-----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, TAdNKQHzcVkWzDa4lhQ/QsIjoeQC92l1J5LrtdGMDY/wttTz9xUcz0Rzytac5s/E titbdkroBtglwQdcN0HUnQ== 0000950142-99-000097.txt : 19990212 0000950142-99-000097.hdr.sgml : 19990212 ACCESSION NUMBER: 0000950142-99-000097 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980131 FILED AS OF DATE: 19990211 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: 0201 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-28410 FILM NUMBER: 99531336 BUSINESS ADDRESS: STREET 1: 2500 HALSEY STREET CITY: BRONX STATE: NY ZIP: 10461 BUSINESS PHONE: 7184092000 MAIL ADDRESS: STREET 1: 2500 HALSEY STREET STREET 2: 2500 HALSEY STREET CITY: BRONX STATE: NY ZIP: 10401 10-K/A 1 AMENDMENT NO. 2 TO 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A-2 [^] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended January 31, 1998 Commission File Number 0-28410 LOEHMANN'S, INC. ---------------- (Exact name of registration as specified in its charter) Delaware 22-2341356 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2500 Halsey Street, Bronx, New York 10461 - ----------------------------------- ----- (Address of principal offices) (Zip Code) Registrant's telephone number, including Area Code: (718) 409-2000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting stock held by nonaffiliates of registrant as of April 28, 1998 was $34,245,074. The Company had 8,976,932 shares of Common Stock and 48,431 shares of Class B Common Stock outstanding as of April 28, 1998. EXPLANATORY NOTE THIS AMENDMENT IS BEING FILED TO AMEND AND RESTATE THE REGISTRANT'S ANNUAL REPORT ON FORM 10-K IN ITS ENTIRETY. [^] PART I. ITEM 1. BUSINESS Loehmann's, Inc.[^] ("Loehmann's" or the "Company"), 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, men's furnishings, accessories, and shoes offered at prices that are typically 30% to 65% 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. As of April 28, 1998 the Company operated 69 stores in major metropolitan markets located in 22 states. Corporate Structure Loehmann's is a Delaware corporation with no subsidiaries. As of January 31, 1998, the Company had 25,000,000 shares of common stock, par value $0.01 per share (the "Common Stock"), 469,237 shares of Class B common stock, par value $0.01 per share (the "Class B Common Stock"), and 1,000,000 shares of preferred stock, par value $0.01 per share (the "Preferred Stock") authorized, of which 8,976,932 shares of Common Stock and 48,431 shares of Class B Common Stock were issued and outstanding. In addition, as of January 31, 1998, the Company had $131,360,000 of long-term indebtedness outstanding, consisting of $33,771,000 under a revolving credit facility, $95,000,000 aggregate principal amount of 11 7/8% Senior Notes due 2003 (the "Notes"), and $2,589,000 of revenue bonds and notes. In anticipation of the Company's initial public offering on May 7, 1996, in order to effect a reincorporation from Maryland to Delaware, Loehmann's Holdings, Inc. ("Holdings"), the Company's predecessor, was merged into the Company (the "Merger"). As a result of the Merger, each share of Holdings common stock and Class B common stock was converted into approximately 0.22 shares of the Company's Common Stock and Class B Common Stock, respectively, and the authorized number of shares of Common Stock was increased to 25,000,000. On May 10, 1996, the Company issued and sold 3,572,000 shares of Common Stock in its initial public offering and issued and sold $100 million principal amount of the Notes in a concurrent debt offering, resulting in net proceeds of approximately $155 million to the Company. The proceeds received from these offerings were used to redeem indebtedness and all issued and outstanding shares of the Company's Series A Preferred Stock. 2 Industry Overview WOMEN'S APPAREL According to published reports, total retail sales of women's apparel and accessories in the United States were in excess of $89.0 billion in 1997. 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, Ralph Lauren and Anne Klein. 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, 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 Benard 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. OTHER PRODUCTS The men's apparel industry includes tailored apparel (suits, formalwear, slacks, sportcoats and outer wear), sportswear (casual pants, sportshirts, sweaters and jackets) and furnishings (dress shirts, ties, belts, suspenders, underwear, socks, scarves and gloves). Loehmann's offers primarily men's furnishings to its customers. The men's furnishings industry is served by a variety of distribution channels including department stores, specialty menswear stores, off-price retailers and catalog retailers. The Company offers primarily designer and brand name men's furnishings, which are generally sold in finer department stores and specialty stores such as Bloomingdale's, Lord & Taylor, Nordstrom, Saks Fifth Avenue and Brooks Brothers. 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 differentiates itself from finer department stores by offering similar merchandise at significantly lower prices and from other 3 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. VALUE PRICING The Company provides its customers with exceptional value by offering its merchandise at prices that are typically 30% to 65% 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 believes that it 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. The failure of the Company to maintain its status as a principal choice for well known designers may erode one of Loehmann's key competitive advantages over its competitors, such as off-price retailers. Such an increase in competition could materially and adversely affect the Company's business and results of operations. BROADEN MERCHANDISE CATEGORIES The Company continually seeks to broaden its appeal and has over the past several years expanded its merchandise mix to include gifts, 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 1997, an increase from 13% in fiscal 1993. In addition, the Company has introduced men's wear at 19 of its locations with plans to expand to 50 locations in 1998. 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. 4 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 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 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 In fiscal 1997 the Company continued its store expansion program, opening new stores in existing suburban markets where the Loehmann's franchise is well established and in other locations which have appealing demographics. The Company opened seven stores in fiscal 1997, in addition to the seven stores opened in fiscal 1996. The Company plans to open three stores in fiscal 1998, two of these stores have already been opened in Long Beach, California, and Cincinnati, Ohio. The Company closed four stores in fiscal 1997 and converted one store into a clearance center. As part of the Company's ongoing strategy to focus on larger, more profitable stores, and to continue to reposition its merchandise offerings, the Company closed nine stores in March 1998, and expects to close one additional store during the year. 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. Merchandising SELECTION The Company offers a wide selection of women's sportswear, dresses, suits, outerwear, coats, accessories, intimate apparel and shoes, as well as a selection of gifts, infantwear, kid's wear and men's furnishings. 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: 5 Adrienne Vittadini Dana Buchman Kenar Andrea Jovine DKNY Oleg Cassini A Line by Anne Klein Donna Karan Ralph Lauren Anne Klein II Emmanuel Ungaro Tahari Calvin Klein Harve Benard CK/Calvin Klein Jones NY 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 over 20% of the Company's net sales in fiscal 1997, an increase from 13% in fiscal 1993. The following table shows the percentages of the Company's net sales attributable to its various product categories for fiscal 1993 through fiscal 1997:
1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- Sportswear ......................... 49.6% 48.8% 47.6% 48.1% 47.8% Dresses and suits .................. 28.6 26.5 26.0 24.6 22.9 Coats and outerwear ................ 5.9 5.2 5.1 5.0 4.7 Accessories/intimate apparel ....... 11.3 13.0 14.5 14.6 13.6 Shoes .............................. 2.1 3.4 5.5 5.8 6.5 Men's .............................. -- -- -- -- 2.5 Other .............................. 2.5 3.1 1.3 1.9 2.0 Total .............................. 100.0% 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, both infantwear and women's large sizes and petite apparel were offered in approximately 40 of the Company's stores during fiscal 1997 and men's furnishings was introduced in 19 locations. PRICING The Company seeks to provide its customers with exceptional value by offering its merchandise at prices that are typically 30% to 65% 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. The Company has historically used a cyclical markdown policy to reduce prices automatically as goods age. Since the beginning of the current fiscal year, however, this 6 policy has been modified slightly, as the prices of goods that are selling well are no longer automatically reduced at pre-determined time intervals. 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 The Company believes it is well 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. Many of the Company's 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. Although the Company has always been able to fulfill its inventory needs, its opportunistic purchasing strategy does not always permit Loehmann's to purchase specific types of goods. For example, certain types of popular merchandise may be unavailable in certain sizes or colors depending on market conditions. 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 does not have any long-term supply contracts with its suppliers. The Company maintains its own central buying staff, comprised of 17 experienced off-priced buyers, many of who also have extensive experience with traditional department stores. Historically, the Company has had very low turnover within its buying group, enabling 7 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, men's apparel, 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. 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. Distribution The Company operates a 126,000 square foot centralized distribution center located at the Company's headquarters and a 32,000 square foot satellite warehouse for processing shoes located near the main distribution center. In addition, the Company leases a 150,000 square foot facility in Secaucus, New Jersey. 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 time from receipt of goods at the distribution center to placement of merchandise in the stores typically ranges from 48 to 72 hours. Advertising and Promotion Over the years, Loehmann's has built its reputation through "word-of-mouth" advertising. In the last three 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. A significant portion of the Company's advertising efforts involve direct mail announcements to members of "The Insider Club," a free membership program. Members receive notification of special events throughout the year and a 15% discount on their birthdays. The list of members now includes approximately 1.6 million active customers. In addition, the 8 Company entered into an agreement with First USA Bank and launched a co-branded Platinum Visa Card in November 1997. 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 eight separate geographic districts each with a regional manager. Regional 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. Senior management meets with the regional 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 regional managers participate in a bonus plan that ties compensation awards to the achievement of specified store profit goals and overall Company profits and also are eligible in the Company's stock option plan. 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 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. The Company believes that the current management information and control systems are capable of supporting the Company's planned expansion for the foreseeable future. The Company has outside service contracts to maintain its computer software programs and expects that all modifications and conversions will be completed on a timely basis. The total dollar amount that the Company estimates will be spent to address the year 2000 issue is not expected to have a material financial impact. 9 Employees At January 31, 1998, the Company had 2,827 employees, of whom 1,900 were store sales and clerical employees, 202 performed store managerial functions, and 725 were corporate and warehouse personnel. 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 to 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. 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. Competitive conditions in the men's furnishings industry are comparable to those in the women's apparel industry. However, as the Company's primary focus is on women's apparel, the Company's men's offerings are limited to such items as shirts, belts and ties. These items are intended to complement women's apparel and are often "impulse" purchases. 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. Many department stores have increased their promotional efforts, although such promotions are typically focused on moderate merchandise. Should finer department stores continue to price more aggressively, the Company's margins may 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 10 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. 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. Special Note Regarding Forward-looking Statements Certain statements under the captions "Business," "Management's Discussions and Analysis of Financial Condition and Results of Operations" and elsewhere in this Form 10-K or incorporated by reference herein, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (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, 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 report. ITEM 2. PROPERTIES As of April 28, 1998, the Company operated 69 stores in 22 states including seven stores opened in fiscal 1997 and two stores opened in fiscal 1998. The Company does not own any of its stores and has no manufacturing facilities. Indicated below is a listing of the regions in which the Company operates its stores: Percent of Number of Fiscal Year Region Stores 1997 Sales (1) - ------ ------ -------------- California ............. 17 26.1% New York .............. 9 23.4 Other Mid-Atlantic ..... 7 9.1 New Jersey ............. 6 9.0 Florida ................ 5 8.5 Midwest ................ 7 5.6 New England ............ 5 5.4 Texas .................. 4 4.7 11 Other Southeast ........ 5 4.3 Other West .......... 4 3.9 ----- ----- 69 100.0% ===== ===== - -------------- (1) These percentages exclude sales from the Company's 4 stores closed in fiscal 1997, and the Company's two stores opened and nine stores closed in fiscal 1998. 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 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 have initial or renewal terms expiring as follows: 1998-1999 (13 stores); 2000-2002 (26 stores); 2003-2005 (9 stores); and 2006 and later (33 stores). Two of three leases that expire by year-end fiscal 1998 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. 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. The Company also leases a 150,000 square foot warehouse in Secaucus, New Jersey, which serves as additional warehouse space. The lease expires on January 31, 1999, and provides for annual rental payments of $675,000. ITEM 3. LEGAL PROCEEDINGS Management is not aware of any litigation or regulatory proceedings against the Company which would materially impact its business or financial position. 12 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None, during the fourth quarter of fiscal 1997. 13 PART II. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock has been traded on the NASDAQ National Market System since May 7, 1996 under the symbol LOEH. As of April 1, 1998, there were approximately 100 shareholders of record of the Company's common stock. The following table shows the high and low sales price for the Company's common stock for each quarterly period from May 7, 1996, the date of the Company's initial public offering, through January 30, 1998. Fiscal Quarter Ended High Low - -------------------- ---- --- August 3, 1996 ................................ $28.125 $18.000 November 2, 1996 .............................. $30.000 $20.375 February 1, 1997 .............................. $31.000 $14.625 May 3, 1997 ................................... $19.500 $ 6.250 August 2, 1997 ................................ $ 8.250 $ 6.000 November 1, 1997 .............................. $10.125 $ 5.688 January 31, 1998 .............................. $ 7.875 $ 3.500 On January 30, 1998, the closing market price of the Company's Common Stock was $3.81. The Company has not paid dividends on its common stock or its Class B Common Stock since inception and does not anticipate paying a cash dividend in the foreseeable future. The Indenture for the Notes and the Company's revolving credit facility contain various covenants which may restrict the payment of cash dividends. On April 1, 1998, the closing market price of the Company's Common Stock was $43/8. During fiscal year 1997, 93,846 shares of Common Stock were issued upon conversion of the Company's Class B Common Stock in reliance on Section 3(a)(9) under the United States Securities Act of 1933 (the "Securities Act"). The exemption provided under Section 3(a)(9) was available because the shares of Common Stock were issued by the Company to its existing security holders exclusively, and no commission or other remuneration was paid for soliciting the conversions. During fiscal year 1997, the Company issued to its employees 44,500 options to purchase shares of Common Stock in reliance on Section 4(2) under the Securities Act ("Section 4(2)"). These options are exercisable at prices ranging from $6.88 to $15.88. Such options were issued pursuant to the Company's New Stock Incentive Plan and vest over a range of one to five years from the date of grant, provided that the individuals remain in the employ of the Company. Such options expire on the tenth anniversary of the date of grant. The exemption provided under Section 4(2) was available because all of the options were issued to four members of the Company's senior management, each of whom is financially sophisticated and highly experienced in business. 14 During fiscal year 1997, the Company issued to its non-employee directors 101,000 options to purchase shares of Common Stock in reliance on Section 4(2) under the Securities Act. The options are exercisable at prices ranging from $5.75 to $7.0625. Such options were issued pursuant to the Company's Stock Option Plan For Non-Employee Directors and vest over a range of one to three years from the date of grant, provided the optionee remains in service of the Company as a director on such date. Such options expire either on the tenth anniversary of the date of grant, or the expiration of one year from the date the optionee's service with the Company terminates. The exemption provided under Section 4(2) was available because such options were granted to seven of the Company's directors, each of whom is financially sophisticated and highly experienced in business. Consequently, the grantees of the options are "sophisticated investors," and the granting of the options did not involve a public offering within the meaning of Section 4(2). 15 ITEM 6. SELECTED FINANCIAL DATA
[^] Selected Financial Data [^] 1997 1996 1995 1994 1993 -------- ---- ---- ---- ---- (In thousands, except per share amounts) Net Sales .......................................$ 443,310 $ 417,758 $ 386,090 $ 392,606 $ 373,443 Net loss applicable to common stock .............$ 15,672 $ 1,216 $ 17,019 $ 3,308 $ 13,727 Basic net loss per share applicable to common stock ..................................$ 1.75 $ 0.15 $ 3.12 $ 0.63 $ 2.18 Diluted net loss per share applicable to common stock ..................................$ 1.75 $ 0.14 $ 3.12 $ 0.63 $ 2.18 Total Assets ....................................$ 189,226 $ 176,200 $ 163,611 $ 178,612 $ 177,666 Long-term obligations ...........................$ 131,360 $ 107,850 $ 131,733 $ 131,967 $ 130,827 Redeemable Series A preferred stock ............. -- -- $ 15,279 $ 13,223 $ 11,421
[^] [^][^] Financial Highlights [^]
Percent 1997 1996 Change ------------------ ----------------- ------------- Operating Results Net Sales ................................................ $443,310,000 $417,758,000 6.1% Adjusted EBITDA (1)....................................... $18,032,000 $36,828,000 -51.0% Non-recurring Charge...................................... 9,300,000 0 N/A Operating (Loss) Income................................... (2,701,000) 24,980,000 N/A [^] Net (Loss) Applicable to Common Stock.................................... (15,672,000) (1,216,000) N/A Basic Net Loss per Share Applicable to Common Stock.......................... ($1.75) ($0.15) N/A Diluted Net Loss per Share Applicable to Common Stock.......................... ($1.75) ($0.14) N/A Financial Position Shareholders Equity....................................... 9,706,000 25,243,000 61.5% Total Assets ............................................. 189,226,000 176,200,000 7.4% Working Capital .......................................... 27,092,000 22,278,000 21.6% Number of Stores at End of Period ........................ 76 73 4.1% Total Square Footage ..................................... 1,492,000 1,279,000 16.7%
[^]-------------------- 16 [^](1) Adjusted EBITDA represents earnings before interest expense, income tax expense, depreciation and a charge for store closings and impairment of assets. Adjusted EBITDA is presented because management believes it is a useful financial indicator used by certain investors and securities analysts to analyze companies on the basis of operating performance. Adjusted EBITDA is not a term defined in generally accepted accounting principles, should not be considered as an alternative to net income, an indicator of the Company's operating performance, or an alternative to the Company's cash flow from operating activities as a measure of liquidity, and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. The Company understands that while EBITDA is frequently used by securities analysts in the evaluation of companies, Adjusted EBITDA, as used herein, is not necessarily comparable to other similarly titled captions of other companies due to potential inconsistencies in the method of calculation. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS [^] [^] Results of Operations The table below sets forth certain financial data of the Company expressed as a percentage of net sales for the periods indicated:
Fiscal Year (1) -------------------------------------------- 1997 1996 1995 Net sales ............................................ 100.0% 100.0% 100.0% Gross margin ......................................... 28.4 31.9 [^] 30.2 Selling, general and administrative expenses ......... 25.1 23.0 23.2 Depreciation and amortization ........................ 2.6 2.8 3.1 Charge for store closings and impairment of assets ... 1.3 -- [^] 3.0 Operating income ..................................... (0.6) 6.0 0.9 Interest expense, net ................................ 2.9 3.2 4.7 Income (loss) before income taxes .................... (3.5)% 2.8% (3.8)% - ------------- (1) Fiscal 1997 and 1996 had 52 weeks, and fiscal 1995 had 53 weeks. Numbers may not total due to rounding.
Fiscal 1997 Compared to Fiscal 1996 Net sales increased by approximately $25.6 million, or 6.1%, to $443.3 million during fiscal 1997 as compared to $417.8 million during fiscal 1996. Comparable store sales (sales at stores that were in operation for both periods) decreased by 6.8% during fiscal 1997 as compared 17 to fiscal 1996. The increase in reported net sales for fiscal 1997 is the result of sales from new stores, offset by the effect of closed stores and the comparable store sales decrease of 6.8%. The Company opened 7 new stores if fiscal 1997 and 7 new stores in fiscal 1996, and closed 4 stores in fiscal 1997 and 3 stores in fiscal 1996. Gross profit decreased by approximately $7.4 million to $125.8 million during fiscal 1997 as compared to $133.1 million for fiscal 1996. Gross margin decreased to 28.4% for fiscal 1997 from 31.9% in the prior fiscal year. The decrease in gross margin is primarily the result of: (i) an increase in markdowns which represents 2.7% of sales (which resulted from inflated inventory levels caused by slow selling women's apparel, primarily designer and bridge lines), and (ii) a one time charge which represents 0.8% of sales, for the planned liquidation of inventory in ten stores to be closed in 1998, and for the planned liquidation of inventory as part of the Company's strategy to reposition its merchandise offerings. Selling, general and administrative expenses increased by approximately $15.1 million to $111.4 million during fiscal 1997 as compared to $96.3 million for fiscal 1996. As a percentage of net sales, selling, general and administrative expense increased to 25.1% in fiscal 1997 from 23.0% in the prior year. The dollar increase in selling, general and administrative expenses was primarily related to: (i) $17.4 million in store operating expenses related to 1996 and 1997 new stores including store payroll, occupancy and advertising costs partially offset by (ii) $3.4 million primarily related to store closings. The increase in selling, general and administrative expense as a percentage of sales is primarily the result of higher relative occupancy costs as a percentage of sales for new stores and the comparable store expansions. Included in selling, general and administrative expense are bonus payments made to the Company's executive officers. The Company's executives received no bonus payments in fiscal 1997, and were paid an aggregate $942,565 in bonuses in fiscal 1996. Annual bonuses are paid to the Company's executives in accordance with the Company's Performance Incentive Plan, which is described more fully under "Report of Compensation Committee - Annual Bonus Incentives" on page 11 of the Company's Definitive Proxy Statement for its Annual Meeting of Stockholders held on July 30, 1998 (the "Proxy Statement"). Depreciation and amortization for fiscal 1997 described by approximately $0.4 million to $11.4 million as compared to $11.8 million for the prior fiscal year. The reduction in depreciation and amortization is attributable to: (i) a decrease in amortization of deferred financing fees related to the refinancing of debt associated with the debt offering in fiscal 1996, (ii) an increase in depreciation related to the opening of the seven new stores and the expansion and renovation of eight stores in fiscal 1997, (iii) a lengthening of the estimated depreciable lives of assets for certain stores whose primary lease terms were extended, and (iv) a decrease in depreciation associated with the natural retirement of certain assets. In connection with the Company's ongoing strategy to focus on larger, more profitable stores, the Company provided for a charge in the amount of $5.7 million for the closing of ten stores during 1998. This charge consists of the write off of property, plant, and equipment, closing expenses, and costs associated with net lease obligations of $2.1 million, $0.6 million, and $3.0 million, respectively. See Note 9 to the Consolidated Financial Statements. 18 Operating (loss) income decreased by $27.7 million to $(2.7) million, or (0.6)% of sales, in fiscal 1997 as compared to $25.0 million, or 6.0% of sales, in fiscal 1996. The decrease in operating income as a percentage of sales from 6.0% to (0.6)% in fiscal 1997 primarily consists of the following: (i) 1.3% related to the charge for store closings, (ii) 2.1% related to selling, general, and administrative expenses primarily resulting from higher occupancy costs as a percentage of sales associated with new and expanded stores, and (iii) 3.5% related to a decrease in gross profit resulting from higher markdowns and the planned liquidation of inventory to reposition its merchandise offerings and for the closing of stores. Interest expense decreased by $0.5 million to $12.8 million for fiscal 1997 as compared to $13.4 million for fiscal 1996. The reduction in net interest expense primarily resulted from the effect of the Company's reduction of approximately $30.0 million of senior notes and a reduction of the average interest rate paid on the long term debt by approximately 60 basis points on May 7, 1996, partially offset by interest expense incurred on borrowings under the revolving line of credit. See Note 4 of the Consolidated Financial Statements. Fiscal 1996 Compared to Fiscal 1995 Net sales increased by approximately $31.7 million, or 8.2%, to $417.8 million during fiscal 1996 as compared to $386.1 million during fiscal 1995. The reporting period for fiscal 1996 was comprised of 52 weeks while fiscal 1995 had 53 weeks. For the comparable 52 week period, sales increased 9.3%. Comparable store sales (sales at stores that were in operation for both periods) increased by 1.6% during fiscal 1996 as compared to fiscal 1995 on a 52 week basis. The increase in reported net sales for fiscal 1996 was a result of the comparable store increase of 1.6%, plus sales from new stores offset by the effect of closed stores and the effect of the fifty third week of fiscal 1995. The Company closed 11 stores in fiscal 1995 and 3 stores in fiscal 1996, two of which were replaced by new stores. Gross profit increased by approximately [^] $16.5 million to $133.1 million during fiscal 1996 as compared to [^] $116.6 million for fiscal 1995. Gross margin increased to 31.9% for fiscal 1996 from [^] 30.2% in the prior fiscal year. The increase in margin was primarily a result of (i) a charge of $3.6 million taken in fiscal 1995 related to store closings, (ii) a continuing shift in the Company's sales mix towards merchandise with a higher average gross margin [^], and (iii) a reduction of markdowns as a percentage of sales. Selling, general and administrative expenses increased by approximately $6.8 million to $96.3 million during fiscal 1996 as compared to $89.5 million for fiscal 1995. As a percentage of net sales, selling, general and administrative expenses decreased to 23.0% in fiscal 1996 from 23.2% in the prior year. The dollar increase in selling, general and administrative expenses was related to: (i) $1.7 million of pre-opening expenses associated with the seven new stores opened in fiscal 1996; (ii) $3.7 million in store operating expenses primarily related to new stores including occupancy and advertising costs and (iii) $2.3 million primarily due to the Company's continued investment in corporate infrastructure to support the new store program partially offset by $0.9 million primarily related to cost recoveries associated with occupancy expense. Included in selling, general and administrative expense are bonus payments made to the Company's executive officers under the Company's Performance Incentive Plan. The Company's executives received an aggregate $942,565 in bonuses in fiscal 1996, and an 19 aggregate $287,500 in bonus payments in fiscal 1995. Bonuses were paid to the Company's executives in fiscal 1995 despite the Company's posting of a net loss before taxes in such year, because the net loss was largely caused by a special charge for closing stores, and the Company's Adjusted EBITDA (which is defined under "Financial Highlights" in Item 6 above) in such year was $30,716,000. Depreciation and amortization for fiscal 1996 decreased by approximately $0.3 million to $11.8 million as compared to $12.1 million for the prior fiscal year. The reduction in depreciation and amortization is attributable to the closing of 11 stores in fiscal 1995, the effect of a $4.95 million asset impairment charge recorded in fiscal 1995, along with a reduction in amortization expense resulting from the refinancing of debt associated with the debt offering. See Note 3 to the Consolidated Financial Statements. This was partially offset by additional depreciation associated with capital expenditures in fiscal 1996 related to the opening of the seven new stores and renovations of the Company's existing store base. Operating income increased by $21.7 million to $25.0 million for fiscal 1996 as compared to $3.3 million for fiscal 1995. Before the charges for store closings and impairment of assets in fiscal 1995, operating income increased by approximately $6.4 million to $25.0 million for fiscal 1996 from $18.6 million for fiscal 1995. As a percentage of net sales, operating income before the charges for store closings and impairment of assets increased to 6.0% from 4.8%. The increase in operating income, before the charge for store closings and impairment of assets, is primarily a result of new store contribution. Interest expense decreased by $4.8 million to $13.4 million for fiscal 1996 as compared to $18.2 million for fiscal 1995. The reduction in net interest expense primarily resulted from the Company's reduction of approximately $30.0 million of senior notes and a reduction of the average interest rate paid on the senior notes by approximately 60 basis points, partially offset by interest expense incurred on borrowings under the revolving line of credit. In May 1996, the Company redeemed its 10-1/2% Senior Secured Notes and 13-3/4% Senior Subordinated Notes totaling $130.0 million face value and issued $100.0 million face value of 11-7/8% Senior Notes (the "Redemption"). Additionally, the reduction in net interest expense resulted from an increase in interest income earned on invested cash and $0.6 million interest capitalized on fixed asset additions. As a result of the Redemption, the Company incurred approximately $4.7 million in extraordinary losses on the early extinguishment of debt and $2.0 million in losses from the write-off of related deferred financing costs associated with such indebtedness. In fiscal 1996, the Company utilized approximately $5.0 million of tax net operating losses. See Note 2 of the Consolidated Financial Statements. Quarterly Results and Seasonality While the Company's net sales do not show significant seasonal variation, the Company's operating income has traditionally been significantly higher in its first and third fiscal quarters. The Company believes that its merchandise is purchased primarily by women who are buying for their own wardrobes rather than as gifts. As a result, the Company does not experience increases in net sales during the Christmas shopping season. Results of operations during the second and fourth quarters are traditionally impacted by end of season clearance events. In addition, fourth quarter results of operations can be affected by employee performance bonuses, because 20 although bonuses are accrued throughout the fiscal year and are estimated on a quarterly basis, bonus amounts are not definitively known until year-end goals are achieved. The following table sets forth certain unaudited operating data for the Company's eight fiscal quarters ended January 31, 1998. The unaudited quarterly information includes all normal recurring adjustments which management considers necessary for a fair presentation of the information shown. 21
Fiscal 1996 Fiscal 1997 ----------------------------------------------------------------------------------------------------- First Second Third Fourth First Second Third Fourth Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter (In thousands, except per share data) Unaudited Statement of operations data Net sales .....................$ 104,120 $ 90,652 $ 114,393 $ 108,593 $ 112,595 $ 95,292 $ 126,495 $ 108,928 Gross profit .................. 33,734 28,100 37,349 33,938 35,106 25,621 40,465 24,570 Selling, general and administrative expenses (1). 23,885 20,802 25,528 26,078 28,868 24,393 30,053 28,056 Depreciation and amortization.. 3,148 2,899 2,845 2,956 2,864 2,668 2,946 2,955 Non-recurring charge........... - - - - - - - 5,660 Operating income (loss) ....... 6,702 4,399 8,976 4,903 3,374 (1,440) 7,466 (12,101) Interest expense .............. 4,231 3,759 2,698 2,673 2,972 3,140 3,278 3,455 Income (loss) before extraordinary item ......... 2,421 630 6,274 2,228 380 (4,587) 4,122 (15,587) Extraordinary loss for early retirement of debt ......... - 7,101 - - - - - - Net income (loss) .............$ 1,835 $ (11,553)$ 6,274 $ 2,228 $ 380 $ (4,587)$ 4,122 $ (15,587) Basic earnings (loss) per share before extraordinary item...$ 0.35 $ (0.51)$ 0.71 $ 0.25 $ 0.04 $ (0.51)$ 0.46 $ (1.73) Basic earnings (loss) per share after extraordinary item....$ 0.35 $ (1.33)$ 0.71 $ 0.25 $ 0.04 $ (0.51)$ 0.46 $ (1.73) Diluted earnings (loss) per share before extraordinary item........................$ 0.31 $ (0.51)$ 0.66 $ 0.23 $ 0.04 $ (0.51)$ 0.45 $ (1.73) Diluted earnings (loss) per share after extraordinary item........................$ 0.31 $ (1.33)$ 0.66 $ 0.23 $ 0.04 $ (0.51)$ 0.45 $ (1.73) - ----------------- (1) Reflects income of $0.5 million of occupancy-related cost recovery items in the fourth quarter of fiscal 1996.
Liquidity and Capital Resources Historically, the Company has used cash to service its indebtedness and to fund capital expenditures. The Company's primary sources of liquidity are cash generated from operations and borrowings under its revolving credit facility (the "Credit Facility"). Net cash used in operating activities totaled $7.5 million for fiscal 1997 of which $9.2 million was for an increase in inventory related primarily to the opening of seven new stores and the expansion of eight comparable stores during the year. These new and expanded stores carry a larger selection of women's apparel. Such stores carry approximately double the store inventory carried by the average Loehmann's store, and also require increased reserve inventory levels. In addition, the merchandise inventory at January 31, 1998 included inventory at 10 stores which were planned to be closed by March 1998. Net cash used in investing activities was $16.7 million in fiscal 1997, principally related to the new store and expansion store activity during the year. Net cash used for operating and investing activities was financed primarily by the increase in borrowings of $23.6 million under the [^] Credit Facility. The Company's outstanding long-term indebtedness as at January 31, 1998, February 1, 1997, and February 3, 1996, was $131.36 million, $107.85 million, and $131.733 million, respectively. Interest expense decreased by $0.5 million, to $12.8 million, for fiscal 22 1997, as compared to $13.4 million for fiscal 1996. The reduction in net interest expense primarily resulted from the effect of the Company's reduction of approximately $30.0 million of indebtedness following the Company's initial public offering in May 1996 and an approximate 60 basis point reduction, on May 7, 1996, of the average interest rate paid on the long term debt, partially offset by interest expense incurred on borrowings under the Credit Facility. On May 10, 1996 the Company sold 3,572,000 shares of Common Stock and $100.0 million principal amount of the Notes in public offerings. The net proceeds received from such offerings were used to (i) redeem in full $54.1 million of the Company's 10-1/2% Senior Secured Notes, at a redemption price of 103.5%, (ii) redeem in full $77.55 million of the Company's 13-3/4% Senior Subordinated Notes at a redemption price of 101.0%, and (iii) redeem all issued and outstanding shares of the Company's Series A Preferred Stock at its liquidation price of $0.56 per share. In addition, in fiscal 1997, the Company made principal payments of $70,000 on its long-term indebtedness. In February 1998, the Company amended [^] the Credit Facility to provide for: (i) the elimination of all financial covenants [^], (ii) an increase in the Credit Facility to $50.0 million, and (iii) an extension of the term of the Credit Facility to June 2001. [^] At January 31, 1998, outstanding borrowings under the Credit Facility were approximately $33.8 million. See Note 4 of the Consolidated Financial Statements. In fiscal 1998, the Company's material commitments will include servicing its indebtedness (primarily interest on the Credit Facility and the Notes) and capital expenditures. Because indebtedness under the Credit Facility bears interest at floating rates based on LIBOR, the Company's debt service costs in fiscal 1998 will fluctuate. However, assuming that interest rates remain constant, the Company expects that: (i) its total debt service costs in fiscal 1998 will be somewhat greater than the $12.8 million in fiscal 1997 due to the Company's increased debt levels, and (ii) the amount of principal reduction in fiscal 1998 will remain approximately $70,000. The Company has reduced its capital expenditure requirements for fiscal 1998 to $9.0 million by decreasing its new store and comparable store expansion program, and has put special emphasis toward inventory management in order to maintain control over markdown requirements during fiscal 1998. Although no assurances can be given, the Company anticipates that these programs will improve the Company's cash flow. The Company believes that cash generated from operations together with funds available under the Credit Facility will be sufficient to satisfy its cash requirements in fiscal 1998. [^] Although the Company fully anticipates that it will be able to continue meeting its obligations as they come due beyond fiscal 1998, the Company's ability to do so will depend on its ability to successfully implement its business plans, general economic and business conditions, and the other factors noted in "Special Note Regarding Forward Looking Statements." Year 2000 The Company presently believes that the year 2000 issue will not pose significant operational problems for its computer systems. The Company has outside service contracts to maintain its computer software programs and expects that all modifications and conversions will be completed on a timely basis. The total dollar amount that the company estimates will be spent 23 to address its year 2000 issues is not expected to have a material financial impact. However, if such modifications and conversions are not made, or are not completed in a timely manner, the year 2000 issue could have a material adverse impact upon Company operations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. 24 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Independent Auditors The Board of Directors and Stockholders Loehmann's, Inc. We have audited the accompanying consolidated balance sheets of Loehmann's Inc. as of January 31, 1998[^] and February 1, 1997, and the related consolidated statements of operations, changes in common stockholders' equity (deficit) and cash flows for the fiscal years ended January 31, 1998, February 1, 1997[^] and February 3, 1996. 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 January 31, 1998 and February 1, 1997, and the consolidated results of its operations and cash flows for the fiscal years ended January 31, 1998, February 1, 1997[^] and February 3, 1996 in conformity with generally accepted accounting principles. ERNST & YOUNG LLP New York, New York March 6, 1998 - -------------------------------------------------------------------------------- 25 Consolidated Balance Sheets Loehmann's, Inc.
January 31, February 1, 1998 1997 -------------------- ------------------- (IN THOUSANDS, EXCEPT SHARE DATA) Assets Current Assets: Cash and cash equivalents................................... $ 1,767 $ 2,292 Accounts receivable and other assets........................ 5,575 4,400 Merchandise inventory....................................... 67,521 58,304 Total current assets................................................. 74,863 64,996 Property, equipment and leaseholds, net.............................. 71,612 66,515 Deferred debt issuance costs and other assets, net................... 3,228 3,870 Purchase price in excess of net assets acquired, net................. 39,523 40,819 -------------------- ------------------- Total assets......................................................... $ 189,226 $ 176,200 -------------------- ------------------- Liabilities and common stockholders' equity Current liabilities: Accounts payable............................................ $ 21,570 $ 19,634 Accrued expenses............................................ [^] 11,732 13,262 Accrued interest............................................ 2,496 2,530 Customer merchandise credits................................ 4,710 7,212 Reserve for store closings.................................. 7,190 10 Current portion of long-term debt........................... 73 70 Total current liabilities............................................ 47,771 42,718 Long-term debt: Revolving line of credit.................................... 33,771 10,188 117/8% senior notes......................................... 95,000 95,000 Revenue bonds and notes..................................... 2,589 2,662 Total long-term debt................................................. 131,360 107,850 Other noncurrent liabilities......................................... 389 389 Common stockholders' equity: Common stock, 25,000,000 shares authorized; 8,976,932 and 8,756,739 shares issued and outstanding at January 31, 1998, and February 1, 1997, respectively...... 89 87 Class B convertible common stock, 469,237 shares authorized, 48,431 and 142,277 at January 31, 1998, and February 1, 1997, respectively........................ 244 713 Additional paid-in capital.................................. 81,597 80,995 Accumulated deficit......................................... (72,224) (56,552) Total common stockholders' equity.................................... 9,706 25,243 -------------------- ------------------- Total liabilities and common stockholders' equity.................... $ 189,226 $ 176,200 ==================== =================== - ------------- The accompanying notes are an integral part of these consolidated financial statements.
26 Consolidated Statements of Operations Loehmann's, Inc.
Fiscal year ended -------------------------------------------------- January 31, February 1, February 3, 1998 1997 1996 ---------------- ---------------- ---------------- (in thousands, except per share data) Net Sales............................................................ $ 443,310 $ 417,758 $ 386,090 Cost of sales........................................................ 317,548 284,637 [^] 269,489 Gross profit......................................................... 125,762 133,121 [^] 116,601 Selling, general and administrative expenses......................... 111,370 96,293 89,485 Depreciation and amortization........................................ 11,433 11,848 12,120 Charge for store closings and impairment assets...................... 5,660 -- 15,300 Operating income..................................................... (2,701) 24,980 3,296 Interest expense, net................................................ 12,845 13,361 18,153 Income (loss) before income taxes.................................... (15,546) 11,619 (14,857) Provision for income taxes........................................... 126 66 106 Income (loss) before extraordinary item.............................. (15,672) 11,553 (14,963) Extraordinary loss on early extinguishment of debt (net of tax)...... -- 7,101 -- Net income (loss).................................................... (15,672) 4,452 (14,963) Stock dividends on and normal and accelerated accretion of preferred stock...................................................... -- 5,668 2,056 Net loss applicable to common stock.................................. $ (15,672) $ (1,216) $ (17,019) Earnings per share: Basic (loss) earnings per share before extraordinary item............ $ (1.75) $ 0.74 $ (3.12) Extraordinary Item................................................... $ -- $ (0.89) $ -- ---------------- ---------------- ---------------- Basic (loss) per share after extraordinary item...................... $ (1.75) $ (0.15) $ (3.12) ================ ================ ================ Diluted (loss) earnings per share before extraordinary item.......... $ (1.75) $ 0.69 $ (3.12) Extraordinary Item................................................... $ -- $ (0.83) $ -- --------------- --------------- --------------- Diluted (loss) per share after extraordinary item.................... $ (1.75) $ (0.14) $ (3.12) =============== =============== =============== Weighted average number of common shares outstanding................. 8,961 7,901 5,463 Weighted average number of common shares and common share equivalents outstanding.............................................. 8,961 8,529 5,463 --------------- --------------- --------------- - ------------- The accompanying notes are an integral part of these consolidated financial statements.
27 Consolidated Statements of Changes in Common Stockholders' Equity (Deficit) Loehmann's, Inc.
Class B Common Stock Common Stock ------------------------------------------------------ Additional Number Number Paid-in Accumulated (In thousands, except share amounts) of Shares Amount of Shares Amount Capital Deficit Totals -------------- ----------- -------------- ----------- ------------- ------------- ------------- 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) Issuance of common stock............. 3,572,000 36 -- -- 55,343 -- 55,379 Exercise of stock options............ 132,359 1 -- -- 159 -- 160 Conversion of Class B common stock... 326,960 3 (326,960) (1,639) 1,636 -- -- Net income for the fiscal year ended February 1, 1997............ -- -- -- -- -- 4,452 4,452 Dividend on and accretion of preferred stock................... -- -- -- -- -- (5,668) (5,668) Balances as of February 1, 1997...... 8,756,739 87 142,277 713 80,995 (56,552) 25,243 Exercise of stock options............ 126,347 1 -- -- 134 -- 135 Conversion of Class B common stock... 93,846 1 (93,846) (469) 468 -- -- Net loss for the fiscal year ended January 31, 1998.................. -- -- -- -- -- (15,672) (15,672) -------------- ----------- -------------- ----------- ------------- ------------- ------------- Balances as of January 31, 1998 8,976,932 $ 89 48,431 $ 244 $ 81,597 $ (72,224) $ 9,706 - ------------- The accompanying notes are an integral part of these consolidated financial statements.
28 Consolidated Statements of Cash Flows Loehmann's, Inc.
Fiscal year ended -------------------------------------------------- January 31, February 1, February 3, 1998 1997 1996 --------------- ---------------- ---------------- (in thousands) Cash flows from operating activities Net income (loss)........................................................ $ (15,672) $ 4,452 $ (14,963) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization.......................... 11,433 11,848 12,120 Accretion of 10 1/2% senior secured notes.............. -- 510 1,328 Charges for [^] impairment of assets [^] related to store closings......................................... 2,110 -- 10,538 Loss on early retirement of 10 1/2% senior secured notes and 13 3/4% senior subordinated notes............. -- 7,101 -- Changes in assets and liabilities: Accounts receivable and other assets.......... (1,175) (2,678) 678 Merchandise inventory......................... (9,217) (14,583) 417 Accounts payable.............................. 1,936 (1,840) (276) Accrued expenses.............................. [^](1,530) 3,060 (985) Customer merchandise credits.................. (2,502) 1,150 537 Reserve for store closings.................... 7,180 (435) 445 Accrued interest.............................. (34) (4,507) 250 --------------- ---------------- ---------------- Net change in current assets and liabilities............................. [^](5,342) (19,833) 1,066 Net change in other noncurrent assets and liabilities.................... (15) 549 (627) Total adjustments........................................................ 8,186 175 24,425 --------------- ---------------- ---------------- Net cash (used in) provided by operations (7,486) 4,627 9,462 Cash flows from investing activities Capital expenditures..................................................... (16,687) (16,037) (8,130) Net cash used in investing activities.................................... (16,687) (16,037) (8,130) Cash flows from financing activities Borrowings on revolving credit facilities................................ 23,583 10,188 -- Redemption of 10 1/2% senior secured notes............................... (55,905) (1,584) Redemption of 13 3/4% senior subordinated notes.......................... (78,325) -- Redemption of 117/8% senior notes........................................ (5,165) -- Sale of 117/8% senior notes, net of issuance costs....................... 95,863 -- Redemption of Series A Preferred Stock................................... (20,947) -- Sale of common stock..................................................... 135 55,379 -- Other financing activities, net.......................................... (70) 102 (58) --------------- ---------------- ---------------- Net cash provided by (used in) financing activities...................... 23,648 1,190 (1,642) --------------- ---------------- ---------------- Net (decrease) increase in cash and cash equivalents..................... (525) (10,220) (310) Cash and cash equivalents at beginning of period......................... $ 2,292 $ 12,512 $ 12,822 Cash and cash equivalents at end of period............................... $ 1,767 $ 2,292 $ 12,512 --------------- ---------------- ----------------
29
Supplemental disclosure of cash flow information Cash paid during the fiscal year for interest............................ $ 13,212 $ 18,807 $ 16,845 Cash paid during the fiscal year for income taxes........................ $ 233 $ 218 $ 103 --------------- ---------------- ---------------- - ------------- The accompanying notes are an integral part of these consolidated financial statements.
30 Notes to Consolidated Financial Statements Loehmann's, Inc. 1. Summary of Significant Accounting Policies Organization Effective May 7, 1996, the Company effected a reincorporation from Maryland, to Delaware by Loehmann's Holdings, Inc. ("Holdings"), the Company's predecessor, merging into the Company (the "Merger"). As a result of the Merger, each share of Holdings common stock and Class B common stock was converted into approximately 0.22 shares of the Company's common and Class B common and the authorized number of common 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 Merger. Basis of Presentation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany items have been eliminated. 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 January 31, 1998, February 1, 1997 and February 3, 1996 had 52 weeks, 52 weeks and 53 weeks, respectively. 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. 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 January 31, 1998 and February 1, 1997 was $20.1 million and $11.9 million, respectively. 31 Revenue Recognition The Company records revenue at the point of sale to its customers at its retail stores. Advertising Expense The cost of advertising is expensed as incurred. Advertising costs were $15.4 million, $14.8 million and $13.0 million during fiscal years 1997, 1996 and 1995, respectively. Depreciation and Amortization Building and furniture, fixtures and equipment are depreciated on a straight-line basis over their estimated useful lives. Leasehold interests represent the beneficial value of operating leases as determined by an independent appraisal of the individual leases at the date such leases were acquired by the Company and such amounts are amortized on a straight-line basis over the related lease term. Leasehold improvements are amortized on a straight-line basis over the shorter of the related lease terms or their useful life. Pre-opening Costs [^] The Company's costs incurred in connection with the opening of new stores are expensed in the fiscal quarter in which the store opens. Due to the nature of the Company's store openings, the majority of such expenditures are made within the quarter the store opens. As a result, the Company believes that Statement of Position ("SOP") 98-5 will have no material impact on the timing of expense recognition. In fiscal 1997 and 1996 the Company incurred $1.3 million and $1.7 million respectively in pre-opening costs. No pre-opening costs were incurred in fiscal 1995. 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 for fiscal years 1997, 1996 and 1995 amounted to $1.3 million annually. Accumulated amortization at January 31, 1998 and February 1, 1997 was $12.2 million and $10.9 million, respectively. Class B Common Stock Each share of Class B Common Stock is convertible into one share of Common Stock, subject to adjustment at any time. During fiscal 1997, approximately 93,846 shares of Class B Common Stock were converted. The Company's various credit agreements prohibit or restrict any such repurchase. 32 Capitalized Interest Interest on borrowed funds is capitalized during construction of property and is amortized on a straightline basis over the depreciable lives of the related assets. Interest of $397,000 and $640,000 was capitalized during fiscal 1997 and fiscal 1996, respectively. Interest capitalized during fiscal 1995 was not material. Deferred Debt Issuance Costs Deferred debt issuance costs are amortized over the terms of the related debt agreements. Deferred debt issuance costs were $4.2 million at January 31, 1998 and $4.1 million at February 1, 1997. Amortization expenses for fiscal years 1997, 1996, and 1995 amounted to $0.6 million, $0.8 million and $1.2 million, respectively. Total accumulated amortization at January 31, 1998 and February 1, 1997 amounted to $1.1 million and $0.5 million respectively. Income Taxes Income taxes are provided using the liability method. Net Loss Per Share of Common Stock Basic EPS is determined by dividing net income/loss (after deducting dividends on and accretion of preferred stock) by the weighted average number of Common and Class B Common shares outstanding during the period. Diluted EPS is determined by dividing net income/loss (after deducting dividends on and accretion of preferred stock) by the weighted average number of Common and Class B Common shares and common stock equivalents outstanding during the period. Outstanding options to purchase Common Stock were not considered in the calculation of Diluted EPS for fiscal 1997 and fiscal 1995, as their effects were antidilutive. In 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share. Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the Statement 128 requirements (see Note 6). The adoption of Financial Accounting Standards Board Statement No. 128 did not have a material adverse effect upon the Company's financial statements. Other Comments Certain items in fiscal 1995 have been reclassified to present them on a basis consistent with fiscal 1997. 2. Income Taxes 33 The Company's provision for income taxes primarily represents state and local minimum and alternative minimum taxes. Significant components of deferred tax liabilities and assets are as follows:
January 31, February 1, 1998 1997 ----------------- ----------------- (In thousands) Deferred tax assets: Net operating loss carryforwards ..................... $ 12,251 $ 8,146 Excess book depreciation and amortization ............ 4,365 6,037 Store closing reserve................................. 3,643 4 Compensation ......................................... -- 925 Capitalization of inventory expenses ................. 711 617 Other, net ........................................... 996 429 Total deferred tax assets ..................................... 21,966 16,158 Deferred tax liabilities ...................................... (269) (205) Net deferred tax assets ....................................... 21,696 15,953 Less valuation allowance ...................................... (21,696) (15,953) $ -- $ -- ----------------- -----------------
Following is a reconciliation of the statutory Federal income tax rate and the effective income tax rate application to earnings before income taxes:
January 31, February 1, February 3, 1998 1997 1996 ------------------- ------------------ ------------------ Statutory tax rate ...................................... 35.0% 35.0% 35.0% Tax effect of extraordinary item ........................ -- (21.4) -- Utilization of net operating loss carry forward ......... -- (17.8)% -- Valuation allowance adjustment .......................... (32.4) -- (31.9) Goodwill ................................................ (3.0) 3.9 (3.2) Other, net............................................... (0.4) 0.9 (0.6) Effective tax rate ...................................... (0.8)% 0.6% (0.7)%
At January 31, 1998, the Company had net operating loss carryforwards of approximately $31.3 million and $24.5 million for regular and alternative minimum tax purposes, respectively. Net operating losses [^] expire in [^] the years 2003 through 2012. 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 received from such offerings (the "Offerings") were used (i) to redeem in full the Company's 10-1/2% Senior Secured Notes, at a redemption price of 103.5%, (ii) to redeem 34 in full the Company's 13-3/4% Senior Subordinated Notes at a redemption price of 101.0%, 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 (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 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. 4. Long-term Debt The Company's long-term debt consists of:
January 31, February 1, 1998 1997 ----------------- ----------------- (In thousands) Revolving line of Credit(a) ................................... $ 33,771 $ 10,188 117/8 senior notes, due 2003(b)................................ 95,000 95,000 9 1/2% New York City Industrial Development Agency revenue bonds, due 2004............................... 2,250 2,250 5 1/2% City of New York note due in varying installments to 2004......................................... 412 482 ----------------- ----------------- 131,433 107,920 Less current maturities........................................ 73 70 ----------------- ----------------- Long-term debt................................................. $131,360 $107,850 ----------------- -----------------
- --------------- (a) In February 1998, the Company amended its credit agreement with its bank (the "Credit Facility") to provide for: (i) the elimination of all financial covenants under the Credit Facility, (ii) an extension of the term of the Credit Facility to June 2001, and (iii) an increase in the Credit Facility to $50.0 million with interest at either the Bank's prime rate plus 0.75%, or LIBOR plus 2.2% at the Company's option. The Credit Facility is subject to certain borrowing base limitations, and imposes certain other limitations on the Company. The Credit Facility is secured by substantially all of the Company's assets and is not subject to scheduled repayments, except upon maturity. At January 31, 1998, the Company's outstanding amounts under letters of credit were $1,719,563. (b) Interest is payable semiannually on May 15 and November 15 in each year. The Company is entitled to redeem the Notes commencing May 15, 2000 at redemption prices of 105.938%, 102.969% and 100% of the principal amount during 2000, 2001 and 2002, respectively. The Senior Notes Indenture contains certain covenants that, among other things, limit the ability of the Company to incur additional indebtedness, 35 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. Based on a quoted market price of 104.4%, the fair value of the 11 7/8 senior notes outstanding at January 31, 1998 approximated $99.1 million. During the second quarter of 1996, the Company purchased and retired $5.0 million face amount of the 117/8% senior notes on the open market incurring an extraordinary loss of approximately $365,000 in connection with this purchase. 5. 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:
Useful January 31, February 1, Lives 1998 1997 -------------- ------------------ ---------------- (In years) (In thousands) Building ............................................... 20 $ 7,879 $ 7,879 Furniture, fixtures and equipment ...................... 3-8 44,246 35,835 Leasehold interests(a).................................. 5-29 45,853 51,781 Leasehold improvements ................................. 5-29 33,332 28,675 Total property, equipment and leaseholds................ 131,010 124,170 Accumulated depreciation and amortization............... (59,698) (57,655) Property, equipment and leaseholds, net................. $ 71,612 $ 66,515
(a) "Leasehold interests" represent the allocation to the Company's leases of the excess of the purchase price of the assets acquired in the leveraged buy-out that took place in 1988 over the net book value of such assets. 36 6. Earnings Per Share The following table sets forth the computation of basic and diluted (loss) earnings per share:
Fiscal 1997 Fiscal 1996 Fiscal 1995 ---------------- ---------------- ---------------- Numerator Net operating (loss) income................................. $ (15,672) $ 11,553 $ (14,963) Preferred stock dividends on and normal and accelerated accretion.............................. -- 5,668 2,056 Numerator for basic and diluted (loss) earnings per share before extraordinary item................ (15,672) 5,885 (17,019) Extraordinary item.......................................... -- 7,101 -- Numerator for basic and diluted (loss) per share after extraordinary item........................... (15,672) (1,216) (17,019) Denominator Denominator for basic (loss) earnings per share -- weighted average shares......................... 8,961 7,901 5,463 Effect of dilutive securities: Employee stock options............................. -- 628 -- Dilutive potential common shares................... -- 628 -- Denominator for diluted (loss) earnings per share -- adjusted weighted average shares and assumed conversions............................ $ 8,961 $ 8,529 $ 5,463 Basic (loss) earnings per share before extraordinary item................................. $ (1.75) $ 0.74 $ (3.12) Extraordinary Item.......................................... $ -- $ (0.89) $ -- Basic (loss) per share after extraordinary item............. $ (1.75) $ (0.15) $ (3.12) Diluted (loss) earnings per share before extraordinary item................................. $ (1.75) $ 0.69 $ (3.12) Extraordinary Item.......................................... $ -- $ (0.83) $ -- Diluted (loss) per share after extraordinary item........... $ (1.75) $ (0.14) $ (3.12)
7. Stock Option Plans 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 1,077,010 shares of Common Stock to key employees and directors. On May 7, 1996, the Company adopted the Loehmann's, Inc. New Stock Incentive Plan (the "New Stock Option Plan") as amended on June 19, 1997. A maximum of 646,892 shares of Common Stock may be delivered by the Company pursuant to options or other awards authorized by a committee appointed by the Board of Directors. On June 19, 1997, the Company adopted the Loehmann's, Inc. Director's Stock Option Plan. A maximum of 250,000 shares of Common Stock may be delivered by the Company pursuant to options or other awards authorized by a committee appointed by the Board of Directors. 37 The following information pertains to the Company's stock option plans:
January 31, February 1, February 3, 1998 1997 1996 --------------------------- ---------------------------- --------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------------ -------------- ------------ --------------- ------------ -------------- (in thousands) (in thousands) (in thousands) Outstanding options, beginning of year .............. 875 $ 7.00 729 $ 2.77 604 $ 1.37 Granted .......................... 147 8.58 324 17.74 264 4.76 Canceled ......................... (38) 14.86 (46) 17.96 (120) 1.07 Exercised......................... (126) 1.18 (132) 1.20 (19) 1.36 Outstanding options, end of year .................... 858 $ 7.63 875 $ 7.00 729 $ 2.77 Options exercisable, end [^] of year ................ 474 $ 4.59 450 $ 3.02 432 $ 2.30 Options available for future grant .................. 423 N/A 77 N/A 42 N/A
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 858,179 options outstanding at January 31, 1998, vest 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 $23.13. Options issued under the 1988 Stock Option Plan generally must be exercised within five years from the date they are earned. Options issued under the New Stock Option Plan must be exercised prior to the tenth anniversary of the grant date. The Company has elected to follow APB 25 and related interpretations in accounting for stock options and accordingly has recognized no compensation expense. Had compensation cost been determined based upon the fair value at grant date for awards consistent with the methodology prescribed by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", the Company would have incurred an additional compensation cost of $1.0 million or $0.11 per share for fiscal 1997, $0.6 million or $0.07 per share for fiscal 1996, and $0.1 million or $0.01 per share for fiscal 199[^] 5. The fair value of these options was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions for fiscal 1997, 1996 and 1995: risk-free interest rate of 6.3%, an expected life of 3 to 7 years and a dividend yield of zero. For fiscal 1997, 1996 and 1995, volatility was 85.8%, 58.0% and 38.7%, respectivel[^] y. 38 8. Commitments and Contingenci[^] es 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 $15.4 million, $10.1 million and $8.1 million for the fiscal years ended January 31, 1998, February 1, 1997 and February 3, 1996, respectively. Future minimum payments under noncancelable operating leases consisted of the following at January 31, 1998: (in thousands) 1998 $ 15,993 1999 15,644 2000 14,818 2001 13,969 2002 13,876 Thereafter 154,026 ------------ Total $ 228,326 9. Charge for Store Closings During the fourth quarter of fiscal 1997, the Company implemented a plan to close ten underperforming stores and, as a result, recorded a $5.7 million charge to continuing operations. These closures are intended to improve the Company's liquidity and future operating profitability. The store closures will be materially completed by the end of March 1998. Net sales and store operating income (loss), including certain specifically allocated charges, for these stores were $21.3 million and $(0.8) million, respectively, in fiscal 1997, $24.9 million and $1.5 million, respectively, in fiscal 1996 and, $26.2 million and $1.2 million, respectively, in fiscal 1995. The charge for store closings consisted of write-offs of property, plant and equipment, costs associated with net lease obligations and other expenses of $2.1 million, $3.0 million and $0.6 million, respectively. 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 were 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 were not material. Net sales and store operating income (loss), including certain specifically allocated charges, for these stores were $8.2 million and $0.1 million, respectively, in fiscal 1995. The charge for store closings consisted of write-offs of property, plant and equipment, markdowns associated with store closings, costs associated with net lease 39 obligations and other expenses of $5.5 million, $3.6 million, $0.95 million and $0.3 million, respectively. 10. Charge for Impairment of Assets During the second quarter of fiscal 1995, the Company completed certain market analyses as part of its overall strategic plan. 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 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 an impairment loss of approximately $4.95 million to continuing operations, representing the excess net book value of these assets over their fair value. Fair value was based on appraisal value. The impairment charge consisted of leasehold interests, furniture, fixtures and equipment and leasehold improvements of $4.45 million, $0.25 million and $0.25 million, respectively. 11. Employee Benefit Plans In October 1996, the Company established a defined contribution retirement savings plan (401(k)) covering all eligible employees. This plan succeeds the previously discretionary profit sharing plan with all prior individual account balances and vesting terms transferred to the new plan. The plan allows participants to defer a portion of their annual compensation and receive a matching employer contribution on a portion of that deferral. During fiscal 1997 and fiscal 1996, the Company recorded contributions of $209,000 and $71,000, respectively, to the 401(k) plan. The Company recorded a contribution of $500,000 to the profit sharing plan in fiscal 1995. 40
[^] [^] SCHEDULE II [^] LOEHMANN'S, INC. [^] VALUATION AND QUALIFYING ACCOUNTS [^](in thousands) Column A Column B Column C Column D Column E - ----------------------------------------------------------------------------------------------------------------- Additions Balance at Charged Charged Balance at Beginning to Cost to Other end of Description of Period and Accounts Deductions Period Expense - ----------------------------------------------------------------------------------------------------------------- Year ended January 31, 1998 $10 $7,190 $70 (a) $7,130 Reserve for Store Closings Year ended February 1, 1997 $445 $435 (a) $10 Reserve for Store Closings Year ended February 3, 1996 $0 $4,850 $4,405 (a) $445 Reserve for Store Closings (a) Payments for leasehold obligation expenses and other store closing expenses.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 41 PART III. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following persons are the executive officers and directors of the Company. Name Age Position - ---- --- -------- Norman S. Matthews ......... 65 Chairman of the Board and Director Robert N. Friedman ......... 57 Chairman, Chief Executive Officer and Director Robert Glass................ 51 President, Secretary, Chief Operating Officer and Director Anthony D'Annibale.......... 37 Senior Vice President Merchandising Jan Heppe................... 46 Senior Vice President and Director of Stores Dennis R. Hernreich......... 42 Vice President Finance, Chief Financial Officer, Treasurer and Assistant Secretary Philip Kaplan (1) .......... 67 Director Janet A. Hickey ............ 53 Director Richard E. Kroon ........... 55 Director Christina A. Mohr .......... 42 Director Arthur E. Reiner............ 57 Director Cynthia R. Cohen ........... 45 Director Lorrence T. Kellar.......... 60 Director - ----------- (1) Until April 1, 1998, Mr. Kaplan was President, Secretary and Chief Operating Officer of the Company. Set forth below are the biographies of the directors of the Company. The term of the Class A Directors expires at the first annual meeting of the Company's stockholders following the end of the Company's fiscal year ending January 30, 1999. The term of the Class B Directors expires at the first annual meeting of the Company's stockholders following the end of the Company's fiscal year ending January 29, 2000. The term of the Class C Directors expires at the first annual meeting of the Company's stockholders following the end of the Company's fiscal year ending January 31, 1998. Class A Directors Robert N. Friedman has been Chairman, Chief Executive Officer and a Director of the Company since November 1995 and was President, Chief Executive Officer and a Director of the Company from September to November 1995. Mr. Friedman was President and Chief Executive Officer of Loehmann's Holdings, Inc., a predecessor of the Company 42 ("Holdings") from April 1992 until May 1996. Prior to joining the Company, 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. Robert Glass has been a Director of the Company since February 1998 and has served as President, Chief Operating Officer and Secretary since April 1998. From September 1994 to March 1998, Mr. Glass served as Senior Vice President, Chief Financial Officer, Treasurer and Assistant Secretary of the Company. 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. Philip Kaplan has been a Director of the Company since September 1988 and served as President, Chief Operating Officer and Secretary of the Company from November 1995 to March 1998. He was Chairman and Chief Operating Officer of the Company from September to November 1995 and served as Chairman, Chief Operating Officer, Secretary and Treasurer 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. Norman S. Matthews has been Chairman of the Board and a Director of the Company 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 Enterprises, Inc. and its subsidiary, Finlay Fine Jewelry Corporation, a jewelry lessee in major department stores, Toys "R" Us, a children's specialty retailer, and Eye Care Centers of America, Inc. Class B Directors Lorrence T. Kellar has been a Director of the Company since September 1997. Mr. Kellar has been Vice President of Real Estate for the Kmart Corporation since April 1996. Prior to that, Mr. Kellar had been Vice President of Real Estate and Finance of The Kroger Co., a supermarket retailer, from 1988 to April 1996. Richard E. Kroon has been a Director of the Company 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 Donaldson Lufkin & Jenrette, Inc. ("DLJ"), since 1981. Mr. Kroon is President, Director and Chief Executive Officer of 43 DLJ Capital Corporation, a subsidiary of DLJ. He is a Director of Educational Medical, Inc., the National Venture Capital Association, and several private companies. Christina A. Mohr has been a Director of the Company since September 1995 and was a director of Holdings from January 1994 until May 1996. Ms. Mohr has been Managing Director at Salomon Smith Barney (formerly Salomon Brothers, Inc.), an investment banking firm, since February 1997. Prior to that, Ms. Mohr had been Managing Director, Banking Group of Lazard Freres & Co. LLC, an investment banking firm, from 1990 to February 1997. She was a Vice President, Banking Group, from 1984 to 1990. She is a Director of United Retail Group, Inc., a retail chain. Class C Directors Cynthia R. Cohen has been a Director of the Company since September 1995 and was a Director of Holdings from January 1994 until May 1996. Since 1990, Ms. Cohen has been President of Strategic Mindshare, a retail marketing and strategy consulting firm. Prior to that, Ms. Cohen was a partner of Touche Ross (a predecessor of Deloitte & Touche LLP). Ms. Cohen is a Director of One Price Clothing, Inc., an apparel retail chain, Office Depot, an office products retailer, the Mark Group and Capital Factors, Inc., a factoring company. Janet A. Hickey has been a Director of the Company 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 DLJ, 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 several private companies. Arthur E. Reiner has been a Director of the Company since August 1996. Mr. Reiner has been President and Chief Executive Officer of Finlay Enterprises, Inc. the parent of Finlay Fine Jewelry Corporation, since January 1996, Vice Chairman of Finlay Enterprises, Inc. since January 1995 and Chairman and Chief Executive Officer of Finlay Fine Jewelry Corporation 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. Set forth below are biographies of the executive officers of the Company who are not also directors. Anthony D'Annibale has been Senior Vice President Merchandising of the Company since 1996. From 1994 to 1996 he was Vice President of Merchandising and from 1989 to 1994 he served in various merchandising capacities of the Company. Prior to 1989, Mr. D'Annibale held various buying positions at Steinbach Department Stores - a division of the Amcena Corporation. Jan Heppe has been Senior Vice President and Director of Stores of the Company since September 1995. Prior to that time, she held a number of senior retail management 44 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. Dennis R. Hernreich has been Vice President Finance, Chief Financial Officer, Treasurer and Assistant Secretary of the Company since April 1998. From June 1996 to March 1998, Mr. Hernreich served as Vice President Finance and Controller of the Company. From 1991 to 1996 he served as Director, Executive Vice President and Chief Financial Officer of Gibson's Discount Centers. Mr. Hernreich's other positions have included Senior Vice President for Finance and Administration for Associated Agencies and Chief Financial Officer for Nucorp, Inc./Equity Group. Section 16(a) Beneficial Ownership Reporting Compliance Based upon a review of Forms 3 and 4 and amendments thereto furnished to the Company during and with respect to its most recent fiscal year and upon written representations from persons known to the Company to be subject to Section 16 of the Exchange Act (a "reporting person"), no one, except Lorrence T. Kellar, Christina A. Mohr and Philip Kaplan did not file when due reports required by Section 16(a) of the Exchange Act during the fiscal year ended January 31, 1998. Lorrence T. Kellar filed his Form 3 late, Christina Mohr will file her Form 5 late, and Philip Kaplan will file his Form 5 late. 45 ITEM 11. EXECUTIVE COMPENSATION The following table sets forth the compensation awarded to, earned by or paid to the named executive officers for services rendered to the Company during the fiscal years ended January 31, 1998, February 1, 1997 and February 3, 1996. SUMMARY COMPENSATION TABLE
Long Term Compensation Awards Other Annual Securities All Other Fiscal Compensation Underlying Compensation ($) Name and Principal Position Year Salary($) Bonus($) ($) Options (#) (1) --------------------------- ---- --------- -------- --- ----------- --- Annual Compensation Robert N. Friedman............... 1997 575,000 -- (2) -- 2,406 Chairman and Chief 1996 550,000 550,000 (2) 63,614 2,750 Executive Officer 1995 475,000 135,000 (2) 187,639 3,471 Philip Kaplan.................... 1997 375,000 -- (2) -- 2,375 President and Chief 1996 374,400 240,000 (2) 25,170 1,875 Operating Officer 1995 356,250 105,000 (2) 14,657 3,471 Robert Glass..................... 1997 257,500 -- (2) -- 2,388 Senior Vice President and 1996 232,500 56,870 (2) 31,172 1,213 Chief Financial Officer 1995 211,250 17,500 (2) -- 574 Jan Heppe(3)..................... 1997 240,000 -- (2) -- 2,400 Senior Vice President and 1996 198,875 50,000 (2) 31,172 1,125 Director of Stores 1995 62,327 10,000 (2) -- -- Bonnie Dexter-Wolterstorff(4) ... 1997 186,500 -- (2) -- 2,375 Senior Vice President, 1996 180,000 45,695 (2) 31,172 925 Merchandising 1995 165,000 20,000 (2) -- 3,471
- ----------- (1) Consists of (i) Company contributions in fiscal 1997 under the Loehmann's Inc. 401(k) Savings and Investment Plan of $2,406 for Mr. Friedman, $2,375 for Mr. Kaplan, $2,388 for Mr. Glass, $2,400 for Ms. Heppe and $2,375 for Ms. Dexter; (ii) Company contributions in fiscal 1996 under the Loehmann's 401(k) Savings and Investment Plan of $2,750 for Mr. Friedman, $1,875 for Mr. Kaplan, $1,213 for Mr. Glass, $1,125 for Ms. Heppe and $925 for Ms. Dexter-Wolterstorff; and (iii) Company contributions in fiscal 1995 under the Loehmann's, Inc. Deferred Profit Sharing Plan of $3,471 for each 46 of Mr. Friedman, Mr. Kaplan and Ms. Dexter-Wolterstorff and reimbursement of moving expenses in fiscal 1995 of $574 for Mr. Glass. (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 $50,000. (3) Ms. Heppe became an executive officer of the Company in October 1995. (4) Ms. Dexter-Wolterstorff resigned from her position with the Company in February 1998. The following table sets forth information concerning the value of unexercised options as of January 31, 1998 held by the executives named in the Summary Compensation Table above. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
Number of Securities Shares Underlying Value of Unexercised Acquired Value Unexercised Options In-the-Money Options On Exercise Realized at Fiscal Year End(#) at Fiscal Year End ($) Name (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable(1) - ---- --- --- ------------------------- ---------------------------- Robert N. Friedman 252,235 53,992 $ 151,076 -- Philip Kaplan 118,458 $ 719,514 102,716 0 $ 213,096 -- Robert Glass 11,170 31,174 $ 18,417 $ 12,284 Jan Heppe 4,468 26,704 -- -- Bonnie Dexter- Wolterstorff 3,796 2,234 -- --
- ------------------------------------------------------- (1) Based on a stock price at January 30, 1998 of $3 13/16. Employment and Severance 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 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 financial goals (as defined by the Compensation Committee). The Friedman Agreement also provides for certain insurance and other benefits to be maintained and paid by the Company. 47 The Friedman Agreement provided for a grant to Mr. Friedman on November 1, 1995, of options to purchase up to 187,638 shares of Common Stock at an exercise price of $5.01 per share. Of such options, 71,474 vested in fiscal 1996, 71,474 vested in fiscal 1997 and 44,690 vest automatically at the end of fiscal 1998. 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 vested automatically at the end of fiscal 1996 and the remainder vested at the end of fiscal 1997. In addition, on April 5, 1996 the Company granted Mr. Friedman options to purchase 27,907 shares of Common Stock at an exercise price of $8.06. Of such options, 9,302 vested in fiscal 1996, 9,303 vested in fiscal 1997 and 9,302 will vest in fiscal 1998. As of April 1, 1998, 383,484 of Mr. Friedman's options had vested and, of these vested options, 131,245 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 full. If Mr. Friedman's employment is terminated by the Company without Cause, 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 Company also will be required to maintain life insurance for Mr. Friedman and medical insurance for Mr. Friedman and his spouse, as described in the foregoing sentence, upon Mr. Friedman's retirement or voluntary termination from the Company after the period of employment provided for in the Friedman Agreement. 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. GLASS Mr. Glass's employment agreement (the "Glass Agreement"), provides that he will serve as President and Chief Operating Officer of the Company from April 1, 1998 through March 31, 2000 for an annual base salary of $300,000. The annual base salary shall be reviewed each April 1 except that no such review shall result in any reduction of the annual base salary then in effect. Mr. Glass also is eligible to receive an annual bonus equal to 60% of his annual base salary in effect, if, for each such fiscal year, the Company attains its 48 targeted financial goals (as defined by the Compensation Committee). The Glass Agreement also provides for certain insurance and other benefits to be maintained and paid by the Company. The Glass Agreement provided for a grant to Mr. Glass on March 4, 1998 of options to purchase 100,000 shares of Common Stock at an exercise price of $3.50 per share. The options vest and become exercisable on the fifth anniversary of the date of the grant and expire on the tenth anniversary of the date of the grant. The Glass Agreement provides that if Mr. Glass's employment is terminated by the Company without Cause or by Mr. Glass with Good Reason (as such terms are defined in the Glass 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. Glass 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. Glass's employment is terminated, either by the Company or by Mr. Glass for Good Reason, coincident with or within one-year after a Change of Control (as defined in the Glass Agreement), the Company will be required to pay Mr. Glass a lump sum, in cash, equal to two times his base salary then in effect and all unvested options will vest in full. If Mr. Glass's employment is terminated by the Company without Cause, Mr. Glass 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. Glass 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. Glass and his spouse until their respective deaths. The Company also will be required to maintain life insurance for Mr. Glass and medical insurance for Mr. Glass and his spouse, as described in the foregoing sentence, upon Mr. Glass's retirement or voluntary termination from the Company after the period of employment provided for in the Glass Agreement. The Glass Agreement provides that if Mr. Glass's employment is terminated for any reason, Mr. Glass will not for a period of two years following termination of his employment directly or indirectly (i) solicit or encourage any member of senior management to leave the employment of the Company or (ii) hire any member of senior management who was an employee of the Company during Mr. Glass's employment under the Glass Agreement or the two year period after Mr. Glass's employment is terminated. MS. DEXTER-WOLTERSTORFF The Company is a party to a severance agreement with Ms. Dexter-Wolterstorff. The severance agreement provides for contingent payment of base salary from date of separation through August 7, 1998. Compensation of Members of the Board of Directors For serving as a director of the Company, each non-employee director receives, $15,000 per year, $1,000 per Board of Directors meeting attended in person, $500 per Board 49 of Directors meeting attended by telephone, and $500 per Board of Directors committee meeting attended. Certain directors who are not employees of the Company will be entitled to receive benefits under the Directors Stock Option Plan and all directors of the Company will be entitled to receive benefits under the Directors Deferred Compensation Plan. Under the terms of the Directors Stock Option Plan, each person, who is not an employee of the Company, and who is first elected, appointed or otherwise first becomes a Director (an "Eligible Director") will be granted an option to purchase 6,000 shares of Common Stock as of the date on which such person first becomes an Eligible Director (an "Initial Option"). Each person who is an Eligible Director on February 1st of each year will receive an option to purchase 3,000 shares of Common Stock (an "Annual Option"). The Directors Stock Option Plan also provides that the Board of Directors shall have discretionary authority to award options to acquire up to an aggregate of 100,000 shares of Common Stock to one or more Eligible Directors ("Discretionary Options"). All options granted under the Directors Stock Option Plan are "nonqualified" stock options subject to the provisions of Section 83 of the Internal Revenue Code of 1986, as amended. Each Initial Option and Special Option vests and becomes exercisable in 1/3 increments on each of the first, second and third anniversaries of the date of grant; provided that the Eligible Director is in the service of the Company as a director on such date. Each Annual Option vests and becomes exercisable in full on the one year anniversary of the date of grant, provided that the Eligible Director is in the service of the Company as a director on such date. In the event of the termination of the Eligible Director's service as a director prior to the time all or any portion or an Initial Option, a Special Option, or an Annual Option vests, such option, to the extent not yet vested, terminates. Discretionary Options are subject to vesting conditions established by the Board of Directors and provided in a separate award agreement evidencing the award of such Discretionary Option. Any unexercised portion of an option automatically becomes null and void at the time of the earliest to occur of (i) the expiration of 10 years from the grant date, and (ii) the expiration of one year from the date the Eligible Director's service terminates. The Directors Stock Option Plan provides that the option exercise price for the options shall be the "fair market value" (as defined in the Directors Stock Option Plan) of the Common Stock on the date of grant. In addition, the Company has a consulting agreement with Mr. Kaplan. Mr. Kaplan will act as a director and consultant to the Company. Under the agreement, he is paid a retainer of $75,000 per year and is entitled to a $15,000 per year auto allowance. This consulting agreement became effective in April 1998 and extends for a five-year period. Compensation of Chairman of the Board The Company has a 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 Option Plan (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. 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. Within 180 days upon termination, depending on the cause of termination, the Company has the right to purchase 50 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. In addition, on June 19, 1997, Mr. Matthews was granted options pursuant to the Directors Stock Option Plan to purchase 65,000 shares at $7.0625 per share. Such options shall vest in full on the earlier of (i) June 19, 2001 or (ii) a Change of Control (as defined in the Directors Stock Option Plan) of the Company, and expire at the earlier of (i) 10 years from the grant date and (ii) one year from the date Mr. Matthews' service terminates. Compensation Committee Interlocks and Insider Participation During fiscal 1997, Mr. Kroon, Mr. Matthews and Ms. Cohen served as members of the Compensation Committee of the Board of Directors. 51 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information as of April 28, 1998 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 and (iv) all directors and executive officers as a group. Unless otherwise indicated in the notes below, the address of each beneficial owner is in care of Loehmann's, Inc., 2500 Halsey Street, Bronx, New York 10461. Name and Address of Beneficial Owner Shares of Common Stock Percentage - ------------------------------------ ---------------------- ---------- Sprout Capital V(1)............................ 200,779 2.2% Sprout Growth, L.P.(1)......................... 242,769 2.7% Sprout Growth, Ltd.(1)......................... 27,025 * DLJ Venture Capital Fund II, L.P.(1)........... 12,065 * Donaldson, Lufkin & Jenrette Securities Corporation(1)........................ 126,161 1.4% Alliance Capital Management L.P.(1)............ 1,000 * J&W Seligman & Co. Incorporated(2)............. 1,072,000 11.9% Putnam Investments, Inc.(3).................... 1,006,430 11.2% Goldman, Sachs & Co.(4)........................ 1,004,400 11.2% AIM Management Group Inc.(5)................... 663,400 7.4% Wellington Management Company, LLP(6).......... 571,000 6.4% Norman S. Matthews(7).......................... 129,562 1.4% Robert Friedman(8)............................. 252,235 2.7% Philip Kaplan(9)............................... 147,174 1.7% Robert Glass(10)............................... 11,170 * Jan Heppe(11).................................. 4,468 * Bonnie Dexter-Wolterstorff (12)................ 9,264 * Janet A. Hickey(1)(13)......................... 2,000 * Lorrence T. Kellar (14)........................ 3,000 * Richard E. Kroon(1)(13)........................ 2,000 * Christina A. Mohr(13).......................... 2,000 * Arthur E. Reiner(13)........................... 2,000 * Cynthia R. Cohen(13)........................... 2,000 * All directors and executive officers as a group (12 persons)(15)........... 566,873 6.0% - ----------- * Less than 1% (1) Based in part upon information provided in a Schedule 13G filed with the Commission. Sprout Capital V, Sprout Growth, L.P., Sprout Growth, Ltd., DLJ Venture Capital II, L.P., Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ" and, collectively with the other entities named above, the "Sprout Group") are all affiliates. Ms. Hickey and Mr. Kroon 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 52 affiliates. The business address of all such Sprout Group entities is 277 Park Avenue, New York, New York 10172. Ms. Hickey and Mr. Kroon disclaim beneficial ownership of such shares. Because of their direct and indirect ownership of a majority of the capital stock of DLJ, AXA Assurances I.A.R.D. Mutuelle, AXA Assurances Vie Mutuelle, Alpha Assurances I.A.R.D. Mutuelle, Alpha Assurances Vie Mutuelle, AXA Courtage Assurance Mutuelle, AXA, Alliance Capital Management L.P. and The Equitable Companies Incorporated may be deemed to beneficially own all of the shares of Common Stock beneficially owned by the Sprout Group. The business address of Alpha Assurances I.A.R.D. Mutuelle and Alpha Assurances Vie Mutuelle is 100-101 Terrasse Boieldien, 92042 Paris La Defense France. The business address of AXA Assurances I.A.R.D. Mutuelle and AXA Assurances Vie Mutuelle is 21, rue de Chateaudun, 75009 Paris France. The business address of AXA Courtage Assurance Mutuelle is 26, rue Louis le Grand, 75002 Paris France. The business address of AXA is 23, avenue Matignon, 75008 Paris France. The business address of The Equitable Companies Incorporated is 787 Seventh Avenue, New York, New York 10019. The business address of Alliance Capital Management L.P. is 1345 Avenue of the Americas, New York, New York 10105. (2) Based upon information provided in a Schedule 13G filed with the Commission. The holdings of J.&W. Seligman & Co. Incorporated ("JWS") include all shares of Common Stock beneficially owned by Seligman Value Fund Series, Inc. - Seligman Small-Cap Value Fund (the "Fund"). JWS, as investment adviser for the Fund, may be deemed to beneficially own the shares of the Fund. Accordingly, the shares owned by JWS include those shares owned by the Fund. In addition, William C. Morris, as the owner of a majority of the outstanding voting securities of JWS, may be deemed to beneficially own the shares reported herein by JWS. The business address of JWS, the Fund and William C. Morris is 100 Park Avenue, New York, NY 10017. (3) Based upon information provided in a Schedule 13G filed with the Commission. The holdings of Putnam Investments, Inc. include all shares of Common Stock beneficially owned by Putnam Investment Management, Inc. and The Putnam Advisory Company, Inc., investment advisors which are subsidiaries of Putnam Investments, Inc. Because of its ownership of all of the capital stock of Putnam Investments, Inc., Marsh & McLennan Companies, Inc. may be deemed to beneficially own all of the shares of Common Stock beneficially owned by Putnam Investments, Inc. The business address of Putnam Investments, Inc., Putnam Investment Management, Inc. and the Putnam Advisory Company, Inc. is One Post Office Square, Boston, Massachusetts 02109. The business address of Marsh & McLennan Companies, Inc. is 1166 Avenue of the Americas, New York, New York 10036. (4) Based upon information provided in a Schedule 13G filed with the Commission. The holdings of The Goldman Sachs Group, L.P. include all shares of Common Stock beneficially owned by Goldman, Sachs & Co. and Goldman Sachs Trust on behalf of GS Small Cap Value Fund, both of which are subsidiaries of Goldman, Sachs & Co. The business address for the Goldman Sachs Group, L.P. and Goldman, Sachs & Co. is 85 Broad Street, New York, NY 10004 and the business address of Goldman Sachs Trust is 1 New York Plaza, New York, NY 10004. (5) Based upon information provided in a Schedule 13G filed with the Commission. The holdings of AIM Management Group Inc. include all shares of Common Stock beneficially owned by AIM Advisors, Inc. and AIM Capital Management, Inc., investment advisors which are subsidiaries of AIM Management Group Inc. The business address of all such entities is 11 Greenway Plaza, Suite 1919, Houston, Texas 77046. 53 (6) Based upon information provided in a Schedule 13G filed with the Commission. The holdings of Wellington Management & Company, LLP include all shares of Common Stock beneficially owned by Wellington Trust Company, NA, a wholly-owned subsidiary of Wellington Management Company. The business address of all such entities is 75 State Street, Boston, Massachusetts 02109. (7) Includes 22,345 shares of Class B Common Stock which are convertible into Common Stock and options to purchase 89,378 shares of Common Stock which are exercisable within sixty (60) days of the date hereof. Does not include options to purchase 65,000 shares of Common Stock which are not exercisable within sixty (60) days of the date hereof. Includes 17,839 shares owned. (8) Includes options to purchase 252,235 rounded shares of Common Stock which are exercisable within sixty (60) days of the date hereof. Does not include options to purchase 53,992 shares of Common Stock which are not exercisable within sixty (60) days of the date hereof. (9) Includes options to purchase 102,716 shares of Common Stock which are exercisable within sixty (60) days of the date hereof. Includes 44,458 shares owned. (10) Includes options to purchase 11,170 shares of Common Stock which are exercisable within sixty (60) days of the date hereof. Does not include options to purchase 31,174 shares of Common Stock which are not exercisable within sixty (60) days of the date hereof. (11) Includes options to purchase 4,468 shares of Common Stock which are exercisable within sixty (60) days of the date hereof. Does not include options to purchase 26,704 shares of Common Stock which are not exercisable within sixty (60) days of the date hereof. (12) Includes options to purchase 6,030 shares of Common Stock which are exercisable within sixty (60) days of the date hereof, and 3,234 shares owned. Does not include options to purchase 28,266 shares of Common Stock which are not exercisable within sixty (60) days of the date hereof. (13) Includes options to purchase 2,000 shares of Common Stock which are exercisable within sixty (60) days of the date hereof. Does not include options to purchase 7,000 shares of Common Stock which are not exercisable within sixty (60) days of the date hereof. (14) Includes 3,000 shares owned. Does not include options to purchase 9,000 shares of Common Stock which are not exercisable within sixty (60) days of the date hereof. (15) Includes 22,345 shares of Class B Common Stock which are convertible into Common Stock and options to purchase 475,997 shares of Common Stock which are exercisable within sixty (60) days of the date hereof. Does not include options to purchase 249,136 shares of Common Stock which are not exercisable within sixty (60) days of the date hereof. Includes 68,531 shares owned. 54 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS According to filings made with the Commission, during fiscal 1997, Putnam Investors, Inc. and its affiliates beneficially owned more than 5% of the Company's Common Stock. The Company believes that Putnam Investors, Inc. and its affiliates own Notes. 56 PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) Documents filed as part of the report. (1) List of Financial Statements Report of Independent Auditors Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Changes in Stockholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements (2) List of Financial Statement Schedules Schedule II, Valuation and Qualifying Accounts Other schedules are omitted because they are either not applicable or the required information is shown in the financial statements or notes thereto. (3) List of Exhibits 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 hereby 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, as Trustee, filed as Exhibit 4.1 to Loehmann's, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended May 4, 1996 (Comm. File 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., BankAmerica Business Credit, Inc., as Agent, and certain Banks party thereto, filed as Exhibit 4.2 to Loehmann's, Inc.'s Registration Statement on Form S-1 (Registration No. 333-12881) and incorporated herein by reference. 4.3 A letter from Loehmann's, Inc. to the Securities and Exchange Commission agreeing to furnish copies of certain debt instruments.+ 57 4.4 First Amendment to Credit Agreement, dated as of July 23, 1997, between Loehmann's, Inc., and BankAmerica Business Credit, Inc., as Agent and sole lender, filed as Exhibit 4.1 to Loehmann's, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended August 2, 1997 (Comm. File No. 0-28410), and incorporated herein by reference. 4.5 Second Amendment to Credit Agreement, dated as of August 15, 1997, between Loehmann's, Inc., and BankAmerica Business Credit, Inc., as Agent and sole lender, filed as Exhibit 4.2 to Loehmann's, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended August 2, 1997 (Comm. File No. 0-28410), and incorporated herein by reference. 4.6 Third Amendment to Credit Agreement, dated as of December 30, 1997, between Loehmann's, Inc., and BankAmerica Business Credit, Inc., as Agent and sole lender.+ 10.1 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. 10.2 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 to Loehmann's Holdings, Inc.'s Registration Statement on Form S-4 (Registration No. 33-71922) and incorporated herein by reference. 10.3 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 Holdings, Inc.'s Registration Statement on Form S-1 (Registration No. 33-97100) and incorporated herein by reference. 10.4 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 Holdings, Inc.'s Registration Statement on Form S-1 (Registration No. 33-97100) and incorporated herein by reference. 10.5 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 Holdings, Inc.'s Registration Statement on Form S-1 (Registration No. 33-97100) and incorporated herein by reference. 57 10.6 Amendment No. 1 to Employment Agreement among Loehmann's Holdings, Inc., Loehmann's, Inc. and Robert N. Friedman dated as of April 5, 1996, filed as Exhibit 10.12 to Loehmann's Holdings, Inc.'s Registration Statement on Form S-1 (Registration No. 33-97100) and incorporated herein by reference. 10.7 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. 10.8 Loehmann's, Inc. Amended and Restated Deferred Profit Sharing Plan, effective January 31, 1993, filed as Exhibit 10.15 to Loehmann's Holdings, Inc.'s Registration Statement on Form S-1 (Registration No. 33-97100) and incorporated herein by reference. 10.9 Loehmann's Holdings, Inc. 1988 Stock Option Plan, filed as Exhibit 10.10 to Loehmann's Holdings, Inc.'s Registration Statement on Form S-1 (Registration No. 33-25718) and incorporated herein by reference. 10.10 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. 10.11 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. 10.12 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. 10.13 Non-Qualified Stock Option Agreement dated as of December 10, 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. 10.14 Employment Agreement between Loehmann's, Inc. and Robert Glass, dated as of February 27, 1998.+ 10.15 Consulting Agreement between Loehmann's, Inc. and Philip Kaplan, dated as of April 3, 1998.+ 58 10.16 Severance Agreement between Loehmann's, Inc. and Bonnie Dexter-Wolterstorff, dated January 9, 1998.* 10.17 Form of Agency Agreement between Loehmann's, Inc. and a joint venture of Gordon Brothers Retail Partners, LLC and The Ozer Group, LLC, dated February 27, 1998.* [^] 23 Consent of Independent Auditors.+ 24 Powers of Attorney.+ 27 Financial Data Schedule.+ (b) Reports on Form 8-K No report on Form 8-K was filed during the quarter ended January 31, 1998. - -------------- * Filed herewith + Previously filed 59 SIGNATURES Pursuant to the requirements of Section 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this amendment to its Annual Report on Form 10-K to be signed on its behalf by the undersigned thereunto duly authorized. LOEHMANN'S, INC. Dated: February 11, 1999 By: /s/ Robert Glass -------------------- Robert Glass, President, Chief Operating Officer, Secretary and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated. Signature Title Date - --------- ----- ---- * Chairman of the Board and Director - ---------------------- Norman S. Matthews * Chairman, Chief Executive Officer and - ---------------------- Director Robert N. Friedman /s/ Robert Glass Director - ---------------------- Robert Glass * Senior Vice President, Finance, Chief - ---------------------- Financial Officer, and Chief Accounting Dennis R. Hernreich Officer * Director - ---------------------- Philip Kaplan * Director - ---------------------- Janet A. Hickey * Director - ---------------------- Richard E. Kroon Director - ---------------------- Christina A. Mohr * Director - ---------------------- Arthur E. Reiner * Director - ---------------------- Cynthia R. Cohen 60 * Director - ---------------------- Lorrence T. Kellar * By: /s/ Robert Glass -------------------- Robert Glass Attorney-in-fact Dated: February 11, 1999 EX-10.16 2 EXHIBIT 10.16 EXHIBIT 10.16 January 9, 1998 TO: BONNIE DEXTER-WOLTERSTORFF FROM: LINDA NASH MERKER This letter is to confirm our mutual understanding of the arrangement you have discussed and agreed upon with respect to your Separation from Loehmann's Inc. The following provisions represent both your benefit entitlement and the additional considerations which have been agreed upon in order to reach this agreement. As agreed, neither the specific terms nor the existence of this agreement will be disclosed by you to anyone except as required by law or for the purpose of obtaining advice as provided for herein. 1. Your employment with Loehmann's will be final on February 3, 1998. All verbal or written inquiries made of either Loehmann's, Inc. or members of the Senior Management team, will be responded to with a confirmation of Voluntary Resignation versus Termination. 2. If the terminated member of senior management has not obtained other employment at the end of her severance, Loehmann's agrees to pay, on a month to month basis, her salary for a period of up to and including six (6) months. During this time, severance will be terminated if she accepts other employment and will be mitigated if employment is of a non-permanent nature. These payments, unless otherwise terminated by acceptance of other employment, will continue even if the Company is sold or enters into any form of Bankruptcy (Chapter 11 or 7). 3. For the period 3/l/98 through 2/28/99, if Ms. Dexter-Wolterstorff has not obtained other employment with available coverage, she will continue to have group medical insurance at no cost to her. Beginning on 3/l/99, if she has not obtained other employment which entities her to benefits, she will be eligible to continue 2 health coverage in accordance with COBRA, for the remaining six (6) months or until otherwise eligible for health care coverage, whichever occurs first. 4. Your regular 401K benefits will be payable to you in accordance with the terms of the 401K Plan. These payments will be made in accordance with the terms of the 401K Plan for a resignation or retirement, not termination. 5. All of your vested stock options, including vested 1997 options, will be made available to you to purchase and sell after 2/3/98. 6. You understand that any and all payments, encompassed within items 1 through 5 above, will be subject to such tax treatment as applies, and to such deductions, if any, as may be required under applicable tax laws. 7. Upon completion of all severance payments, if you have not accepted other employment, Loehmann's, Inc. will not contest any claim made for unemployment benefits. 8. You agreed that you will take no action which is intended, or would reasonably be expected, to harm Loehmann's Inc., the officers or employees of each ("the Company"), impair the Company's reputation, or lead to unwanted or unfavorable publicity to the Company, nor will you disclose any confidential or proprietary information obtained by you in the course of your employment. Nothing herein shall preclude you from accepting any other employment, including employment with a competing retailer. 9. Loehmann's, Inc., the officers or employees of each ("The Company") agree that they will take no action which is intended, or would reasonably be expected, to harm Bonnie Dexter-Wolterstorff, impair her reputation, or lead to unwanted or unfavorable publicity concerning her. 10. You agree that the terms, existence and circumstances surrounding this Agreement shall be and remain confidential and shall not be disclosed to anyone except as required by law or for the purpose of obtaining advice as provided for herein. 11. In consideration for the Company's commitment to the various arrangements described in the preceding paragraphs, and in lieu of any other benefits of payments, as a full and final mutual settlement, you hereby release and discharge Loehmann's Inc., and the current and former directors, officers, shareholders, agents and employees of each, and each of their predecessors, successors and assigns, (herein "The Loehmann's Entity") from any and all claims and causes of action (except for the payments and benefits specifically set forth in this Agreement) arising out of or related to your employment or separation from employment, 3 including, but not limited to, any claims for severance pay, vacation pay, or other compensation, race, color, national origin, ancestry, religion, marital status, sexual orientation, pregnancy, disability (as defined by the Americans with Disabilities Act, or any other federal, state or local law), age or other unlawful discrimination (under the Age Discrimination in Employment Act, as amended by the Older Workers Benefit Protection Act of 1990, Title VII of the Civil Rights Act, as amended, or any other federal, state, or local laws), breach of implied or express contracts, breach of promises, misrepresentation, fraud, estoppel or wrongful discharge, that you, your heirs, executors, administrators, successors, and assigns now have, ever had or may hereafter have, whether known or unknown, suspected or unsuspected, up to and including the date of this Agreement. It is further agreed that you have not and will not institute any complaint, lawsuit, or action at law or otherwise against the Loehmann's Entity and shall hold the Loehmann's Entity harmless against such actions (except, of course, for the right to the various payments and benefits specified in this Agreement which describes the complete arrangements to which we agree). 12. It is expressly understood and agreed that this settlement and the effectuation of its terms do not constitute an admission or statement by any party that Loehmann's has acted unlawfully or is otherwise liable. It is further agreed that evidence of this settlement, its terms or the circumstances surrounding the parties entering into this Agreement, shall be inadmissible in any action or lawsuit of any kind, except an action for alleged breach of this Agreement. 13. This agreement contains the entire understanding of the parties hereto and supersedes and revokes any and all prior agreements, discussions, negotiations or understandings between the parties. 14. You agree to return to Loehmann's all documents, software, equipment, and all other materials belonging to Loehmann's, including but not limited to, your Loehmann's computer, modem, printer, identification, keys, etc., wherever such items may be located, together with all copies (in whatever form they exist) of all materials related to your employment or obtained or created in the course of your employment with Loehmann's. 15. If any section of this Agreement should be held invalid by operation of law or by any tribunal of competent jurisdiction, or if compliance with or enforcement of any section is restrained by such tribunal, the application of any and all other sections, other than those which have been held invalid, shall not be affected. 16. You have the right to consult with an attorney to review this Agreement and are encouraged to do so. 4 17. You have twenty-one (21) days to consider this Agreement from the date it was first given to you although you may accept it anytime within those twenty-one (21) days. 18. You have seven (7) days after signing this Agreement to revoke it by notifying Loehmann's, in writing, of such revocation within the seven (7) day period. However, if you do not revoke your signature, the Agreement will become effective on the eighth day after you sign it ("Effective Date"). If the arrangements we have discussed and agreed upon are accurately set forth above, please confirm your approval and acceptance of our agreement by signing the enclosed copy of this Agreement, and returning the copy to me. Linda Nash Merker Vice President-Human Resources I acknowledge that I have carefully read this agreement and understand all of its terms including the full and final release of claims set forth above. I further acknowledge that I have voluntarily entered into this agreement, that I have not relied upon any representation or statement, written or oral, not set forth in this agreement and that I have been given the opportunity and encouraged to have this agreement reviewed by my attorney and tax advisor. I also acknowledge that I have been afforded 21 days to consider this agreement and that I, or Loehmann's, have 7 days after signing this agreement to revoke it by notifying the other party, in writing, of such revocation. If neither party has revoked this agreement, the agreement will become effective on the eighth day after I have signed it (the "effective date"). - --------------------------------- - --------------------------------- DATE 5 EX-10.17 3 EXHIBIT 10.17 EXHIBIT 10.17 AGENCY AGREEMENT This Agency Agreement is made this 27th day of February, 1998 by and between a joint venture of Gordon Brothers Retail Partners, LLC, a Massachusetts limited liability company with a principal place of business at 40 Broad Street, Boston, Massachusetts 02109 and The Ozer Group, LLC, a Massachusetts limited liability company with a principal place of business at 75 Second Avenue, Hillsite Office Building, Needham, MA 02194 (the "Agent") and Loehmann's, Inc. (the "Merchant.") WHEREAS, the Merchant operates and desires that the Agent act as the Merchant's exclusive sales agent for the limited purpose of conducting the Sale at the Stores (as such terms are hereinafter defined.) NOW THEREFORE, in consideration of the mutual covenants and agreements set forth hereinafter and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Agent and the Merchant hereby agree as follows: 1. Agency Appointment (a) The Agent shall serve as the Merchant's exclusive agent to conduct "store closing" or similar sales (the "Sales") of all inventory assets as further defined in subsection 2(c) hereof (the "Merchandise") from Merchant's eight (8) stores located at the locations set forth on Exhibit 1(a) hereto and Merchants store located in Sawgrass Mills ("Sawgrass") as described in Exhibit 1 (b) hereto (collectively, the "Stores.") It is expressly agreed that Agent shall be entitled to advertise the Sale consistent with the preceding sentence. All such advertising will be submitted to the Merchant for approval, which approval shall not be unreasonably withheld. Absent a response from the Merchant with regard to Agent's request for such approval within one business day of Merchant's receipt of Agent's request, such advertising will be deemed approved. 1 (b) Merchant and Agent agree that the Sale at Sawgrass shall be governed by the terms of Exhibit 1(b) attached hereto, and that (i) except to the extent specifically referenced in Exhibit 1(b), all of the terms of this Agreement shall control as to Sawgrass, and (ii) in the event of a conflict relating to the terms of Sale at Sawgrass, the provisions of Exhibit 1(b) shall control as to Sawgrass only. 2. Merchandise (a) Inventory The Agent shall cause to be taken a "Retail Price" and SKU physical inventory (as hereinafter defined) of the Merchandise, as defined in subsection 2(c), to be conducted beginning at the close of business at the Stores on March 5, 1998 ("Inventory Date") and no sales shall be transacted during the taking of the inventory. Merchant and Agent shall jointly employ RGIS or Washington Inventory Service to conduct such inventory, and Merchant and Agent each shall pay 50% of the costs and fees of such inventory taking service. Other than such costs and fees, each of Merchant and Agent shall bear their own costs relative thereto. Merchant and Agent shall each have representatives present during the inventory taking and each shall have the right to review and verify the listing and tabulation of the inventory count as provided by the inventory taking service. The procedures to perform the inventory taking and its verifications are set forth in Exhibit 2(a). Prior to the inventory taking, Agent shall have full access to all pricing files and all documents and files of Merchant relative to the actual costs and Retail Prices of the Merchandise. (b) Valuation For purposes of this Agreement "Retail Price" shall mean the lowest ticketed price offered to the public as of the physical inventory taking, subject to a verification that (a) no tickets have been marked up since February 6, 1998; (b) all ticketing, including ticketing of on-order inventory received from today to the date of the physical inventory, will be done in accordance with Merchant's customary, historic and ordinary ticketing practices and consistent with current ticketing (subject to Sections 2(c) and 2(d) hereof); and (c) all normal course hard markdowns 2 have been taken consistent with past and customary practices (subject to Sections 2(c) and 2(d) hereof.) (c) Merchandise Subject to this Agreement For purposes hereof, Merchandise shall mean all Merchandise inventory that is located at the Stores from today, including goods received at the Stores prior to and during the inventory taking in the ordinary course of business; inventory transferred from Merchant's remaining operating stores, as "clearance" goods, as herein defined; and "defective" goods. "Clearance" goods are goods which prior to the Inventory Date are being transferred to the Stores (at Merchant's cost and expense but with Agent's oversight and direction) from Merchant's other ongoing stores, all of which either shall reflect at least a 25% hard markdown or shall be valued as if at least a 25% markdown were taken, if such hard markdown is not so reflected. If such hard markdown is not so reflected on any item within a given SKU, then the markdown to be applied shall be consistent with the hard markdown on other items within such "Clearance" Merchandise is more particularly described in Exhibit 2(b) hereto as to quantity, mix and category. "Defective" goods are goods agreed upon and identified by Merchant and Agent as defective or otherwise not salable in the ordinary course during the inventory taking process because they were dented, scratched, torn, worn, part of a set, dated, mismatched, has broken parts or contain other characteristics making them not "first quality." Display Merchandise shall not be deemed defective per se. If Merchant and Agent cannot agree on the value of an item that is Defective, then such item shall be excluded from Merchandise for purposes of this Agreement and shall be subject to Section 2(e) hereof. On the Inventory Date, as a consequence of transfer and ordinary course sale activity, no more than 90% of the Merchandise at Retail Price shall be Clearance and no less than 10% of the Merchandise will be regular price, non-Clearance items (representing items received from vendors after December, 1997 and January, 1998.) Merchandise shall not include goods held by Merchant on consignment; goods retained by Merchant as bailee; furnishings, fixtures and equipment; goods subject to "special order"; and goods on layaway or held for repair. Merchant shall remain 3 responsible for processing and handling all goods referred to in the preceding sentence, and contracts relating thereto, and Agent shall have no cost, expense or responsibility in connection therewith. (d) Supplies Supplies (e.g. boxes, bags) shall not be redirected or directed by Merchant between or among Stores prior to the Inventory Date so as to alter the relative supplies levels of the Stores from that existing on the date hereof. Merchant does not represent that adequate stocks of supplies are or will be available at the Stores as of the Sale Commencement Date, but additional supplies will be made available to the Sale as needed, with Merchant's cost to provide the additional supplies being an Expense (as defined in Section 3(c)(ii) herein.) (e) Defective Goods If, at the time of the inventory taking, Merchant and Agent cannot agree on the value of an item that is defective goods, Merchant shall retain title to any defective goods not included as "Merchandise" as defined in Section 2(d). Agent shall accept these goods from Merchant for sale as "Merchant Consignment Goods" at prices established by the Agent. The Agent shall receive 30% of the sale price for all sales of Merchant Consignment Goods, and Merchant shall retain 70% of the sales prices thereof. Agent shall pay to Merchant such 70% amount on each Wednesday during the Sale Term on account of sales of Merchant Consignment Goods during the Prior week (Sunday through Saturday.) 3. Sale (a) Term The Sale shall commence as soon as those conditions set forth in Section 6 hereto are satisfied or met (the "Sale Commencement Date") but in no event later than March 6, 1998 so that the advertised portion of the Sale can commence by March 6, 1998. The Agent shall complete the Sale no later than eighty (80) days (after the Sales Commencement Date, and shall have the discretion to terminate the Sale as to any Store at any time within that time frame, unless the Sale is extended by mutual written agreement of Agent and Merchant (the "Sale 4 Termination Date.") If Agent terminates the Sale as to any particular Store prior to the Sale Termination Date, Agent may consolidate goods remaining therein in other Stores. The period from the Sale Commencement Date to the Sale Termination Date at a Store shall be hereinafter referred to as the "Sale Term." (b) Rights of Agent The Agent shall conduct the Sale during the Sale Term in the name of and on behalf of the Merchant in a commercially reasonable manner. The Agent, in the exercises of its sole discretion, however, shall be entitled (i) to establish and implement advertising and promotion programs subject to Section 1, (ii) to establish Sale prices, (iii) to use, during the Sale Term and for purposes of selling the Merchandise, and Merchant Consignment Goods, without charge, all customer lists, credit card facilities, computer hardware and software, furniture, fixtures, equipment, advertising materials, supplies, intangible assets (including Merchant's name, logo, and tax I.D. numbers) and other assets of Merchant whether owned, leased, or licensed which will be returned to Merchant at the end of the Sale Term, and have not been used (e.g. supplies) or otherwise disposed of through no fault of Agent, (iv) to use the Merchant's personnel, to the extent that the Agent, in the exercise of its sole discretion, shall deem appropriate, (v) to have access to the Stores upon the execution of this Agreement to prepare for the Sale and to prepare for the Sale in a manner so as not to disrupt Merchant's on going business operations, and thereafter, and to use all Store keys, case keys, security codes, and safe and lock combinations to gain access to and to operate the Stores, and (vi) to transfer Merchandise between Stores. All sales of Merchandise and Merchant Consignment Goods will be "final sales" and "as is" and all advertisements and sales receipts will reflect the same. Agent shall not warrant the Merchandise or Merchant Consignment Goods in any manner, but will pass to the customers, manufacturers; warranties to the extent transferable. Merchant shall indemnify and hold harmless Agent for all liabilities and costs of whatever kind related to or resulting from any consumer warranty or products liability claims 5 relating to the Merchandise and Merchant Consignment Goods, and at Agent's cost, Agent shall be added as an insured on Merchant's product liability insurance coverage. (c) Obligations of Agent (i) During the Sale Term, the Agent shall collect from Sales at the Stores all Salerelated sales, excise and gross receipts taxes payable to any taxing authorities having jurisdiction, which taxes shall be added to the sales price and shall be paid by the customer. The Agent shall reimburse Merchant for sales taxes collected as part of the weekly reconciliation between Merchant and Agent. Agent agrees to cooperate with the Merchant at Merchant's request as it relates to questions from taxing authorities. So long as Agent complies with the provisions of this subsection, the Merchant shall indemnify and hold harmless the Agent from and against any and all costs including, but not limited to, reasonable attorneys' fees, assessments, fines or penalties which the Agent sustains or incurs as a result or consequence of the failure by the Merchant to promptly pay such taxes to the proper taxing authorities and/or the failure by the Merchant to promptly file with such taxing authorities any and all reports and other documents required, by applicable law, to be filed with or delivered to such taxing authorities. (ii) The Agent shall pay, or if paid by Merchant, reimburse Merchant for, Storelevel operating expenses of the Sales which arise during the Sale Term at the Stores, but not limited to the following: base payroll (including on average $1,500 per Store to be funded by Agent to pay bonuses to Store level employees), payroll related expenses (excluding Merchant providing central administrative services for the Sale, including, home office payroll processing, sales audit, cash reconciliation, data processing and other services, as needed by Agent and which Merchant shall provide to Agent during the Sale Term) and benefits (not to exceed 20% of payroll); inventory insurance; Agent's sale supervisors' fees and travel costs; in-store signage; credit card fees and discounts (at Merchant's customary rates) and chargebacks; costs of Merchandise transfers among the Stores during the Sale Term; advertising and signage; and long-distance telephone expenses (collectively, the "Expenses.") "Expenses" shall also include Occupancy (which 6 is limited to rent, percentage rent, CAM, utilities, real estate and use taxes, Merchant's Associations dues and charges, trash removal, cash register maintenance, building insurance, utilities, HVAC, building and store maintenance and structural repair during the Sale Term on a per store per diem basis per Exhibit 3(a) based upon actual charges.) Expenses specifically excludes any other costs and expenses payable by Merchant (including but not limited to costs resulting from administration of matters such as layaways, store credits and gift certificates, which shall be the responsibility of Merchant); employee benefit costs (such as but not limited to pension, health, sick pay or leave, maternity or other leaves of absence, ERISA coverage, vacation or severance benefits except as they fall under the 20% cap) other costs and expenses not enumerated above; labor, handling and freight to transfer Merchandise to the Stores prior to the Inventory Date; central administrative services necessary for the Sale; and rental for furniture, fixtures and equipment except as such rental's are ordered by Agent. All Expenses shall be paid to or on behalf of Merchant by Agent on each Wednesday for the prior week's (i.e. Sunday through Saturday) Expenses including the Wednesday following the Sale Termination Date. (iii) During the Sale Term, the Merchant shall process the base payroll for all Merchant employees utilized by the Agent. Such employees will be identified by Agent prior to the Sale Commencement Date. Agent may terminate such employees at any time during the Sale, and will use best efforts to notify any employee to be terminated at least seven (7) days prior to termination, except for a termination "for cause" such as dishonesty, fraud or breach of employee duties. Each week during the Sale Term the Agent shall pay to Merchant, or shall deposit to an account designated by the Merchant, the base payroll plus related payroll taxes. Base payroll and related payroll taxes of employees are designated on Exhibit 3(b) hereto. Merchant shall not transfer employees from or between Stores without Agent's consent. The Agent shall not be responsible for reimbursement or payment of any other compensation or costs due to employees, including but not limited to vacation pay, severance pay, sick pay, leaveofabsence pay, or pension benefits or amounts 7 required to be paid by statute or law. Nothing herein shall make Agent liable under any collective bargaining or employment agreement, nor shall Agent be deemed a joint or successor employer. (iv) Except as specifically set forth in this Agreement, the Agent shall not assume, nor shall its actions be construed as an assumption of, any of the Merchant's liabilities or obligations. The Merchant shall indemnify and hold the Agent harmless in respect to all claims, if any, for those obligations and liabilities not specifically assumed by Agent hereunder. The Agent shall indemnify and hold the Merchant harmless in respect to all claims, if any, for those obligations and liabilities specifically assumed by Agent hereunder. 4. Proceeds (a) For purposes of this Agreement, Proceeds shall mean the total amount (in dollars) of all sales of Merchandise made under this Agreement (exclusive of sales excise and gross receipt taxes; credit card fees; and, returns, allowances and customer credits). All sales will be made only for cash and by credit cards currently accepted by Merchant. The Agent shall accept Merchant gift certificates, store credits and due bills issued in accordance with Merchants historic policy prior to the Sale Commencement Date but the amount thereof will not be Proceeds. Agent also shall accept returns of goods sold within fourteen (14) days prior to the Sale Commencement Date in accordance with Merchant's historic return policy, but the amount thereof will not be proceeds. Merchant shall reimburse Agent for all gift certificates, stores credits, due bills and returns which are honored pursuant to this Agreement. All such reimbursement shall be applied as offset to the weekly payment of Expenses provided for in Section 3(c)(ii) hereof. If requested by Merchant, Agent shall purchase such returned goods that are resalable, from Merchant, at that Retail Price (applicable to that category of Merchandise as if such returned item were "Merchandise" hereunder) multiplied by the inverse of the applicable discount at the time of the return, multiplied by twenty-four percent (24%). 8 (b) All Proceeds shall be deposited in special agency accounts, but the Agent shall have sole signatory authority and control over such accounts. Merchant shall execute and deliver all necessary documents to open and maintain the accounts. 5. Payment (a) Payment Amount The Merchant shall receive from Agent the sum of twenty four percent (24%) of the Retail Price of the Merchandise based upon the inventory taking (the "Guaranteed Amount.") (b) Time of Payment Agent shall pay 90% of the estimated Guaranteed Amount to Merchant by wire funds transferred on March 6, 1998 which shall be the Sale Commencement Date and the day following the inventory taking by the inventory taking service and the balance of the actual Guaranteed Amount upon reconciliation of the inventory by Merchant and Agent which shall be no later than March 11, 1998, which shall be five (5) days following completion of the inventory taking. (c) Agent's Payments The Merchant shall not be entitled to the payment of any other monies from the Sale or otherwise, except as specified in this Agreement. The remaining Proceeds (after payment of sales taxes, credit card fees and Expenses) shall belong to Agent in consideration of goods and services provided by Agent hereunder. All Merchandise remaining at the conclusion of the Sale shall become the property of Agent, free and clear of all liens, claims and encumbrances of any kind or nature whatsoever. 6. Conditions The Agent's and Merchant's willingness to enter into the transaction contemplated hereunder and Agent's and Merchant's obligations hereunder are directly conditioned upon the satisfaction, compliance, and completion of the following: 9 (a) The Merchant having obtained all government permits and consents necessary to conduct the Sale and any other necessary governmental approvals. (b) The Merchant having obtained all other consents and approvals, whether required by contract or otherwise (including those of landlords for the Stores) necessary to consummate and perform the transaction herein contemplated. (c) The Merchant having executed and delivered to Agent a Security Agreement in the form of Exhibit 6 hereto and accompanying Uniform Commercial Code financing statements sufficient to grant to Agent a valid and perfected, first priority security interested in the Merchandise. (d) The Merchant possessing and the Agent having the right to the undisturbed and unencumbered use and occupancy of, and the peaceful and quiet possession of, the Stores and assets currently located thereat and the services provided thereto. (e) The Merchant continuing to operate the Stores in the ordinary course of business from the date hereof to the Sale Commencement Date, selling Merchandise during said period at prices currently charged therefor, not promoting or advertising any "sales" or instore promotions to the public, and not making any management personnel moves or changes. If any casualty or act of God substantially inhibits the conduct of business in the ordinary course at any Store, such Store and Merchandise thereat shall be deleted from this Agreement. All Clearance Merchandise shall have been identified either on the tickets or otherwise, and any other Merchandise at the Stores which are the same SKU/category as Clearance Merchandise also shall have been identified as Clearance Merchandise for purposes of this Agreement. (f) Prior to and during the Sale Term, Merchant shall not issue any communications about or concerning the Sale without Agent's prior consent, which will not be unreasonably withheld. (g) The inventory taking shall have been completed at each Store, and the inventory taking service shall have issued its final report to Merchant and Agent. 10 7. Representations and Warranties (a) The Merchant hereby makes the following representations and warranties to the Agent, which shall survive the execution and delivery of this Agreement: (i) The Merchant is a corporation, duly organized validly existing and in good standing under the laws of Delaware and has the corporate power and authority to own, lease and operate its assets, properties and business and to carry on its business as now being conducted. (ii) The Merchant has the right, power and authority required to execute, deliver and perform fully its obligations hereunder. This Agreement has been duly executed and delivered by the Merchant and constitutes the valid and binding obligation of the Merchant enforceable in accordance with its terms. No court order or decree of any federal, state, or local government authority or regulatory body is in effect that would prevent or impair consummation of the transactions contemplated by this Agreement, and no consent of any third party other than that obtained by Merchant is required therefor. (iii) The Merchant has operated the Stores in the ordinary course of business consistent with historical operations and has not conducted any promotions or advertised sales except promotions and sales in the ordinary course of business prior to the Inventory Date consistent with historic promotions and sales for comparable periods last year described in the promotional calendar provided to Agent as Exhibit 7(a). (iv) The Merchant is authorized to conduct business in all States in which the Stores are located and has all licenses, permits and authorizations of governmental bodies necessary therefor. (v) The Merchandise is owned free and clear of liens, claims and encumbrances, except for the liens listed on Exhibit 7(b) hereof. (vi) Since February 6, 1998, Merchant has maintained its pricing files of the Merchandise of the Stores in the ordinary course and prices charged to the public for the 11 Merchandise (whether in-store, by advertisement or otherwise) are the same as set forth in the said pricing files as of and for the periods indicated, except for the promotions and sales described in Section 7(a)(iii). Merchant shall identify and provide, as requested by Agent, copies of all pricing files and records since September 1, 1997 as to all Merchandise in the Stores, and same are true and accurate as to the actual cost to Merchant for purchasing the said Merchandise and as to the selling price to the public therefor as of the dates and for the periods of such files and records. (vii) As of the Inventory Date, the levels of Merchandise (as to quantity) and the mix of Merchandise (as to the type, category, style, brand and description) at the Stores (except Sawgrass Mills) will be no less than $9.0 million or more than $9.5 million per Exhibit 2(b) attached. (viii) There has been since September 1, 1997, and currently is, no threatened or pending legal, administrative or other proceeding with respect to the Stores or any inventory transferred to the Stores pursuant to Section 2(d) hereof which would in any way impact Merchant's responsibilities hereunder. There has not been since September 1, 1997, and there is, no event, report, proceeding or matter concerning or affecting the business of Merchant or its assets which had, has or may have a material adverse impact on the business of Merchant. (b) The Agent represents and warrants to Merchant as follows, which representations and warranties shall survive the execution of this Agreement: (i) The Agent is a joint venture, duly organized, validly existing and in good standing under the laws of the Commonwealth of Massachusetts and has the power and authority to consummate the transactions contemplated hereby. (ii) The Agent has the right, power and authority to execute and deliver this Agreement and perform its obligations hereunder and has taken all necessary action required to authorize the execution, delivery and performance of this Agreement and no further approval is required for the Agent to enter into and deliver this Agreement and to perform its obligations hereunder. 12 (iii) This Agreement has been duly executed and delivered by the Agent and constitutes the legal, valid and binding obligation of the Agent enforceable against the Agent in accordance with its terms subject only to any applicable bankruptcy, insolvency or similar laws affecting the rights of creditors generally. No court order or decree of any federal, state, or local governmental authority or regulatory body is in effect that would prevent or impair or is required for the Agent's consummation of the transactions contemplated by this Agreement and no consent of any third party is required therefor. No contract or other agreement to which the Agent is a party or by which the Agent is otherwise bound will prevent or impair the consummation of the transactions contemplated by this Agreement. (iv) The Agent does not hold or represent any interest adverse to, or have any relationship with the Company, its agents or employees. (v) To the Agent's knowledge, no actions or proceedings have been instituted by or against the Agent, or have been threatened, which question the validity of this Agreement or any action taken or to be taken by the Agent in connection with this Agreement or that, if adversely determined, would have a material adverse effect upon the Agent's ability to perform its obligations under this Agreement. (vi) No actions or proceedings (including, but not limited to, bankruptcy or other insolvency proceedings) have been instituted against the Agent or, to its knowledge, are threatened or are likely to be instituted against the Agent. 8. Insurance (a) Until the expiration of the Sale Term, the Merchant shall continue in force all insurance in such amounts as it currently has in effect which the Merchant represents is accurately shown on Exhibit 8(a) attached hereto. The Agent shall be named as an additional insured and loss payee, as its interests may appear, on all such insurance policies, as applicable. The Agent shall reimburse the Merchant for costs of inventory insurance (which is defined as an Expense) during the Sale Term upon receipt of an invoice therefor from the Merchant. 13 (b) During the Sale Term, the Agent shall maintain, at its cost, comprehensive public liability insurance for injury to property and persons in amounts per Exhibit 8(b) hereto, naming Merchant as an additional insured, as its interests may appear. Agent shall be liable for any deductibles on Agent's property and general liability insurance policy. 9. Furniture, fixtures and equipment At the Merchant's request, Agent either shall offer to purchase furniture, fixtures and equipment at the Stores, or, if mutually agreeable terms cannot be reached, shall arrange for the sale or disposition of furniture, fixtures and equipment, in which case, in consideration of the Agent's efforts, Agent shall retain 7.5% of the sales price received therefor, less sales taxes. 10. Defaults The following shall be "Events of Default" hereunder: (a) The Merchant or Agent shall fail to perform any material obligation hereunder if such failure remains uncured seven days after written notice thereof; or (b) Any representation or warranty made by Merchant or Agent proves untrue when made; or (c) The Sale is terminated at a Store for reasons other than a default, breach or action by Agent not authorized hereunder. Any party's damages or entitlement to equitable relief on account of an Event of Default shall be determined by a Court in the State of New York. 11. Miscellaneous (a) All communications provided for pursuant to this Agreement must be in writing, and mailed by Federal Express or other overnight delivery service, as follows: If to the Agent: 40 Broad Street Boston, MA 02109 Attn: Gary M. Kulp 75 Second Avenue 14 Hillsite Office Building Needham, MA 02194 Attn: Stephen Miller If to the Merchant: 2500 Halsey St. Bronx, New York 10461 Attn: Robert Glass (b) This Agreement shall be construed and enforced in accordance with the laws of the State of New York . (c) This Agreement contains the entire agreement between the parties hereto, and no variations shall be binding upon any party unless set forth in a document duly executed by and on behalf of such party. (d) No consent or waiver, express or implied, by any party, to or of any breach or default by the other in the performance by the other of its obligations hereunder shall be deemed or construed to be a consent or a waiver to or of any other breach or default in the performance by such other party of the same or any other obligations of such party. Failure on the part of any party to complain of any act or failure to act by the other party or to declare the other party in default, irrespective of how long such failure continues, shall not constitute a waiver by such party of its rights hereunder. (e) This Agreement upon execution shall inure to the benefit of and be binding upon the undersigned, all parties in interest and their respective successors and assigns. (f) This Agreement may be executed in several counterparts, each of which when so executed shall be deemed to be an original and such counterparts, together, shall constitute one and the same instrument. Delivery by facsimile of this Agreement or an executed counterpart hereof shall be deemed a good and valid execution and delivery hereof. IN WITNESS WHEREOF, the Agent and Merchant hereby execute this Agreement by their duly authorized representative as a sealed instrument as of the day and year first written above. 15 GORDON BROTHERS RETAIL PARTNERS, LLC By: Its: THE OZER GROUP, LLC By: Its: LOEHMANN'S, INC. By: Its: 16 -----END PRIVACY-ENHANCED MESSAGE-----