------- (a) [Intentionally omitted.] (b) The proceeds of the Revolving Credit Loans shall be used by Borrower solely for the purpose of (i) financing its working capital requirements, (ii) paying Obligations, (iii) providing for general corporate purposes and (iv) financing, in part, the Redemption. (c) The Letters of Credit shall be requested by Borrower only for general corporate purposes of Borrower. 4.16. Title and Condition of Assets; Inventory. ---------------------------------------- (a) Borrower and each of its Subsidiaries have title to all of the assets and property interests material to the conduct of their business and purported to be owned by them, including those reflected in the balance sheets referred to in Section 4.6, except for such property as has been disposed of in the ordinary course of business, or pursuant to the terms of this Agreement, or with the consent of the Majority Banks, since the respective dates of such balance sheets. There has been no casualty, condemnation or threat of condemnation or adverse claim affecting Borrower's or its Subsidiaries' title to or use of such assets or property interests which is not adequately covered by insurance. All real property owned by Borrower and its Consolidated Subsidiaries has an aggregate fair market value of less than $2,000,000. (b) all of the Inventory owned by Borrower is and will be held for sale or lease, or to be furnished in connection with the rendition of services, in the ordinary course of its business, and (except for de minimis amounts of Inventory in accordance with past practices of Borrower) is and will be fit for such purposes. Borrower will keep its Inventory in good and marketable condition, at its own expense, except for de minimis amounts of Inventory in accordance with past practices of Borrower. It will not, without the prior written consent of the Agent, acquire or accept any Inventory on consignment or approval. It will conduct a physical count of the Inventory at least once per Fiscal Year, and after and during the continuation of an Event of Default, at such other times as the Agent requests. Borrower will maintain a perpetual inventory reporting system at all times. It will not, without the Agent's written consent, sell any Inventory on a bill-and-hold, guaranteed sale, sale and return, sale on approval, consignment, or other repurchase or return basis. 4.17. Insurance. All policies of insurance in effect of any kind or nature --------- owned by or issued to Borrower or any of its Subsidiaries, including policies of life, fire, theft, product liability, public liability, property damage, other casualty, employee fidelity, workers' compensation, employee health and welfare, title, property and liability insurance, are in full force 58 and effect and are of a nature and provide such coverage as is customarily carried by companies of the size and character of Borrower and its Subsidiaries. 4.18. Labor Matters. There are no strikes or other labor disputes or ------------- grievances pending or, to the knowledge of Borrower, threatened against Borrower or any of its Subsidiaries which could have a Material Adverse Effect. There are no unfair labor practice charges or grievances pending or in process or, to the knowledge of Borrower, threatened by or on behalf of any employee or group of employees of Borrower or its Subsidiaries which could have a Material Adverse Effect. All payments due from Borrower or its Subsidiaries pursuant to the provisions of any collective bargaining agreement have been paid or accrued as a liability on either of their books. 4.19. Certain Debt. Schedule 4.19 hereto specifies all Indebtedness of ------------ Borrower and its Subsidiaries which is (a) for borrowed money, or (b) not incurred in the ordinary course of the business of such Person in a manner and to the extent consistent with past practice, or (c) material to the financial condition, properties, business, operations or prospects of Borrower or any of its Subsidiaries (or will be material to the financial condition, properties, business, operations or prospects of Borrower or any of its Subsidiaries). 4.20. Leases. All real property leased by Borrower or any of its ------ Subsidiaries is listed on Schedule 4.20 hereto (individually a "Lease" and collectively the "Leases"). Borrower has delivered to the Agent a true and correct copy of the Leases that are marked on Schedule 4.20 hereto to indicate they were so delivered and have granted the Agent access to all other Leases. Each Lease is valid and enforceable against the other parties thereto in accordance with its terms and is in full force and effect, except for such invalidity or unenforceability as would not, in the aggregate, have a Material Adverse Effect. Neither Borrower nor any Subsidiary nor, to the best of Borrower's knowledge, any other party to any Lease is in default of its obligations thereunder or has delivered or received any notice of default under any Lease, nor has any event occurred which, with the giving of notice, the passage of time or both, would constitute a default under any such lease, except for defaults or events identified on Schedule 4.20 or defaults which would not in the aggregate have a Material Adverse Effect. 4.21. Solvency. Borrower is Solvent and will be Solvent after giving effect -------- to the Maryland Merger, the Holdings Merger, the Offering, the Redemption and the other transactions contemplated by this Agreement and the Related Documents, including the payment of related fees and expenses. 4.22. Intellectual Property. Borrower and/or its Subsidiaries own, are --------------------- licensed to use, or otherwise have the right 59 to use all Intellectual Property that is necessary for the operation of Borrower's business, without infringement of or conflict with the rights of any other Person. Such Intellectual Property, together with the name of the owner of, the date and jurisdiction of registration of and the registration number of such Intellectual Property is accurately and as to rights granted under federal law completely listed on Schedule 4.22 hereto. No slogan or other advertising device, product, process, method, substance, part or other material now employed, or now contemplated to be employed, by Borrower or any of its Subsidiaries which is material to its business infringes upon or conflicts with any rights owned by any other Person; no claim or litigation regarding any of the foregoing is pending or threatened which has any reasonable likelihood of having a Material Adverse Effect; no patent, invention, device, application, principle or any statute, law, rule, regulation, standard or code is pending or, to the knowledge of Borrower, proposed which, in the aggregate, would be reasonably likely to have a Material Adverse Effect. 4.23. Environmental Matters. Except as disclosed on Schedule 4.23 hereto: --------------------- (a) The operations of Borrower and its Subsidiaries comply in all material respects with all applicable requirements of Law concerning environmental health and safety matters; (b) Borrower and its Subsidiaries have obtained all environmental, health and safety Permits necessary for their operations, and all such Permits are in good standing and Borrower and its Subsidiaries are in compliance with all terms and conditions of such Permits; (c) Neither Borrower nor any of its Subsidiaries nor any of their respective present or past property or operations is subject to any outstanding written order from or agreement with any Governmental Authority or other Person or is subject to any judicial or administrative proceeding respecting (i) environmental, health or safety Requirements of Law, (ii) Remedial Action or (iii) Environmental Liabilities and Costs, arising from a Release or threatened Release, which has any reasonable likelihood of having a Material Adverse Effect; (d) Neither Borrower nor any of its Subsidiaries has been notified that any of its present or past operations is the subject of any investigation by any Governmental Authority evaluating whether any Remedial Action is needed at any facility of Borrower or any of its Subsidiaries, which could reasonably be expected to have a Material Adverse Effect; (e) Neither Borrower, Holdings, nor any of their Subsidiaries has engaged in the past or present treatment, storage or disposal (on properties owned, leased or operated by such Person or elsewhere) of a hazardous waste, as said terms are defined under 60 the Resource Conservation and Recovery Act, 42 U.S.C. ss. 6901, or any state equivalent; (f) Neither Borrower, Holdings, nor any of their Subsidiaries has filed any notice under any applicable Requirement of Law reporting a Release, which has any reasonable likelihood of having a Material Adverse Effect; (g) There is not now on or in the property owned, leased or operated by Borrower, Holdings, or any of their Subsidiaries: (i) any underground storage tanks or surface impediments, (ii) any asbestos-containing material, or (iii) any polychlorinated biphenyls (PCB's) used in electrical or other equipment; which has any reasonable likelihood of having a Material Adverse Effect. (h) There have been no communications or agreements involving Borrower, Holdings, or any of their Subsidiaries from or with any Governmental Authority relating to any Environmental Liabilities and Costs that have, or can reasonably be expected to have, a Material Adverse Effect; (i) Neither Borrower, Holdings, nor any of their Subsidiaries has received any notice or claim to the effect that it is or may be liable to any Person as a result of the Release or threatened Release which has any reasonable likelihood of having a Material Adverse Effect; (j) Neither Borrower, Holdings, nor any of their Subsidiaries has knowledge of any material contingent liability in connection with any Release or threatened Release; and (k) No Environmental Lien has attached to any property of Borrower, Holdings, or any of their Subsidiaries which has any reasonable likelihood of having a Material Adverse Effect. 4.24. Certain Obligations. Upon deposit of the trust funds into the trusts ------------------- for redemption under the Discount Notes Indenture and the 1993 Notes Indenture, the obligations of Borrower under the Discount Notes, the Discount Notes Indenture, the 1993 Notes and the 1993 Notes Indenture will cease to be outstanding Indebtedness of Borrower for financial accounting purposes, and the deposit of such funds into such trusts will be considered an extinguishment of such Indebtedness for financial accounting purposes. 61 4.25. Note Covenant Defeasance. ------------------------ (a) All conditions set forth in Section 1203 of the 1993 Notes Indenture have been satisfied in full and, as a result thereof, the "covenant defeasance" (as defined in the 1993 Notes Indenture) has occurred; and (b) all conditions set forth in Section 404 of the Discount Notes Indenture have been satisfied in full and, as a result thereof, the "covenant defeasance" (as defined in Section 403 of the Discount Notes Indenture) has occurred. ARTICLE V REPORTING COVENANTS As long as any Obligations shall remain unpaid or any Bank shall have any Commitment, Borrower shall, unless the Majority Banks shall otherwise consent in writing: 5.1. Financial Statements. Furnish, or cause to be furnished, to the Banks: -------------------- (a) as soon as available, and in any event within 30 days after the end of each fiscal month, the results of any physical count of Borrower's Inventory conducted during such fiscal month (provided, however, that ----------------- at least two such counts will be conducted in each Fiscal Year), a consolidated balance sheet of Borrower and its Consolidated Subsidiaries as of the end of such fiscal month, together with a comparison of such balance sheet with the consolidated balance sheet as of the end of the same fiscal month in the immediately preceding Fiscal Year and with management's projected financial information as of the end of such fiscal month, and related consolidated statements of income and cash flow for such fiscal month and the period commencing at the end of the previous Fiscal Year and ending with the end of such fiscal month, together with a comparison of such income and cash flow statements with income and cash flow statements as of the end of the same fiscal month and period in the previous Fiscal Year and with management's projected financial information for such fiscal month and period, and together with a schedule detailing all amounts treated as an expense for depreciation for such fiscal month, all amounts treated as an expense for the amortization of transaction costs or intangibles of any kind for such fiscal month and the Capital Expenditures of Borrower and its Consolidated Subsidiaries for such fiscal month, in each case certified by the chief financial or accounting officer of Borrower and in form acceptable to the Majority Banks, and accompanied by a certificate of a Responsible Officer of Borrower stating that no Default or Event of Default has occurred and is continuing or if a Default or an Event of Default has occurred and is continuing, a statement as 62 to the nature thereof and the action which Borrower proposes to take with respect thereto; (b) as soon as available, and in any event within 45 days after the end of each Fiscal Quarter, a consolidated balance sheet of Borrower and its Consolidated Subsidiaries, each as of the end of such Fiscal Quarter, together with a comparison of such balance sheet with a consolidated balance sheet as of the end of the same Fiscal Quarter in the immediately preceding Fiscal Year and with management's projected financial information as of the end of such Fiscal Quarter, and the related statements of income and cash flow for such Fiscal Quarter and for the period commencing at the end of the previous Fiscal Year and ending with such Fiscal Quarter, together with a comparison of such statements with statements as of the end of the same Fiscal Quarter and period in the immediately preceding Fiscal Year and with management's projected financial information for such Fiscal Quarter and period, and financial information on a store by store basis showing actual sales, gross margins and operating income compared to management's projections for such Fiscal Quarter and the comparable financial information as of the end of the Fiscal Quarter in the immediately preceding Fiscal Year, certified by the chief financial or accounting officer of Borrower and in form acceptable to the Majority Banks, together with (i) a certificate of a Responsible Officer of Borrower and Borrower stating that no Default or Event of Default has occurred and is continuing or Default or if a Default or an Event of Default has occurred and is continuing, a statement as to the nature thereof and the action which Borrower proposes to take with respect thereto, and (ii) a schedule certified by such officer of Borrower in form satisfactory to the Agent of computations used by such officer in determining compliance with the covenants contained in Article VI and VIII and reconciling computations with such financial statements; (c) as soon as available, and in any event within 90 days after the end of each Fiscal Year, a consolidated balance sheet of Borrower and its Consolidated Subsidiaries, as of the end of such Fiscal Year, certified by Ernst & Young LLP or other independent public accountants acceptable to the Majority Banks, together with (A) a certificate of such accounting firm stating that in the course of the regular audit of the business of Borrower and its Consolidated Subsidiaries, which audit was conducted by such accounting firm in accordance with generally accepted auditing standards, such accounting firm obtained no knowledge that a Default or Event of Default has occurred and is continuing or if, in the opinion of such accounting firm, a Default or an Event of Default has occurred and is continuing, a statement as to the nature thereof, (B) a comparison of such balance sheet with the consolidated balance sheet for the previous Fiscal Year and with management's projected financial information for such Fiscal Year, (C) the related statements of income and cash flow for such year, together with a comparison of such events with financial statements for the previous Fiscal Year and with management's projected 63 financial information for such Fiscal Year, (D) a schedule certified by the chief financial or accounting officer of Borrower in form satisfactory to the Agent of the computations used by such accountants in determining, as of the end of such Fiscal Year, compliance with the covenants contained in Articles VI and VIII and reconciling such computations with such financial statements, (E) a written discussion and analysis by the management of Borrower of the financial statements furnished in respect of such Fiscal Year and (F) financial information on a store by store basis showing actual sales, gross margins and operating income and detailing capitalized expenses and their start-up costs with respect to any stores opened during such Fiscal Year; (d) as soon as available, and in any event at least 90 days prior to the end of each Fiscal Year, annual financial projections (including a forecasted income statement, cash flow statement and a consolidated balance sheet of Borrower and its Consolidated Subsidiaries) for the next Fiscal Year and annual financial projections, including consolidated balance sheets and statements of income and cash flow (by fiscal month) for the next Fiscal Year, in each case in form satisfactory to the Agent; (e) promptly after the same are received by Borrower, any management letters provided to such Person by its independent certified public accountants; (f) within 30 days after the end of each fiscal month, a report of Borrower's and its Consolidated Subsidiaries' accounts payable aging, in form satisfactory to Agent; (g) within 30 days after the end of each fiscal month, a report, in form satisfactory to Agent, breaking down Inventory by department and category; (h) within 30 days after the end of each Fiscal Quarter, a report, in form satisfactory to Agent, (i) of operating profit by store location for such Fiscal Quarter, and (ii) of Inventory by store location showing the amount of Inventory as of the close of business at the end of such Fiscal Quarter; and (i) within four Business Days after the Saturday of each week, a Borrowing Base Certificate in form satisfactory to Agent, and containing (i) a roll forward in detail Borrower's ledger of Inventory stock for such week, and (ii) a list of open buys for such week. 5.2. Reporting Requirements. Furnish to the Banks: ---------------------- (a) as soon as possible, and in any event (A) within 30 days after Borrower or any member of its Controlled Group knows or should know that any ERISA Event described in clause (i) of the definition of ERISA Event or any event described in Section 4063(a) of ERISA with respect to any Plan has occurred, and (B) within ten 64 days after Borrower or any member of its Controlled Group knows or should know that any other ERISA Event with respect to any Plan has occurred or a request for a minimum funding waiver under Section 412 of the Code with respect to any Plan has been made, a statement of the chief financial officer of Borrower describing such ERISA Event and the action, if any, which Borrower or such member of its Controlled Group proposes to take with respect thereto, together with a copy of the notice of such ERISA Event or other event, if required by the applicable regulations under ERISA, given to the PBGC; (b) promptly, and in any event within ten Business Days after receipt thereof, by Borrower or any member of its Controlled Group from the PBGC, copies of each notice received by such Person or any such member of its Controlled Group of the PBGC's intention to terminate any Plan or to have a trustee appointed to administer any Plan; (c) promptly, and in any event within 30 days after requested by the Banks, copies of the filings, by Borrower or any member of its Controlled Group with the United States Department of Labor ("DOL"), the IRS or the PBGC, copies of each annual and other report, including Schedule B thereto with respect to each Plan; (d) promptly, and in any event within 30 days after receipt thereof, a copy of any notice, determination letter, ruling or opinion that Borrower or any member of its Controlled Group receives from the PBGC, the DOL or the IRS with respect to any Plan; (e) promptly, and in any event within 15 Business Days after receipt thereof, a copy of any correspondence that Borrower or any member of its Controlled Group receives from the Plan Sponsor (as defined by Section 4001(a)(10) of ERISA) of any Plan concerning potential withdrawal liability of Borrower or any member of its Controlled Group pursuant to Section 4219 or 4202 of ERISA, and a statement from the chief financial officer of Borrower or such member of its Controlled Group setting forth details as to the events giving rise to such potential withdrawal liability and the action which Borrower or such member of its Controlled Group proposes to take with respect thereto; (f) notification within 30 days of any material increase in the benefits of any existing Plan which is not a Multiemployer Plan, or the establishment of any new Plan, or the commencement of contributions to any Plan to which Borrower or any member of their Controlled Group was not previously contributing within 30 days; (g) notification within ten Business Days after Borrower or any member of its Controlled Group knows or should know that Borrower or any such member of its Controlled Group has or intends to file a notice of intent to terminate any Plan under a 65 distress termination within the meaning of Section 4041(c) of ERISA and a copy of such notice; (h) promptly after receipt of written notice of commencement thereof, notice of all actions, suits and proceedings before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, affecting Borrower or any member of its Controlled Group with respect to any Plan, except those which, in the aggregate, if adversely determined are not reasonably expected to have a Material Adverse Effect; (i) promptly after the commencement thereof, notice of all actions, suits and proceedings before any court governmental department, commission, board, bureau, agency instrumentality, domestic or foreign, affecting Borrower or any of its Subsidiaries except those which, if adversely determined, could not have a Material Adverse Effect; (j) promptly, and in any event within three Business Days after Borrower becomes aware of the existence of any Default or Event of Default, (ii) any breach or nonperformance of, or any default under, any Related Document or any lease, contract, indenture, loan or credit agreement or any other agreement or instrument to which Borrower or any of its Subsidiaries is a party and which is material to the business, prospects, operations or the financial condition of Borrower and its Subsidiaries considered as one enterprise, or (iii) any Material Adverse Effect, any Material Adverse Change or any development or other information which has any reasonable likelihood of having a Material Adverse Effect, notice specifying the nature of such Default, Event of Default, development or information, including the anticipated effect thereof; (k) promptly after the sending or filing thereof, copies of all reports which Borrower sends to its security holders generally, and copies of all reports and registration statements which Borrower or any of its Subsidiaries files with the Commission or any national securities exchange; (l) upon the request of any Bank, copies of any federal, state and local tax return or report filed by Borrower, Holdings or any of their Subsidiaries in respect of taxes measured by income (excluding sales, use and like taxes); (m) promptly upon Borrower or any of its Subsidiaries learning thereof, written notification of any of the following which are material in amount: (i) receipt by Borrower or any of its Subsidiaries of written notice or a claim to the effect that such Person or any of its Subsidiaries is or may be liable to any Person as a result of the Release or threatened Release; 66 (ii) receipt by Borrower or any of its Subsidiaries of notice that any real or personal property of such Person or any of its Subsidiaries is subject to an Environmental Lien; (iii) receipt by Borrower or any of its Subsidiaries of written notice of violation of, or awareness by such Person or any of its Subsidiaries of a condition which might reasonably result in a written notice of violation of, any Requirement of Law involving environmental, health or safety matters; (iv) receipt by Borrower or any of its Subsidiaries of notice of the commencement or threat of any judicial or administrative proceeding alleging a violation of any Requirement of Law involving environmental, health or safety matters; (v) any new or proposed change to any existing environmental, health or safety Requirement of Law; or (vi) any proposed acquisition of stock, assets, or real estate, leasing of property or any other action by Borrower or any of its Subsidiaries that could reasonably be expected to subject such Person or any of its Subsidiaries to additional material Environmental Liabilities and Costs; and (n) such other information respecting the business, properties, condition or operations, financial or otherwise, of Borrower or any of its Subsidiaries, as any Bank through the Agent may from time to time reasonably request. ARTICLE VI FINANCIAL COVENANTS As long as any Obligations shall remain unpaid or Bank shall have any Commitment, unless the Majority Banks shall otherwise consent in writing: 6.1. Minimum EBDAIT. The Borrower will not permit EBDAIT of the Borrower -------------- and its Consolidated Subsidiaries during each period of four consecutive Fiscal Quarters ending on the last day of each Fiscal Quarter set forth below to be less than the following amounts: 67 Fiscal Quarter Ending on Amount ------------------------ ------ April 30 and July 31, $26,000,000 1996 October 31, 1996 $26,500,000 February 1, April 30, July 31 and October 31, 1997 $27,000,000 January 31, April 30, July 31 and October 31, 1998 $29,000,000 January 30, April 30, July 31 and October 31, 1999 $30,000,000 January 29, 2000 and each Fiscal Quarter thereafter $30,000,000 6.2. Capital Expenditures. Borrower will not permit any Capital -------------------- Expenditures to be made during the Fiscal Years set forth below in excess of the amount set forth below for such Fiscal Year. Fiscal Year ending on Maximum Capital Expenditures --------------------- ---------------------------- February 1, 1997 $18,000,000 January 31, 1998 $15,000,000 January 30, 1999 $15,000,000, plus the lesser of (i) 50% of Cash Flow from Fiscal Year 1998 and (ii) the unused portion of Capital Expenditures from Fiscal Year 1997 January 29, 2000 $16,000,000, and each Fiscal plus the lesser of (i) 50% of Year thereafter Cash Flow from Fiscal Year 1999 and (ii) the unused portion of Capital Expenditures from Fiscal Years 1997 and 1998 ; provided, however, that amounts set forth above for any Fiscal Year set forth ----------------- above and not used in such Fiscal Year may be carried forward into the next succeeding Fiscal Year but not into any Fiscal Year thereafter. 68 6.3. Minimum Interest Coverage Ratio. Borrower and its Consolidated ------------------------------- Subsidiaries shall maintain, for each twelve-month period ending on the last day of each Fiscal Quarter set forth below, an Interest Coverage Ratio of not less than the following: Fiscal Quarter Ending on Ratio - ------------------------ ----- April 30, 1996 1.6 to 1.0 July 31, 1996 1.7 to 1.0 October 31, 1996 1.8 to 1.0 February 1, April 30, July 31 and October 31, 1997 2.0 to 1.0 January 31, April 30, July 31 and October 31, 1998 2.1 to 1.0 January 30, April 30, July 31 and October 31, 1999 2.2 to 1.0 January 29, 2000 and each Fiscal Quarter thereafter 2.25 to 1.0 6.4. Minimum Net Worth. Borrower and its Consolidated Subsidiaries shall ----------------- have a minimum Net Worth at the end of each Fiscal Quarter set forth below of not less than the amount set forth below for such date: 69 Fiscal Quarter Ending on Amount - ------------------------ ------ April 30, 1996 ($33,000,000) July 31, 1996 ($1,000,000) October 31, 1996 and February 1, 1997 $3,000,000 April 30, 1997 $1,000,000 July 31, 1997 $1,500,000 October 31, 1997 and January 31, 1998 $6,000,000 April 30, 1998 $5,000,000 July 31, 1998 $5,500,000 October 31, 1998 $7,500,000 January 30, 1999 $9,500,000 April 30, 1999 $8,500,000 July 31, 1999 $9,000,000 October 31, 1999 $11,000,000 January 29, 2000 and each Fiscal Quarter thereafter $13,000,000 6.5. [Intentionally Omitted.] ------------------------ 6.6. [Intentionally Omitted.] ------------------------ ARTICLE VII ADDITIONAL AFFIRMATIVE COVENANTS OF BORROWER As long as any Obligations shall remain unpaid or any Bank shall have any Commitment, Borrower shall, unless the Majority Banks shall otherwise consent in writing: 7.1. Compliance with Laws, Etc. ------------------------- (a) Comply, and cause each of its Subsidiaries to comply, in all material respects, with all Requirements of Law; and 70 (b) Preserve and cause each of its Subsidiaries to preserve its ownership and exclusive right to use all of the Intellectual Property owned by or licensed to it, except where the failure to preserve such rights would be immaterial with respect to the business of such Person and its Subsidiaries. 7.2. Conduct of Business. ------------------- (a) Conduct, and cause each of its Subsidiaries to conduct, its business in a regular manner and reasonably consistent with past practice; and (b) perform and observe, and cause each of its Subsidiaries to perform and observe, in all material respects, all the terms, covenants and conditions required to be performed and observed by it under (i) the Related Documents (other than the Employment Agreements), and (ii) except where the failure to perform or observe such terms, covenants and conditions would not have a Material Adverse Effect, all other Contractual Obligations (including paying all rent and other charges available under any Lease) and do, and cause its Subsidiaries to do, all things necessary to preserve and to keep unimpaired its rights under such other Contractual Obligations. 7.3. Solvency. Continue to be Solvent and ensure that it and its -------- Subsidiaries, on a consolidated basis, continue to be Solvent. 7.4. Maintenance of Insurance. Maintain, and cause each of its Subsidiaries ------------------------ to maintain, insurance with responsible and reputable insurance companies or associations in such amounts and covering such risks as is usually carried by companies engaged in similar businesses and owning similar properties in the same general areas in which such Person or Subsidiary operates (including insurance covering property in which the Banks have a security interest, naming the Agent for the benefit of the Agent and the Banks as additional insured and loss payee pursuant to an endorsement substantially in the form of Exhibit P hereto) and as otherwise reasonably satisfactory to the Majority Banks which insurance shall name the Agent for the benefit of the Agent and the Banks as additional insured and loss payee. 7.5. Application of Proceeds. Use the entire amount of the Loans as set ----------------------- forth in Section 4.15. 7.6. Payment of Taxes, Etc. Pay and discharge, and cause each of its --------------------- Subsidiaries to pay and discharge, before the same shall become delinquent, all lawful claims and all taxes, assessments and governmental charges or levies, except where contested in good faith, by proper proceedings, if adequate reserves therefor have been established on the books of such Person or such Subsidiary in accordance with GAAP and non-payment would not, in the aggregate, have a Material Adverse Effect. 71 7.7. Preservation of Corporate Existence, Etc. Preserve and maintain, and ---------------------------------------- cause each of its Subsidiaries to preserve and maintain, its corporate existence, rights (charges and statutory) and franchises, except where the failure to preserve and maintain the corporate existence, rights (charter or statutory) or franchise of any Subsidiary would not have a Material Adverse Effect. 7.8. Access and Inspections. From time to time, permit the Agent and each ---------------------- of the Banks and any agents or representatives thereof to examine and make copies of and abstracts from the records, documents and books of account of, and visit and inspect the properties of such Person and any of its Subsidiaries (whether such inspection pertains to reasons of environmental compliance, hazard, liability or otherwise), and to discuss the affairs, finances, accounts, properties or operations of such Person and any of its Subsidiaries with any of their respective officers, directors, employees or agents and permit any Bank or the Agent to communicate directly with such Person's independent certified public accountants and authorize those accountants to disclose to such Bank or the Agent any and all financial statements and other information of any kind, including copies of any management letter or the substance of any oral information that such accountants may have with respect to the business, financial and other affairs of such Person or any of its Subsidiaries; provided, however, that, except during the continuance of a Default or Event of Default, any such investigation shall be conducted only during regular business hours and in a manner that does not interfere unreasonably with the business or operations of Borrower and its Subsidiaries. 7.9. Keeping of Books. Keep, and cause each of its Subsidiaries to keep, ---------------- proper books of record and account, in which full and correct entries shall be made of all financial transactions and the assets and business of such Person and each such Subsidiary in accordance with GAAP. 7.10. Maintenance of Properties, Etc. Maintain and preserve and cause each ------------------------------ of its Subsidiaries to maintain and preserve all of their respective properties (real and personal) which are used or useful in the conduct of its business in good working order and condition, ordinary wear and tear excepted; and notify the Agent of any casualty or condemnation or threat of condemnation with respect to such properties. 7.11. [Intentionally omitted]. ----------------------- 7.12. [Intentionally omitted]. ----------------------- 7.13. Collection Accounts and Blocked Accounts. Maintain, and cause each of ---------------------------------------- its Subsidiaries to maintain, such blocked collection accounts referred to in Sections 2.18 and 3.2 as shall be satisfactory in all respects to the Agent. 72 7.14. Key-Man Life Insurance. Maintain key-man life and disability ---------------------- insurance on the lives of such Management Shareholders in such amounts as shall be satisfactory in all respects to the Agent. 7.15. Maintenance of Licenses and Permits. Maintain and cause each ----------------------------------- Subsidiary to maintain all rights, permits, licenses, approvals and privileges necessary for the proper conduct of its and each of such Subsidiary's business and to continue to engage in the same type of business. 7.16. Employee Plans. -------------- (a) With respect to other than a Multiemployer Plan, for each Plan hereafter adopted or maintained by either Borrower or any member of its Controlled Group, (i) request, or cause such member of its Controlled Group to request, determination letters from the IRS to the effect that such Plan is qualified within the meaning of Section 401(a) of the Code; (ii) from and after the adoption of such Plan, cause, or cause such member of its Controlled Group to cause, such Plan to be qualified within the meaning of Section 401(a) of the Code and to be administered in all material respects in accordance with the requirements of ERISA and Section 401(a) of the Code; (iii) make, or cause such member of its Controlled Group to make, all required contributions by the due date under Section 412 of the Code and Section 302 of ERISA; and (iv) not take, and cause each member of its Controlled Group not to take any action which is reasonably likely to cause such Plan not to be qualified within the meaning of Section 401(a) of the Code or not to be administered in all material respects in accordance with the requirements of ERISA and Section 401(a) of the Code; and (b) with respect to each Multiemployer Plan, make, and cause each member of its Controlled Group to make, all contributions required by such Multiemployer Plan. 7.17. Fiscal Year. Maintain the Fiscal Year as its annual accounting ----------- period. 7.18. Appraisals. Provide appraisals of, or other information concerning, ---------- such Person's and its Subsidiaries' assets as reasonably requested by the Agent. 7.19. Consents. Use its commercially reasonable efforts to obtain, or cause -------- its Subsidiaries to obtain, all third party consents in form and substance satisfactory to the Agent required in connection with the assignment of its interests in joint ventures, in each case, as soon as practicable and in any event within 60 days after the Effective Date; provided, however, that Borrower ----------------- shall not be required to obtain any such consent which is subject to conditions adverse to Borrower's business, would require Borrower to commence any litigation, to pay any increase in rent or other sum of money to the lessor or substantially reduce Borrower's 73 rights or substantially increase Borrower's obligations under the subject Lease or joint venture agreements. 7.20. [Intentionally omitted.] ------------------------ 7.21. [Intentionally omitted.] ------------------------ 7.22. Mortgage. In the event that (i) Borrower or any Subsidiary of -------- Borrower shall acquire any parcel, or group of related parcels, of real property with a market value of $1,000,000 or more, or (ii) any parcel, or group of related parcels, of real property owned by the Borrower or any Subsidiary shall attain a market value of $3,000,000 or more, then Borrower or such Subsidiary, as the case may be, shall promptly execute and deliver to the Agent a mortgage (the "Mortgage") with respect to such real property, and such other agreements and instruments in connection therewith as the Agent shall reasonably request (including title insurance), all in form and substance reasonably satisfactory to the Agent, sufficient to grant to the Banks a first mortgage lien thereon. 7.23. Landlord Waivers. Use commercially reasonable efforts to obtain all ---------------- waivers of landlords' Liens on the Collateral in substantially the form of Exhibit F hereto; provided, however, that Borrower shall not be required to ----------------- obtain any such waiver which is subject to conditions adverse to Borrower's business, would require Borrower to commence any litigation, to pay any increase in rent or other sum of money to the landlord or substantially reduce Borrower's rights or substantially increase Borrower's obligations under the subject Lease. 7.24. Lease Security. Provide to the Agent within 30 days after the -------------- Effective Date: (i) acknowledgment copies of proper Financing Statements filed under the Uniform Commercial Code of all jurisdictions as may be necessary or, in the opinion of the Agent, desirable to perfect the Lien created by the Security Agreement and the Loehmann's Pledge Agreement in favor of the Agent and the Banks, together with certified copies of Requests for information or Copies (Form UCC-11), or equivalent reports, listing all effective financing statements which name Holdings, Loehmann's and any Subsidiary of Loehmann's (under its present name and any previous name) as debtor and which are filed in such jurisdictions together with copies of such other financing statements (none of which shall cover the collateral purported to be covered by the Security Agreement or the Loehmann's Pledge Agreement); and (ii) evidence of the completion of all recordings and filings as may be necessary or, in the opinion of the Agent, desirable to perfect the Lien created by the Security Agreement and the Loehmann's Pledge Agreement. 74 7.25. Further Assurances. The Borrower shall execute and deliver, or cause ------------------ to be executed and delivered, to the Agent and/or the Banks such documents and agreements, and shall take or cause to be taken such actions, as the Agent or any Bank may, from time to time, reasonably request to carry out the terms and conditions of this Agreement and the other Loan Documents. 7.26. Dissolution of Ware Lo. The Borrower shall (i) duly file a ---------------------- certificate of dissolution of Ware Lo and any other documents required to be filed therewith with the department of taxation of the State of New York not later than July 10, 1996, (ii) file a certified copy of such certificate with the Department of State of the State of New York not later than June 30, 1997, (iii) provide the Agent with a certified copy of such certificate as approved by the Department of State of the State of New York not later than July 7, 1997, and (iv) complete the winding up and liquidation of Ware Lo not later than July 14, 1997. ARTICLE VIII NEGATIVE COVENANTS OF BORROWER As long as any Obligations shall remain unpaid or any Bank shall have any Commitment, Borrower shall not, directly or indirectly, without the written consent of the Majority Banks: 8.1. Liens, Etc. Create or suffer to exist, or permit any of its ---------- Subsidiaries to create or suffer to exist, any Lien upon or with respect to any of its properties (including, without limitation, property consisting of leasehold interests in real property), whether now owned or hereafter acquired, or assign, or permit any of its Subsidiaries to assign, any right to receive income except: (a) Purchase money liens or purchase money security interests upon or in any property acquired or held by Borrower or any Subsidiary of Borrower in the ordinary course of business to secure the purchase price of such property or to secure indebtedness incurred solely for the purpose of financing the acquisition of such property, or liens existing on such property at the time of its acquisition (other than any such Lien created in contemplation of such acquisition); provided, however, that the aggregate principal amount of the ----------------- Indebtedness secured by the Liens referred to in this clause shall not exceed $250,000 at any time outstanding; (b) (i) Liens created pursuant to the Loan Documents; or (ii) Liens on the funds deposited in trust pursuant to subsection 1203(a) of the 1993 Notes Indenture and subsection 404(1) of the Discount Notes Indenture created for the benefit of the holders of the 1993 Notes and the Discount Notes in connection with the 1993 Note Redemption and the Discount Note Redemption 75 pursuant to subsection 1203(a) of the 1993 Notes Indenture and subsection 404(1) of the Discount Notes Indenture; (c) Any Lien securing the renewal, extension or refunding of any Indebtedness secured by any Lien permitted by this Section 8.1 (other than the Indebtedness under the 1993 Notes secured by the Lien referred to in clause (ii) of subsection 8.1(b), which Indebtedness when renewed, extended or refunded in connection with the Offering and the Redemption shall thereafter be unsecured) without any increase in the amount secured thereby; (d) Liens in favor of materialmen, mechanics, warehousemen, carriers, lessors or other similar Persons incurred by Borrower or any of its Subsidiaries in the ordinary course of business which secure its obligations to such Person; provided, however, that Borrower or such Subsidiary (i) is not in default with - ----------------- respect to such payment obligation to such Person or (ii) is in good faith and by appropriate proceedings diligently contesting such obligation, and in each case the failure to pay such contested obligations would not in the aggregate have any reasonable likelihood of having a Material Adverse Effect; (e) Liens securing taxes, assessments or governmental charges or levies; provided, however, that neither Borrower nor any of its Subsidiaries is ----------------- in default in respect of any payment obligation with respect thereto unless (i) it is in good faith and by appropriate proceedings diligently contesting such obligation, and (ii) the failure to pay such contested obligations would not in the aggregate have any reasonable likelihood of having a Material Adverse Effect; (f) Liens incurred or pledges and deposits made in the ordinary course of business in connection with worker's compensation, unemployment insurance, old-age pensions and other social security benefits; (g) Liens securing the performance of bids, tenders, leases, contracts (other than for the repayment of borrowed money), statutory obligations, surety and appeal bonds and other obligations of like nature, incurred as an incident to and in the ordinary course of business; provided, however, that neither ----------------- Borrower nor any of its Subsidiaries is in default in respect of any payment obligation with respect thereto unless (i) it is in good faith and by appropriate proceedings diligently contesting such obligation, and (ii) the failure to pay such contested obligations would not in the aggregate have a Material Adverse Effect; (h) Zoning restrictions, easements, licenses, reservations, restrictions on the use of real property or minor irregularities incident thereto, leases, subleases, rights of way, encroachments and other survey defects which do not in the aggregate materially detract from the value of the property or 76 assets of Borrower or any of its Subsidiaries, as the case may be, or impair the use of such property for the purposes for which such property is held by Borrower or any such Subsidiary; and (i) Liens existing on the date of this Agreement and disclosed on Schedule 8.1(i) hereto. (j) Liens securing Indebtedness of the Borrower and its Subsidiaries permitted by Section 8.2 incurred to finance the acquisition of fixed or capital assets, provided that (i) such Liens shall be created substantially -------- simultaneously with the acquisition of such fixed or capital assets, (ii) such Liens do not at any time encumber any property other than the property financed by such Indebtedness, (iii) the amount of Indebtedness secured thereby is not increased and (iv) the principal amount of Indebtedness secured by any such Lien shall at no time exceed 100% of the original purchase price of such property at the time it was acquired; (k) attachment or judgment liens (other than any Liens described in subsection 8.1(l)) individually or in the aggregate not in excess of $500,000 (exclusive of (i) any amounts that are duly bonded to the reasonable satisfaction of the Agent or (ii) any amount adequately covered by insurance as to which the insurance company has not disclaimed or disputed in writing its obligations for coverage); (l) any Lien arising pursuant to any order of attachment, distraint or other legal process in connection with court or arbitration proceedings so long as (i) the execution or other enforcement thereof is effectively stayed, (ii) the claims secured thereby are being contested in good faith by appropriate proceedings, (iii) adequate reserves have been established with respect to such claims in accordance with GAAP, and (iv) no Event of Default would occur as a result thereof; 8.2. Indebtedness. ------------ (a) Create or suffer to exist, or permit any of its Subsidiaries to create or suffer to exist, any Indebtedness except (i) the Obligations; (ii) (A) Indebtedness evidenced by the Senior Notes, as well as any replacements and refinancings thereof (provided that any such replacement or refinancing is for no greater amount of Indebtedness and is not due to be repaid until after the Commitment Termination Date), and (B) prior to the completion of the Discount Note Redemption and the 1993 Note Redemption, respectively, by the Discount Notes and the 1993 Notes; (iii) Indebtedness of Borrower to any of its wholly owned Subsidiaries; (iv) Indebtedness of any wholly owned Subsidiary of Borrower to any other wholly owned Subsidiary of Borrower; (v) Indebtedness of any Subsidiary of Borrower to Borrower; (vi) (A) Indebtedness pursuant to the Loan Agreement dated January 15, 1980, between Loehmann's and The City of New York with respect to the 77 warehouse, executive office and distribution center facility of Borrower in the Bronx, New York, (B) Indebtedness evidenced by the New York City Industrial Development Agency, Industrial Development Revenue and Refunding Bonds (1983 Loehmann's Inc. Project), and (C) any refinancings of the Indebtedness described in items (A) and (B) of this clause (vi), provided that any such refinancing is -------- (x) on terms and conditions no less favorable to Borrower than those applicable to the Indebtedness so refinanced and in effect immediately prior to such refinancing and (y) in an amount not greater than the amount of the Indebtedness so refinanced and outstanding immediately prior to such refinancing; and (vii) additional Indebtedness not to exceed an aggregate principal amount at any time outstanding equal to $10,000,000, which amount includes any Indebtedness secured by Liens permitted by Section 8.1. No indebtedness (excluding Indebtedness secured by Liens permitted by Section 8.1) may be incurred in reliance on clause (vii) of the preceding sentence unless the Interest Coverage Ratio for Borrower and its Consolidated Subsidiaries for the twelve month period ending at the end of the most recent Fiscal Quarter is not less than 3.0 to 1.0 (b) Cancel, or permit any of its Subsidiaries to cancel, any claim or Indebtedness owed to it, except for adequate consideration or in the ordinary course of business or for the settlement of disputes concerning accounts receivable in accordance with past practice. 8.3. [Intentionally Omitted.] ------------------------ 8.4. Stock Payments, Etc. Declare or make, or permit any of its ------------------- Subsidiaries to declare or make, any Stock Payment except (i) any Stock Payment by any Subsidiary of Borrower to Borrower, (ii) repurchases of capital stock of Borrower by Borrower pursuant to the Employment Agreements with the proceeds of the key-man life and disability insurance policies referred to in Section 7.14 hereof, and (iii) Stock Payments necessary to effect the Series A Preferred Stock Redemption as described in the Offering Documents. 8.5. Mergers, Etc. Except for Investments permitted by Section 8.6, merge ------------ or consolidate with or into, or convey, transfer, lease or otherwise dispose (whether in one transaction or in a series of transactions), all or substantially all of its assets or the assets of any division (whether now owned or hereafter acquired) to any Person, or permit any of its Subsidiaries to do any of the foregoing, or (b) acquire all or substantially all of the stock of any Person, or acquire all or substantially all of the assets of any Person or enter into any joint venture or partnership with any Person, or permit any of its Subsidiaries to do any of the foregoing, except that any Subsidiary of the Borrower may be merged or consolidated with or into the Borrower (provided that -------- the Borrower shall be the continuing or surviving corporation) or with or into anyone or more wholly owned Subsidiaries of the Borrower (provided that the -------- wholly owned 78 Subsidiary or Subsidiaries shall be the continuing or surviving corporation). 8.6. Investments in Other Persons. Except as permitted by Section 7.5, ---------------------------- make, or permit any of its Subsidiaries to make, any loan or advance to any Person, or purchase or otherwise acquire, or permit any of its Subsidiaries to purchase or otherwise acquire, any capital stock, equity interest, obligations or other securities issued by, or make, or permit any of its Subsidiaries to make, any capital contribution to, or otherwise invest in, any Person (any of the foregoing being an "Investment"), except for the following: (a) Investments by Borrower or any of its Subsidiaries in any wholly owned Subsidiary of Borrower; (b) Investments by any Subsidiary of Borrower in Borrower; (c) Investments by Borrower and its Subsidiaries in accounts, contract rights and chattel paper (as defined in he Uniform Commercial Code), and notes receivable made in the ordinary course of business in accordance with past practice; (d) Loans or advances to employees of Borrower or any of its Subsidiaries, which loans and advances are in the ordinary course of business and are in amounts and for purposes consistent with past practice; (e) Investments of Borrower or any of its Subsidiaries in (i) securities with maturities of one year or less from the date of acquisition issued or fully guaranteed or insured by the United States Government or any agency hereof, (ii) certificates of deposit, eurodollar time deposits, overnight bank deposits, bankers' acceptances and repurchase agreements of a Qualified Issuer having maturities of one year or less from the date of acquisition, (iii) commercial paper of an issuer rated at least A-1 by Standard & Poor's Corporation or P-1 by Moody's Investors Service, Inc., or carrying an equivalent rating by a nationally recognized rating agency, if both of the two named rating agencies cease publishing ratings of investments, and (iv) money market funds acceptable to the Agent in the exercise of its reasonable judgment; (f) Investments in joint ventures formed to open new stores in an amount not to exceed $200,000 in any Fiscal Year or $750,000 in the aggregate. 8.7. Contingent Obligations. Incur, or permit any of its Subsidiaries to ---------------------- incur, directly or indirectly, any Contingent Obligation, except for: (a) the Subsidiary Guaranty; and 79 (b) endorsements for collections or deposits in the ordinary course of business. 8.8. Sale of Assets; Maintenance of Ownership of Stock; Sale Leasebacks; ------------------------------------------------------------------- Transfers of Real Property; Transfers of Assets. - ----------------------------------------------- (a) Sell or otherwise dispose of any assets or any interest therein (other than with respect to leases of real property) or permit any of its Subsidiaries to sell or dispose of any of its assets or any interest therein, or permit or suffer any other Person to acquire any interest in any of its assets, except in the ordinary course of business; provided, however, that the sale or ----------------- disposition of assets for adequate consideration and in connection with the closing of individual stores which are not, in the aggregate, material to Borrower's business, shall be deemed to be a sale or disposition of assets in the ordinary course of business; (b) [Intentionally omitted]; (c) Become liable, or permit any of its Subsidiaries to become liable, as lessee or guarantor or other surety with respect to any lease of any property (whether real or personal or mixed) whether now owned or hereafter acquired (i) which either Borrower or any of its Subsidiaries has sold or transferred or is to sell or transfer to any other Person or (ii) which either Borrower or any of its Subsidiaries intends to use for substantially the same purpose as any other property which has been or is to be sold or transferred by that entity to any other Person in connection with such lease; or (d) Transfer or permit any of its Subsidiaries to transfer any assets to any Subsidiary, other than a transfer permitted by Section 8.2 or 8.6; except that any Subsidiary may sell, lease, assign, transfer or otherwise dispose of any or all of its assets (upon voluntary liquidation or otherwise) to the Borrower. 8.9. Change in Nature of Business. Make any material change or permit any ---------------------------- of its Subsidiaries to make any material change in the nature or conduct of its business as carried on at the Effective Date (except for actions taken in respect of Ware Lo pursuant to Section 7.26), or enter into or permit any of its Subsidiaries to enter into any business other than apparel retailing. 8.10. Capital Structure. Make, or permit any of its Subsidiaries to make, ----------------- any change in its capital structure (including in the terms of its outstanding Stock) or amend its certificate of incorporation or by-laws. 8.11. No Modifications to Related Documents. Amend, supplement or otherwise ------------------------------------- modify any provision of (a) any Related 80 Document or take or fail to take any action thereunder which would directly or indirectly have a Material Adverse Effect, or (b) the Discount Notes, the Discount Notes Indenture, the 1993 Notes, the 1993 Notes Indenture, the Senior Notes or the Senior Note Indenture, unless the terms of such amendment, supplement or modification are no less favorable to Borrower, or, in the case of clause (b), the consent of the Agent has been obtained. 8.12. Transactions with Affiliates. Enter into or be a party to, or permit ---------------------------- any of its Subsidiaries to enter into or be a party to, any transaction with any Affiliate of Borrower or any such Subsidiary, except (i) as otherwise expressly permitted by Section 8.2, 8.4, 8.6, 8.7 or 8.8, (ii) for such transactions, otherwise permitted hereunder, on terms and conditions no less favorable to Borrower or such Subsidiary than would be obtained in an arm's- length transaction with a non-Affiliate, (iii) between Subsidiaries of Borrower consistent with past practice to the extent otherwise permitted herein, (iv) among Borrower and its Subsidiaries to the extent otherwise permitted herein, (v) with respect to transactions in the nature of employment agreements or compensation arrangements, upon fair and reasonable terms and consistent with past practice, and (vi) financial advisory fees paid to Donaldson, Lufkin & Jenrette, Inc., Encantrales, Inc. and their affiliates as described in the Offering Documents. 8.13. Adverse Transactions. -------------------- (a) Enter into or be a party to, or permit any of its Subsidiaries to enter into or be a party to, any transaction the performance of which in the future would be inconsistent with or could require Borrower or any such Subsidiary to breach any of the covenants or agreements contained herein or in any other Loan Document or Related Document or give rise to any Event of Default. (b) Take or omit to take, or permit any of its Subsidiaries to take or omit to take, any action, which act or omission would constitute a default pursuant to or noncompliance with any of the terms of this Agreement, any of the other Loan Documents, any Related Document, or of any other material contract, instrument, or lease to which it is a party or by which it or any of its property is bound. (c) Amend, modify, alter, rescind, terminate, assign or waive, or permit any of its Subsidiaries to amend, modify, alter, rescind, terminate or waive, any of its rights or permit any breach or event of default to exist under any Employment Agreement, or the Shareholders' Agreement or, other than in the ordinary course of business, any material franchise agreement or material lease agreement to which it is a party as of the Effective Date. 8.14. Accounting Changes. Make, or permit any of its Subsidiaries to make, ------------------ any significant change in accounting 81 treatment and reporting practices except as permitted or required by GAAP. 8.15. Speculative Transactions. Engage in any transaction involving ------------------------ commodity or currency options or futures contracts except for the sole purpose of hedging. 8.16. Compliance with ERISA. Permit any member of its Controlled Group --------------------- directly or indirectly to (i) terminate any Plan so as to result in any material (in the reasonable opinion of the Majority Banks) liability to Borrower or any member of its Controlled Group, (ii) permit to exist any ERISA Event, or any other event or condition which presents the risk of a material (in the reasonable opinion of the Majority Banks) liability of Borrower, Holdings or any member of their Controlled Group, (iii) make a complete or partial withdrawal (within the meaning of Section 4201 of ERISA) from any Multiemployer Plan so as to result in any material (in the reasonable opinion of the Majority Banks) liability to Borrower or any member of its Controlled Group, (iv) enter into any new Plan or modify any existing Plan so to increase its obligations thereunder except in the ordinary course of business which could result in any material (in the reasonable opinion of the Majority Banks) liability to Borrower or any member of its Controlled Group, or (v) permit the present value of all benefit liabilities, as defined in Title IV of ERISA, under each Plan, other than a Multiemployer Plan (using the actuarial assumptions utilized by the plan) to exceed the fair market value of Plan assets allocable to such benefits all determined as of the most recent valuation date for each such Plan to the extent that would constitute a Material Adverse Change (in the reasonable opinion of the Majority Banks), or do any of the foregoing themselves. 8.17. Limitation on the Formation of Subsidiaries After the Effective Date. -------------------------------------------------------------------- Incorporate or otherwise organize any new Subsidiary which was not in existence on the Effective Date or permit any of its Subsidiaries to do so unless, in the case of Borrower, (i) any such newly formed Subsidiary shall have executed and delivered to the Agent, for the benefit of the Agent and the Banks, a guaranty, in substantially the form of the Subsidiary Guaranty, and a security agreement, in substantially the form of the Security Agreement, (ii) the stock of such Subsidiary is pledged pursuant to the Loehmann's Pledge Agreement and (iii) the incorporation or organization of such Subsidiary could not have a Material Adverse Effect. 8.18. Internal Revenue Code Section 338. Make any election under Section --------------------------------- 338 of the Code other than a protective carryover election pursuant to the Treasury Regulations issued under such Section without the prior consent of the Majority Banks which shall not be unreasonably withheld. 8.19. [Intentionally omitted.] ------------------------ 82 8.20. [Intentionally omitted.] ------------------------ 8.21. Prepayments. (a) Prepay, redeem or purchase, or permit any of its ----------- Subsidiaries to prepay, redeem or purchase, in any manner any Indebtedness, except (i) the Obligations; and (ii) the Discount Notes and the 1993 Notes in connection with the Discount Note Redemption and the 1993 Note Redemption, respectively; or (b) make any payment in violation of the terms of the Senior Notes or the Senior Note Indenture or terminate all or any of its obligations under the Senior Note Indenture, by depositing or causing to be deposited with the trustee thereunder, pursuant to such indenture or otherwise, any cash or securities in trust or otherwise; provided, however, that nothing in this ----------------- Section 8.21 shall prohibit (X) the prepayment, redemption or repurchase of the Senior Notes solely out of proceeds from any offering of (i) equity securities of Borrower so long as, before or simultaneously with such prepayment, redemption or repurchase, the Revolving Credit Loans and all unpaid interest and Obligations (including the Early Termination Fee) shall have been repaid in full in cash and all outstanding Letters of Credit shall have been cash collateralized to the satisfaction of BABC, or (ii) debt securities of Borrower otherwise permitted to be incurred pursuant to Section 8.2 and scheduled to mature no earlier than the Senior Notes to be prepaid, redeemed or purchased, or (Y) the purchase or redemption of up to an aggregate maximum of $10 million face amount of Senior Notes if (I) after giving effect to such purchase or redemption, Borrower shall have Availability hereunder of at least $10 million and (II) during the period of three months immediately prior to the date of such purchase or redemption, Borrower had average daily Availability hereunder of at least $20 million; provided, further, that no prepayment, purchase or redemption ----------------- shall be permitted hereunder if any event has occurred and is continuing, or would result from such prepayment, purchase or redemption, which constitutes a Default or an Event of Default. 8.22. Investment Company Act. Borrower will not engage in any transaction ---------------------- or series of transactions with any of the affiliated investment companies referred to in Section 4.13 or any of their Affiliates other than Borrower and its Subsidiaries which violates or will violate the Investment Company Act of 1940, as amended. ARTICLE IX EVENTS OF DEFAULT 9.1. Events of Default. If any of the following events ("Events of ----------------- Default") shall occur and be continuing: (a) Borrower shall fail to make any payment of principal on any Loan when the same becomes due and payable; or 83 (b) Borrower shall fail to make any payment of interest on any Loan, or fee or any other amount or Obligation due hereunder or under any other Loan Document within five days after the same becomes due and payable; or (c) Any representation or warranty (except for the representations and warranties provided in Section 4.3 with respect to the Conditional Assignments of Lease) made by or on behalf of Borrower or any other Loan Party herein or in any other Loan Document or by any Loan Party (or any of its officers) in connection with any Loan Document, including any certificate or financial information delivered pursuant thereto, shall prove to have been incorrect in any material respect when made; or (d) (i) Borrower shall fail to perform or observe any term, covenant or agreement contained in Articles VI or VIII or Section 5.2(j), 7.5, 7.7, 7.8 or 7.17 hereof or (ii) any Loan Party shall fail to perform or observe any other term, covenant or agreement contained in this Agreement or any other Loan Document on its part to be performed or observed and, in the case of a failure under clause (ii), such failure shall remain unremedied for ten days after written notice thereof shall have been given to Borrower by the Agent or any Bank; or (e) Any Loan Party or any of its Subsidiaries shall fail to pay any principal of or premium or interest on any Indebtedness, the aggregate outstanding principal amount of which is at least $1,000,000, of such Loan Party or such Subsidiary (as the case may be), when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), or any other event shall occur or condition shall exist under any agreement or instrument relating to any such Indebtedness, if the effect of such event or condition is to accelerate, or to permit the acceleration of, the maturity of such Indebtedness; or any such Indebtedness shall be declared to be due and payable, or required to be prepaid or repurchased (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof; or (f) Any Loan Party or any of its Subsidiaries shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors, or any proceeding shall be instituted by or against such Loan Party or any of its Subsidiaries seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of 84 an order for relief or the appointment of a receiver, trustee, or other similar official for it or for any substantial part of its property and in the case of any such proceeding instituted against any Loan Party or any of its Subsidiaries such proceeding shall not be stayed or dismissed within 60 days from the date of institution thereof; or any Loan Party or any of its Subsidiaries shall take any corporate action to authorize any of the actions set forth above in this subsection (f); or (g) Any judgment or order for the payment of money in excess of $500,000 shall be rendered and be enforceable against any Loan Party or any of its Subsidiaries and either (i) enforcement proceedings shall have been commenced by any creditor upon such judgment or order or (ii) there shall be any period of 10 consecutive days during which such judgment or order shall be unsatisfied or a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; or (h) With respect to any Plan: (i) Borrower or any other party-in-interest or disqualified person shall engage in transactions which in the aggregate would reasonably result in a direct or indirect liability to either of them or any of their Subsidiaries in excess of $500,000 under Section 409 or 502 of ERISA or Section 4975 of the Code; (ii) either Borrower or any member of its Controlled Group shall incur any accumulated funding deficiency, as defined in Section 412 of the Code, in the aggregate in excess of $500,000, or request a funding waiver from the IRS, or apply for an extension of the amortization period under Section 412(e) of the Code or Section 304 of ERISA, for contributions in the aggregate in excess of $500,000; (iii) either Borrower or any member of its Controlled Group shall incur any withdrawal liability in the aggregate in excess of $500,000 as a result of a complete or partial withdrawal within the meaning of Section 4203 or 4205 of ERISA; (iv) either Borrower or any member of its Controlled Group shall fail to make a required contribution by the due date under Section 412 of the Code or Section 302 of ERISA which would result in the imposition of a lien under Section 412 of the Code or Section 302 of ERISA; (v) either Borrower, any member of its Controlled Group or any Plan sponsor shall notify the PBGC of an intent to terminate, or the PBGC shall institute proceedings to terminate, a Plan; (vi) a Reportable Event shall occur with respect to a Plan, other than a Multiemployer Plan, and within 15 days after the reporting of such Reportable Event to the Majority Banks, the Majority Banks shall have notified Borrower in writing that (A) the Majority Banks have reasonably made a determination that, on the basis of such Reportable Event, there are reasonable grounds for the termination of such Plan by the PBGC or for the appointment by the appropriate United States District Court of a trustee 85 to administer such Plan and (B) as a result thereof an Event of Default shall occur hereunder; (vii) a trustee shall be appointed by a court of competent jurisdiction to administer any Plan other than a Multiemployer Plan to which neither Borrower nor any member of its Controlled Group could have any liability; (viii) the benefits of any Plan other than a Multiemployer Plan to which neither Borrower nor any member of its Controlled Group could have any liability shall be increased if such increase could have a Material Adverse Effect, or either of Borrower or any member of its Controlled Group shall begin to maintain, or begin to contribute to, any Plan, if such maintenance or contribution could have a Material Adverse Effect, without the prior written consent of the Majority Banks; or (ix) any ERISA Event other than an event described in clause (iv), (v) or (vi) above with respect to a Plan shall have occurred, and 30 days thereafter (A) such ERISA Event, other than such event described in clause (vi) of the definition of ERISA Event herein (if correctable), shall not have been corrected and (B) the then present value of such Plan's benefit liabilities, as defined in Title IV of ERISA, shall exceed the then current value of assets accumulated in such Plan by more than $2,500,000; provided, however, that the events listed ----------------- in subsections (v)-(ix) shall constitute Events of Default only if, as of the date thereof or any subsequent date, the maximum amount of liability Borrower, Holdings or any member of their Controlled Group would be likely, in the reasonable opinion of the Majority Banks, to incur in the aggregate under Section 4062, 4063, 4064, 4219 or 4023 of ERISA or any other provision of law with respect to all such Plans, computed by the actuary of the Plan taking into account any applicable rules and regulations of the PBGC at such time, and based on the actuarial assumptions used by the Plan, resulting from or otherwise associated with such event exceeds $500,000; or (i) There shall occur any Material Adverse Change; or (j) There shall occur any Change In Control; or (k) Any Loan Document (except, to the extent invalid or unenforceable under applicable law, the Conditional Assignments of Lease) executed by any Loan Party which grants any security interest to the Agent for the benefit of the Agent and the Banks, shall cease to be in full force and effect or to create a Lien on the Collateral covered thereby or purported to be covered thereby; or (l) [Intentionally omitted.] (m) any guaranty of the Obligations shall be terminated, revoked or declared void or invalid; 86 then, and in any such event, the Agent (i) shall at the request, or may with the consent, of the Majority Banks, declare the Commitments and the obligation of each Bank to make Loans and the obligation of BABC to issue the Letters of Credit to be terminated, whereupon the same shall forthwith terminate, and (ii) shall at the request, or may with the consent, of the Majority Banks, by notice to Borrower, declare the Loans, and all interest thereon and all other obligations and amounts payable under this Agreement, to be forthwith due and payable, whereupon the Loans, all such interest and all such obligations and amounts shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by Borrower, and LAC shall immediately deliver to the Agent cash in an amount equal to the aggregate amount of all outstanding Letters of Credit to be held by the Agent as cash collateral; provided, however, that if such event is ----------------- an Event of Default specified in clause (f) of this Article IX, (A) the Commitments and the obligation of each Bank to make Loans and the obligation of BABC to issue Letters of Credit shall automatically be terminated and (B) the Loans and all other Obligations and amounts owing under or with respect to this Agreement and the Letters of Credit and the obligation of Borrower to provide the Agent with cash collateral for all outstanding Letters of Credit shall automatically become and be due and payable, without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by Borrower. ARTICLE X THE AGENT 10.1. Authorization and Action. Each Bank hereby appoints and authorizes ------------------------ the Agent to take such action as agent on its behalf and to exercise such powers under this Agreement and the other Loan Documents as are delegated to the Agent by the terms hereof and thereof, together with such powers as are reasonably incidental thereto. As to any matters not expressly provided for by this Agreement and the other Loan Documents, the Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Majority Banks, and such instructions shall be binding upon all Banks; provided, however, that the Agent shall not be ----------------- required to take any action which in its judgment exposes the Agent to personal liability or which is contrary to this Agreement or applicable law. The Agent agrees to give to each Bank prompt notice of each notice given to it by Borrower or any other Loan Party pursuant to the terms of this Agreement or the other Loan Documents. Notwithstanding any provision to the contrary contained elsewhere in this Agreement or in any other Loan Document, the Agent shall not have any duties or responsibilities, except those expressly set forth herein, nor shall the Agent have or be deemed 87 to have any fiduciary relationship with any Bank, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against the Agent. The Agent may execute any of its duties under this Agreement or any other Loan Document by or through agents, employees or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Agent shall not be responsible for the negligence or misconduct of any agent or attorney-in-fact that it selects as long as such selection was made without gross negligence or willful misconduct. 10.2. Agent's Reliance, Etc. Neither the Agent nor any of its directors, --------------------- officers, agents or employees shall be liable for any action taken or omitted to be taken by it or them under or in connection with this Agreement or the other Loan Documents, except for its or their own gross negligence or wilful misconduct. Without limitation of the generality of the foregoing, the Agent: (i) may treat the payee on its records of any Obligation as the holder thereof until the Agent receives written notice of the assignment or transfer thereof signed by such payee and in form satisfactory to the Agent; (ii) may consult with legal counsel (including counsel to Borrower), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (iii) makes no warranty or representation to any Bank and shall not be responsible to any Bank for any statements, warranties or representations made in or in connection with this Agreement or the other Loan Documents; (iv) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of this Agreement or the other Loan Documents on the part of Borrower, or to inspect the property (including the books and records) of Borrower; (v) shall not be responsible to any Bank for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or the other Loan Documents or any other instrument or document furnished pursuant hereto or thereto; and (vi) shall incur no liability under or in respect of this Agreement or the other Loan Documents by acting upon any notice, consent, certificate or other instrument or writing (which may be by telegram, cable, facsimile transmission or telex) believed by it to be genuine and signed or sent by the proper party or parties. 10.3. BABC and Affiliates. With respect to its Commitments and the Loans ------------------- made by it, BABC shall have the same rights and powers under this Agreement as any other Bank and may exercise the same as though it were not the Agent; and the term "Bank" or "Banks" shall, unless otherwise expressly indicated, include BABC in its individual capacity. BABC and its affiliates may accept deposits from, lend money to, act as trustee under indentures of, and generally engage in any kind of business with Borrower any of its Subsidiaries and any Person who may do business with or own 88 securities of Borrower or any such Subsidiary, all as if BABC were not the Agent and without any duty to account therefor to the Banks. 10.4. Bank Credit Decision. Each Bank acknowledges that it has, -------------------- independently and without reliance upon the Agent or any other Bank and based on the financial statements referred to in Section 4.6 and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Bank also acknowledges that it will, independently and without reliance upon the Agent or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement. 10.5. Indemnification. The Banks agree to indemnify the Agent (to the --------------- extent not reimbursed by Borrower), ratably according to the respective amounts of their Commitments from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatever which may be imposed on, incurred by, or asserted against the Agent in any way relating to or arising out of this Agreement or the other Loan Documents or any action taken or omitted by the Agent under this Agreement or the other Loan Documents; provided, however, that ----------------- no Bank shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the Agent's gross negligence or wilful misconduct. Without limitation of the foregoing, each Bank agrees to reimburse the Agent promptly upon demand for its ratable share of any out-of-pocket expenses (including counsel fees) incurred by the Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement or the other Loan Documents, to the extent that the Agent is not reimbursed for such expenses by Borrower. The undertaking in this Section shall survive the payment of all Obligations hereunder and the resignation or replacement of the Agent. 10.6. Successor Agent. The Agent may resign at any time by giving written --------------- notice thereof to the Banks and Borrower and may be removed at any time with or without cause by the Majority Banks. Upon any such resignation or removal, the Majority Banks shall have the right to appoint a successor Agent, with the consent of Borrower (which consent shall not be unreasonably withheld). If no successor Agent shall have been so appointed by the Majority Banks, and shall have accepted such appointment, within 30 days after the retiring Agent's giving of notice of resignation or the Majority Banks' removal of the retiring Agent, then the retiring Agent may, on behalf of the Banks, and with the consent of Borrower (which consent shall not be unreasonably withheld), appoint a successor Agent, which shall be a commercial bank organized under the laws of 89 the United States of America or of any State thereof and having a combined capital and surplus of at least $50,000,000. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such Successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations under this Agreement and the other Loan Documents. After any retiring Agent's resignation or removal hereunder as Agent, the provisions of this Article shall inure to its benefit as to any actions taken or permitted to be taken by it while it was Agent under this Agreement and the other Loan Documents. ARTICLE XI MISCELLANEOUS 11.1. Amendments, Etc. No amendment or waiver of any provision of this --------------- Agreement or the other Loan Documents, or consent to any departure by Borrower therefrom, shall in any event be effective unless the same shall be in writing and signed by the Majority Banks, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no amendment, waiver or consent shall, unless in ----------------- writing and signed (A) by BABC, waive any of the conditions specified in Section 3.4, or (B) by all the Banks, do any of the following: (a) waive any of the conditions specified in Section 3.1, 3.2 or 3.3, (b) increase the Commitments of the Banks or subject the Banks to any additional obligations, (c) reduce the principal of or interest on the Obligations or any fees or other amounts payable hereunder, (d) postpone any date fixed for any payment of principal of, or interest on, the Obligations or any fees or other Obligations payable hereunder, (e) change the percentage of the Commitments which shall be required for the Banks or any of them to take any action hereunder, (f) amend this Section 11.1, (g) increase the advance rate with respect to Revolving Credit Loans, or (h) release Collateral other than as permitted by the Security Agreement; and provided, further, however, that no amendment, waiver or consent shall, unless - -------------------------- in writing and signed by the Agent in addition to the Banks required above to take such action, affect the rights or duties of the Agent under this Agreement or the other Loan Documents. 11.2. Notices, Etc. All notices and other communications provided for ------------ hereunder shall be by telegram, telex, cable, facsimile communication or letter or by telephone confirmed immediately in a writing if to Borrower, at its address at Loehmann's, Inc., 2500 Halsey Street, Bronx, New York 10461, Telephone No.: (718) 518-2774, Fax No.: (718) 518-2766, Attention: Philip Kaplan; if to any Bank, at its Domestic Lending Office specified opposite its name on Schedule 1 hereto; and if to the Agent, at its address at 40 East 52nd St., New York, New York 90 10022, Telephone No. 212-836-5241, Fax No. 212-836-5167, Attention: Division Manager, with a copy to Rogers & Wells, 200 Park Avenue, New York, New York 10166, Telephone No. 212-878-8000, Fax No. 212-878-8375, Attention: Alan M. Christenfeld, Esq.; or, as to Borrower or the Agent, at such other address as shall be designated by such party in a written notice to the other parties and, as to each other party, at such other address as shall be designated by such party in a written notice to Borrower and the Agent. All such notices and communications shall, when telegraphed, telexed, cabled, sent by facsimile transmission or mailed, be effective when delivered to the telegraph company, confirmed by telex answerback, delivered to the cable company, confirmed by facsimile answerback or deposited in the mails, respectively, except that notices and communications to the Agent pursuant to Article II or X shall not be effective until received by the Agent. 11.3. No Waiver; Remedies. No failure on the part of any Bank or the Agent ------------------- to exercise, and no delay in exercising, any right hereunder or under any Loan Document shall operate as a waiver thereof; nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. 11.4. Costs and Expenses; Indemnification. ----------------------------------- (a) Borrower will pay all out-of-pocket costs and expenses of the Agent (including all reasonable fees, expenses and disbursements of counsel (including, without limitation, a reasonable estimate of the allocable cost of in-house counsel and staff)), and all travel, appraisal, audit, search, and filing fees (including any interest or penalties thereon) incurred or sustained at any time in connection with this transaction, whether or not there is any Borrowing hereunder or the transaction closes, including, without limitation: (i) expenses for any amendment, supplement, waiver, consent, or subsequent closing in connection with the Loan Documents and the transactions contemplated thereby; (ii) costs and expenses of lien and title searches and title insurance; (iii) taxes, fees and other charges for recording the Mortgage, filing financing statements and continuations, and other actions to perfect, protect, and continue the Agent's Liens (including costs and expenses paid or incurred by the Agent in connection with the consummation of this Agreement); (iv) sums paid or incurred to pay any amount or take any action required of the Borrower under the Loan Documents that the Borrower fails to pay or take; (v) costs and expenses of forwarding loan proceeds, collecting checks and other items of payment, and establishing and maintaining collection accounts; (vi) costs and expenses of preserving and protecting the Collateral; and (vii) costs and expenses paid or incurred to obtain payment of the Obligations, enforce the Agent's Liens, sell or otherwise realize upon the Collateral, and otherwise enforce the provisions of the Loan Documents, or to defend any claims made or threatened against the 91 Agent or any Bank arising out of the transactions contemplated hereby (including without limitation, preparations for and consultations concerning any such matters). Borrower will also pay all costs and expenses of Agent, as well as Agent's then-standard fees, in connection with any field exams and reports deemed reasonably necessary by Agent to be conducted after the Effective Date. Such payments shall be in addition to the amounts otherwise provided for herein. Following notice to the Borrower setting forth any of the foregoing costs and expenses, such costs and expenses shall be charged to a loan account of Borrower maintained with the Agent as Revolving Credit loans as described in Section 2.3. (b) Borrower agrees to indemnify and hold harmless the Agent and each Bank, their respective Affiliates and each of their respective directors, officers and agents (each an "Indemnified Party"), from and against any and all claims including claims in connection with or arising out of Environmental Liabilities and Costs, damages, liabilities, costs and expenses (including all reasonable fees, expenses and disbursements of counsel) as they are incurred by the Agent or such Bank in connection with or arising out of any investigation, or for defense of any pending or threatened claim or any action or proceeding related to the Acquisition, the LAC Merger, the Maryland Merger, the Holdings Merger, the Offering, the Redemption, this Agreement or any other Loan Document or the financing contemplated by this Agreement, whether or not an Indemnified Party is a party and whether or not any such transaction is consummated, except to the extent such claim, damage, loss, liability or expense is found in a final judgment by a court of competent jurisdiction to have resulted from such Indemnified Party's gross negligence or wilful misconduct. The foregoing obligations shall survive the payment of the Loans, and any sale or disposition of any property as a result of which any Environmental Liabilities and Costs shall arise. 11.5. Right of Set-off. Upon the occurrence and during the continuance of ---------------- any Event of Default, each Bank is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Bank to or for the credit or the account of Borrower against any and all of the Obligations of Borrower now or hereafter existing under this Agreement, irrespective of whether or not such Bank shall have made any demand under this Agreement and although such Obligations may be unmatured. Each Bank agrees promptly to notify Borrower after any such set-off and application made by such Bank; provided, however, ----------------- that the failure to give such notice shall not affect the validity of such set-off and application. The rights of each Bank under this Section are in addition to the other rights and remedies (including other rights of set-off) which such Bank may have. 92 11.6. Assignments and Participations. ------------------------------ (a) Each Bank may, with the prior written consent of Borrower (which consent shall not unreasonably be withheld) and of the Agent, assign to one or more other banks or financial institutions (provided that any such bank or financial institution is not an Affiliate of any direct or indirect competitor of Borrower) all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans made by it) in a minimum amount of $10,000,000; provided, however, that the parties to each such ----------------- assignment shall execute and deliver to the Agent, for its acceptance, an Assignment and Acceptance, together with a processing fee payable to the Agent in the amount of $2,500. Upon such execution, delivery and acceptance, from and after the effective date specified in each Assignment and Acceptance, (x) the assignee thereunder shall, in addition to any rights and obligations hereunder held by it immediately prior to such effective date (if any), have the rights and obligations hereunder that have been assigned to it pursuant to such Assignment and Acceptance, (y) the Bank assignor thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Bank's rights and obligations under this Agreement, such Bank shall cease to be a party hereto) and (z) the assignee shall thereupon become a Bank for all purposes hereunder, except that if such assignee is not a bank which accepts deposits, no set-off pursuant to Section 11.5 need be shared with such assignee. (b) By executing and delivering an Assignment and Acceptance, the Bank assignor thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than as provided in such Assignment and Acceptance, such assigning Bank makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement of any other instrument or document furnished pursuant hereto, (ii) such assigning Bank makes no representation or warranty and assumes no responsibility with respect to the financial condition of Borrower or the performance or observance by any Loan Party of any of their obligations under this Agreement or any other instrument or document furnished pursuant hereto, (iii) such assignee Bank confirms that it has received a copy of this Agreement, together with such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance, (iv) such assignee Bank will, independently and without reliance upon the Agent, such assigning Bank or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to 93 make its own credit decisions in taking or not taking action under this Agreement, (v) such assignee Bank appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Agent by the terms hereof, together with such powers as are reasonably incidental thereto, and (vi) such assignee Bank agrees that it will perform in accordance with their terms all of the obligations which by the terms of this Agreement are required to be performed by it as a Bank. (c) The Agent shall maintain at its address referred to in Section 11.2 a copy of each Assignment and Acceptance delivered to and accepted by it. Such copies shall be available for inspection by Borrower or any Bank at any reasonable time and from time to time upon reasonable prior notice. (d) Upon its receipt of an Assignment and Acceptance executed by an assigning Bank and an assignee, the Agent shall, if such Assignment and Acceptance is consented to by the Agent and Borrower, (i) accept such Assignment and Acceptance, and (ii) give prompt notice thereof to Borrower. Immediately upon the receipt by Agent of its processing fee payment under the Assignment and Acceptance, this Agreement shall be deemed to be amended to the extent, but only to the extent, necessary to reflect the addition of the assignee Bank and the resulting adjustment of the Revolving Credit Loan Commitments arising therefrom. The Revolving Credit Loan Commitment allocated to each assignee Bank shall reduce such Revolving Credit Loan Commitment of the assigning Bank pro tanto. (e) Each Bank may sell participations to one or more Banks or financial institutions (provided that any such bank or financial institution is not an Affiliate of any direct or indirect competitor of Borrower) in or to all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans made by it; provided, however, that ----------------- (i) such Bank's obligations under this Agreement (including its Commitment to Borrower hereunder) shall remain unchanged, (ii) such Bank shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) such Bank shall remain the holder of any such Obligations for all purposes of this Agreement, (iv) Borrower, the Agent and the other Banks shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement, and (v) no Bank shall transfer or grant any participating interest under which the Participant has rights to approve any amendment to, or any consent or waiver with respect to, this Agreement or any other Loan Document, and all amounts payable by the Borrower hereunder shall be determined as if such Bank had not sold such participation; except that, if amounts outstanding under this Agreement are due and unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Event of Default, each Participant shall be deemed to have the right of set-off in respect of its participating interest in amounts owing 94 under this Agreement to the same extent as if the amount of its participating interest were owing directly to it as a Bank under this Agreement. (f) Notwithstanding any other provision in this Agreement, any Bank may at any time create a security interest in, or pledge, all or any portion of its rights under and interest in this Agreement in favor of any Federal Reserve Bank in accordance with Regulation A of the FRB or U.S. Treasury Regulation 31 CFR ss.203.14, and such Federal Reserve Bank may enforce such pledge or security interest in any manner permitted under applicable law. 11.7. Binding Effect. This Agreement shall become effective on the -------------- Effective Date and thereafter shall be binding upon and inure to the benefit of Borrower, the Agent and each Bank and their respective successors and assigns, except that Borrower shall not have the right to assign any of its rights hereunder or any interest herein without the prior written consent of the Banks and the assignment by any Bank is governed by Section 11.6. 11.8. GOVERNING LAW. THIS AGREEMENT WILL BE GOVERNED BY, AND CONSTRUED IN ------------- ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. 11.9. Execution in Counterparts. This Agreement may be executed in any ------------------------- number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 11.10. WAIVER OF JURY TRIAL. THE AGENT, THE BANKS, AND BORROWER HEREBY -------------------- KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF THE AGENT, SUCH BANKS, OR BORROWER. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE AGENT AND SUCH BANKS ENTERING INTO THIS AGREEMENT. 11.11. Waiver of Permitted Exceptions. Subject to the occurrence of and ------------------------------ effective upon, the Effective Date, BABC, as the sole Bank party to the 1993 Amended Credit Agreement, waives the Permitted Exceptions. 11.12. Severability. The illegality or unenforceability of any provision of ------------ this Agreement or any instrument or agreement required hereunder shall not in any way affect or impair the legality or enforceability of the remaining provisions of this Agreement or any instrument or agreement required hereunder. [BALANCE OF PAGE INTENTIONALLY LEFT BLANK] 95 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. BORROWER: LOEHMANN'S, INC. By /s/ Philip Kaplan ---------------------------- Title: President AGENT: BANKAMERICA BUSINESS CREDIT, INC., as Agent By /s/ Louis Alexander ----------------------------- Title: VP Commitment: BANKS: - ---------- $35,000,000 BANKAMERICA BUSINESS CREDIT, INC. By /s/ Louis Alexander ----------------------------- Title: VP EX-4.3 4 Exhibit 4.3 [Loehmann's Letterhead] October 11, 1996 Securities and Exchange Commission 450 Fifth Avenue, N.W. Washington, D.C. 20549 Loehmann's, Inc. Registration Statement on Form S-1 (Registration No. 333-12881) --------------------------------------------------------------- Ladies and Gentlemen: In accordance with Item 601(b)(4)(iii) of Regulation S-K, Loehmann's, Inc. (the "Registrant") has not filed herewith any instrument with respect to long-term debt not being registered where the total number of securities authorized thereunder does not exceed ten percent (10%) of the total assets of the Registrant and its subsidiaries on a consolidated basis. The Registrant hereby agrees to furnish a copy of any such agreement to the Securities and Exchange Commission upon request. Sincerely, LOEHMANN'S, INC. By: /s/ Robert Glass -------------------- Name: Robert Glass Title: Senior Vice President, Chief Financial Officer, Treasurer and Assistant Secretary EX-5.1 5 Exhibit 5.1 [LETTERHEAD OF PAUL, WEISS, RIFKIND, WHARTON & GARRISON] October 11, 1996 Loehmann's, Inc. 2500 Halsey Street Bronx, New York 10461 Loehmann's, Inc. Registration Statement on Form S-1 Registration No. 333-12881 ---------------------------------- Ladies and Gentlemen: In connection with the above-captioned Registration Statement (the "Registration Statement"), filed with the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended (the "Act"), and the rules and regulations promulgated thereunder (the "Rules"), we have been requested by Loehmann's, Inc., a Delaware corporation (the "Company"), to furnish our opinion as to the legality of the securities being registered thereunder. The Registration Statement relates to the registration under the Act of 2,265,500 shares (including up to 295,500 shares to be sold upon exercise of the underwriters' over-allotment option) of the Company's common stock, par value $.01 per share (the "Common Stock"), to Loehmann's Inc. 2 be sold for the account of certain selling stockholders of the Company. The Common Stock to be sold in the offering contemplated by the Registration Statement (the "Offering") consists of outstanding shares of Common Stock (the "Outstanding Shares") and shares of Common Stock underlying certain outstanding stock options, which options will be exercised by certain selling shareholders prior to the consummation of the Offering (the "Option Shares"). In connection with the furnishing of this opinion, we have reviewed the Registration Statement (including all amendments thereto filed on or prior to the date hereof), the form of the Underwriting Agreement for the sale of the Common Stock included as Exhibit 1.1 to the Registration Statement, originals, or copies certified or otherwise identified to our satisfaction, of the Loehmann's Holdings, Inc. 1988 Stock Option Plan and the Loehmann's, Inc. New Stock Incentive Plan (the "Option Plans"), the agreements listed in Annex A hereto related to the Option Shares (the "Option Agreements"), the Company's Restated Certificate of Incorporation and Amended and Restated By-laws, each as in effect on the date hereof, and records of certain of the Company's corporate proceedings, including resolutions adopted by the Board of Directors of the Company and by the Compensation Committee of the Board of Directors of the Company. We also have examined and relied upon representations as to factual matters contained in certificates of officers of the Company, and have made such other investigations of fact and law and have Loehmann's Inc. 3 examined and relied upon the originals, or copies certified or otherwise identified to our satisfaction, of such documents, records, certificates or other instruments, and upon such factual information otherwise supplied to us, as in our judgment are necessary or appropriate to render the opinions expressed below. In addition, we have assumed, without independent investigation, the genuineness of all signatures, the authenticity of all documents submitted to us as originals and the conformity of original documents to all documents submitted to us as certified, photostatic, reproduced or conformed copies, the authenticity of all such latter documents and the legal capacity of all individuals who have executed any of the documents. Based upon the foregoing, we are of the opinion that: 1. The Outstanding Shares are duly authorized, validly issued, fully paid and nonassessable. 2. When issued, delivered and paid for as provided for by the Option Plans and the Option Agreements, the Option Shares will be duly authorized, validly issued, fully paid and nonassessable. Our opinions expressed above are limited to the General Corporation Law of the State of Delaware. Please be advised that no member of this firm is admitted to practice in the State of Delaware. Our opinions are rendered only with respect to laws, and the rules, regulations and orders thereunder, which are currently in effect. Loehmann's Inc. 4 We hereby consent to the use of this opinion as an Exhibit to the Registration Statement and to the use of our name under the heading "Legal Matters" contained in the Prospectus included in the Registration Statement. In giving this consent, we do not thereby admit that we come within the category of persons whose consent is required by the Act or the Rules. Very truly yours, /s/ Paul, Weiss, Rifkind, Wharton & Garrison PAUL, WEISS, RIFKIND, WHARTON & GARRISON Annex A Option Agreements ----------------- 1. Amended and Restated Agreement among Loehmann's Holdings, Inc., Loehmann's, Inc. and Philip Kaplan dated as of September 19, 1988 and Memorandum dated March 1, 1993 amending such Agreement. 2. Non-Qualified Stock Option Agreement between Loehmann's Holdings, Inc. and Philip Kaplan dated September 30, 1988. 3. Amendment No. 1 to Employment Agreement among Loehmann's Holdings, Inc., Loehmann's, Inc. and Philip Kaplan dated as of November 1, 1995. 4. Amendment No. 2 to Employment Agreement among Loehmann's Holdings, Inc., Loehmann's, Inc. and Philip Kaplan dated as of April 5, 1996. 5. Agreement among Loehmann's Holdings, Inc., Loehmann's, Inc. and Robert Friedman dated as of April 2, 1992. 6. Agreement among Loehmann's Holdings, Inc., Loehmann's, Inc. and Robert N. Friedman dated as of November 1, 1995. 7. Amendment No. 1 to Employment Agreement among Loehmann's Holdings, Inc., Loehmann's, Inc. and Philip Kaplan dated as of April 5, 1996. 8. Compensation/Consultation Agreement among Loehmann's Holdings, Inc., Loehmann's, Inc. and Norman Matthews dated as of October 18, 1988. 9. Non-Qualified Stock Option Agreement between Loehmann's Holdings, Inc. and Norman Matthews dated as of January 13, 1989. 10. Non-Qualified Stock Option Agreement between Loehmann's Holdings, Inc. and Norman Matthews dated as of December 10, 1993. EX-10.4 6 Exhibit 10.4 EXECUTION COPY AMENDMENT NO. 2 TO SHAREHOLDERS AGREEMENT Amendment No. 2, dated as of May 9, 1996, to the Shareholders Agreement, dated as of September 19, 1988 (the "Shareholders Agreement"), as amended, among Loehmann's, Inc., a Delaware corporation (the "Company"), and certain holders of the Company's Common Stock, par value $.01 per share (the "Common Stock"), that are listed on the signature pages hereof (collectively, the "Supermajority Holders"). Capitalized terms used but not defined herein have the meanings ascribed thereto in the Shareholders Agreement. WHEREAS, on May 7, 1996, Loehmann's Holdings, Inc., a Maryland corporation ("Holdings"), the original party to the Shareholders Agreement, was merged with and into a new wholly-owned Delaware subsidiary of Holdings ("New Holdings") and on May 8, 1996, New Holdings subsequently was merged with and into the Company, with the Company being the surviving corporation (the "Holdings Merger") and whereby the Company succeeded to the rights and obligations of Holdings under the Shareholders Agreement; WHEREAS, upon consummation of the Holdings Merger, each share of Holdings common stock, par value $0.008403361 per share, will be converted into .223446 shares of the Company's common stock, par value $0.01 per share (the "Common Stock"); WHEREAS, pursuant to a Registration Statement filed with the Securities and Exchange Commission, the Company may sell up to 3,572,000 shares of Common Stock and certain shareholders of the Company may sell up to 535,800 2 shares of Common Stock pursuant to the underwriters' overallotment option (collectively, the "Initial Public Offering"), and as a result, upon consummation of the Initial Public Offering, the Shareholders Agreement might otherwise terminate pursuant to section 7.10 thereof; and WHEREAS, the parties desire to amend the Shareholders Agreement to enable certain provisions thereof to continue in effect following the Initial Public Offering. NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, the parties hereto agree as follows: 1. Section 7.10 of the Shareholders Agreement is hereby amended and restated to read in its entirety as follows: "This Agreement, other than the Surviving Provisions, shall terminate and be of no further force or effect (i) when 40% of the Common Shares then outstanding have been sold pursuant to one or more Public Offerings, provided that such 40% shall be calculated after giving effect to and upon completion of such Offering or Offerings or (ii) upon a vote in favor of terminating this Agreement by the Supermajority Holders at the time of termination; provided, however, that the Surviving Provisions shall terminate and be of no further force or effect upon the earliest of (i) when 60% of the Common Shares then outstanding shall have been sold pursuant to one or more public Offerings (including the Initial Public Offering), provided that such 60% shall be calculated after giving effect to and upon completion of such offering or offerings, (ii) immediately following the Company's 1998 annual meeting of stockholders and (iii) upon the vote in favor of terminating this Agreement by the Supermajority Holders at the time of termination. For purposes of this Section 7.10, the Surviving Provisions shall mean Articles 3 (other than Sections 3.1(a)(iv) and 3.1(a)(v)) and Article VII, as amended hereby." 2. Except as specifically amended hereby, the Shareholders Agreement shall remain in full force and effect and is hereby ratified and confirmed. 3 3. This Amendment No. 2 shall be governed by and construed in accordance with the laws of the State of New York as to agreements made and to be performed entirely within such state. 4. This Amendment No. 2 may be executed in two or more counterparts, each of which shall be deemed an original but all of which shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 2 to be duly executed as of the date first written above. LOEHMANN'S, INC. By: /s/Philip Kaplan --------------------------- Name: Philip Kaplan Title: President SEFINCO LTD., a Bermuda corporation By: /s/ Joseph J. Pinto --------------------------- Name: Joseph J. Pinto Title: Vice President SPROUT CAPITAL V, a partnership organized under the laws of New York By: DLJ GROWTH ASSOCIATES, as General Partner By: /s/ Janet Hickey --------------------------- Name: Janet Hickey Title: General Partner 4 SPROUT GROWTH, L.P., a partnership organized under the laws of Delaware By: DLJ GROWTH ASSOCIATES, as General Partner By: /s/ Janet Hickey ---------------------------- Name: Janet Hickey Title: General Partner SPROUT GROWTH, LTD., a corporation organized under the laws of Cayman Islands By: DLJ GROWTH ASSOCIATES, as Attorney-in-fact By: /s/ Janet Hickey ---------------------------- Name: Janet Hickey Title: General Partner DLJ VENTURE CAPTIAL FUND II, L.P., a limited corporation organized under the laws of Delaware By: DLJ GROWTH ASSOCIATES, as General Partner By: /s/ Janet Hickey ---------------------------- Name: Janet Hickey Title: General Partner DONALDSON, LUFKIN & JENRETTE, INC., a Delaware corporation By: /s/ Thomas E. Siegler --------------------------- Name: Thomas E. Siegler Title: Senior Vice President 5 /s/ Philip Kaplan --------------------------- Name: Philip Kaplan c/o Loehmann's, Inc. 2500 Halsey Street Bronx, New York 10461 Telephone: EX-23.2 7 EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated May 10, 1996, in Amendment No. 1 to the Registration Statement (Form S-1 No. 333-12881) and related Prospectus of Loehmann's, Inc. dated October 11, 1996. ERNST & YOUNG LLP New York, New York October 11, 1996 -----END PRIVACY-ENHANCED MESSAGE-----