-----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, T4I+nWeJyLtyfsSFPE20hYCdBgSiezLqlf8qhXcCFb9uDuLWlQkrB/p1ar/l3zYs 2CUp1NyGTiZuiXdJpk7sxA== 0000950150-96-001556.txt : 19961217 0000950150-96-001556.hdr.sgml : 19961217 ACCESSION NUMBER: 0000950150-96-001556 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961026 FILED AS OF DATE: 19961216 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CLOTHESTIME INC CENTRAL INDEX KEY: 0000727739 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-WOMEN'S CLOTHING STORES [5621] IRS NUMBER: 330469138 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-12203 FILM NUMBER: 96681393 BUSINESS ADDRESS: STREET 1: 5325 E HUNTER AVE CITY: ANAHEIM STATE: CA ZIP: 92807 BUSINESS PHONE: 7147795881 MAIL ADDRESS: STREET 1: 5325 E HUNTER AVE CITY: ANAHEIM STATE: CA ZIP: 92807 10-Q 1 FORM 10-Q FOR PERIOD ENDED OCTOBER, 26 1996 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark one) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For quarterly period ended October 26, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------------- ---------------- Commission file number 0-12203 THE CLOTHESTIME, INC. (Exact name of registrant as specified in its charter) Delaware 33-0469138 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 5325 E. Hunter Avenue, Anaheim, California 92807 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (714) 779-5881 Not Applicable - ------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of the issuer's classes of common stock, as of the latest practicable date: As of December 12, 1996, 14,198,241 shares of the issuer's common stock, $.001 par value per share, were outstanding. This Form 10-Q consists of 22 Pages Exhibit Index on Page 22 2 INDEX TO FORM 10-Q INDEX
PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements (Unaudited) Condensed Consolidated Balance Sheets - October 26, 1996 and January 27, 1996................ 3 Condensed Consolidated Statements of Operations - Thirteen and Thirty-nine weeks ended October 26, 1996 and October 28, 1995 ................................ 4 Condensed Consolidated Statements of Cash Flows- Thirty-nine weeks ended October 26, 1996 and October 28, 1995 .................................................. 5 Notes to Condensed Consolidated Financial Statements - October 26, 1996....................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................................................... 11 PART II. OTHER INFORMATION Item 1. Legal Proceedings............................................................................. 17 Item 5. Other Information............................................................................. 20 Item 6. Exhibits and Reports on Form 8-K.............................................................. 20 SIGNATURES.............................................................................................. 21 EXHIBIT INDEX........................................................................................... 22
Page 2 of 22 3 THE CLOTHESTIME, INC. PART I. -- FINANCIAL INFORMATION ITEM 1. -- CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
October 26, 1996 January 27, 1996 ---------------- ---------------- Assets Current Assets Cash and cash equivalents $ 24,254,221 $ 34,477,823 Marketable securities available-for-sale, net of allowances 3,128,137 3,191,737 of $95,264 and $16,678 Merchandise inventories 13,396,698 8,551,207 Income taxes receivable -- 9,336,008 Prepaid expenses and other current assets 2,607,188 2,707,926 Deferred income taxes 471,000 471,000 ------------ ------------ Total Current Assets 43,857,244 58,735,701 ------------ ------------ Investments -- 1,174,497 ------------ ------------ Property, plant and equipment - on the basis of cost 50,627,676 55,281,631 Less: accumulated depreciation & amortization (29,809,902) (27,384,443) ------------ ------------ 20,817,774 27,897,188 Other assets 350,985 472,766 ------------ ------------ Total Assets $ 65,026,003 $ 88,280,152 ============ ============ Liabilities and Shareholders' Equity (Deficiency) Current Liabilities Accounts payable $ 6,748,420 $ 11,074,076 Accrued sales tax 1,564,691 1,982,300 Accrued payroll and related taxes 3,593,419 4,629,524 Other accrued liabilities 8,834,269 8,378,305 ------------ ------------ Total Current Liabilities 20,740,799 26,064,205 ------------ ------------ Long-term Liabilities Deferred income taxes 471,000 471,000 Capital lease obligation 645,000 -- ------------ ------------ Total long-term Liabilities 1,116,000 471,000 ------------ ------------ Liabilities subject to compromise 48,741,499 53,433,703 ------------ ------------ Shareholders' Equity (Deficiency) Common Stock, $.001 par value, authorized 50,000,000 shares issued and outstanding - 14,198,241 shares at October 26, 1996 and January 27, 1996, respectively 14,763 14,763 Additional paid-in capital 10,861,514 10,861,514 Retained earnings (accumulated deficit) (11,503,093) 2,301,860 Less: Treasury stock, 565,000 shares at cost at October 26, 1996 and January 27, 1996, respectively (4,850,215) (4,850,215) Securities valuation allowance (95,264) (16,678) ------------ ------------ Total Shareholders' Equity (Deficiency) (5,572,295) 8,311,244 ------------ ------------ Total Liabilities and Shareholders' Equity (Deficiency) $ 65,026,003 $ 88,280,152 ============ ============
See Notes to Condensed Consolidated Financial Statements Page 3 of 22 4 THE CLOTHESTIME, INC. CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
Thirteen Weeks Ended Thirty-Nine Weeks Ended ------------------------------------ ---------------------------------- October 26, October 28, October 26, October 28, 1996 1995 1996 1995 -------------- -------------- -------------- -------------- Revenues: Net sales $ 46,401,345 $ 78,738,231 $ 149,560,688 $ 240,367,503 Interest and other income 552,253 67,618 695,711 508,433 ------------ ------------- ------------- ------------- 46,953,598 78,805,849 150,256,399 240,875,936 ------------ ------------- ------------- ------------- Costs and Expenses: Cost of sales, including buying and distribution and occupancy costs 31,565,226 56,797,076 102,994,642 176,354,135 Selling, general and administrative expenses 17,704,158 25,565,500 53,863,862 74,734,229 Interest expense 30,805 92,475 123,200 648,658 Other losses - - - 404,956 ------------- ------------- ------------- ------------- 49,300,189 82,455,051 156,981,704 252,141,978 ------------- ------------- ------------- ------------- Loss before reorganization costs and income taxes (2,346,591) (3,649,202) (6,725,305) (11,266,042) Reorganization costs 1,417,080 - 7,079,648 - ------------- ------------- -------------- ------------- Loss before income taxes (3,763,671) (3,649,202) (13,804,953) (11,266,042) Benefit for income taxes - (1,350,204) - (4,168,435) ------------- ------------- ------------- ------------- Net Loss $ (3,763,671) $ (2,298,998) $ (13,804,953) $ (7,097,607) ============= ============= ============= ============= Loss per share $ (0.27) $ (0.16) $ (0.97) $ (0.50) ============= ============= ============= ============= Weighted average number of shares outstanding 14,198,241 14,193,753 14,198,241 14,187,895 ============= ============= ============= =============
See Notes to Condensed Consolidated Financial Statements Page 4 of 22 5 THE CLOTHESTIME, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Thirty-nine weeks ended ---------------------------------- October 26, October 28, 1996 1995 ------------- -------------- Operating Activities: Net loss $(13,804,953) $ (7,097,607) Adjustments to reconcile net loss to net cash used in operating activities: Non cash reorganization costs 5,271,457 -- Depreciation and amortization 4,718,390 6,790,652 Loss on sales of marketable securities -- 404,956 Gain on sale of investments (375,503) -- Changes in operating assets and liabilities: Increase in merchandise inventories (4,845,491) (11,943,308) Decrease in income taxes receivable 9,336,008 1,174,176 (Increase) decrease in prepaid expenses and other assets 222,519 (1,804,590) Increase (decrease) in accounts payable (2,675,500) 1,383,246 Decrease in accrued payroll and related taxes (1,036,105) (906,263) Decrease in accrued sales tax and other accrued liabilities (809,842) (1,018,198) ------------ ------------ Net cash used in operating activities (3,999,020) (13,016,936) ------------ ------------ Investing activities: Investment in marketable securities (14,986) (18,370) Proceeds from sales of marketable securities -- 4,718,600 Proceeds from sale of investments 1,550,000 -- Purchases of property, plant, and equipment (52,120) (627,225) Proceeds from sale of property, plant and equipment -- 112,000 ------------ ------------ Net cash provided by investing activities 1,482,894 4,185,005 ------------ ------------ Financing Activities: Net repayments under revolving credit facility (6,507,979) (30,050,000) Proceeds from long-term debt -- 1,400,000 Principal payments under long-term debt (1,199,497) (576,424) Proceeds from the exercise of stock options -- 32,758 ------------ ------------ Net cash used in financing activities (7,707,476) (29,193,666) ------------ ------------ Decrease in cash and cash equivalents (10,223,602) (38,025,597) Cash and cash equivalents at beginning of year 34,477,823 40,829,741 ------------ ------------ Cash and cash equivalents at end of quarter $ 24,254,221 $ 2,804,144 ============ ============ Supplemental disclosure of cash flow information: Income tax refunds received $ 9,443,657 $ 5,366,580 Income taxes paid $ 3,903 $ 23,970 Interest paid $ 56,038 $ 648,658
See Notes to Condensed Consolidated Financial Statements Page 5 of 22 6 THE CLOTHESTIME, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) OCTOBER 26, 1996 NOTE A - REORGANIZATION AND BASIS OF REPORTING On December 8, 1995 (the "Petition Date"), The Clothestime, Inc. ("Clothestime") and five of its subsidiaries, MRJ Industries, Inc. ("MRJ"), Clothestime Stores, Inc. ("Stores"), Clothestime Investment, Inc. ("Investment"), Clothestime Acquisition Corporation ("Acquisition") and Clothestime International, Inc. ("International") (collectively, the "Debtors") commenced reorganization cases (the "Bankruptcy Cases") by filing voluntary petitions for relief under chapter 11, Title 11 of the United States Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the Central District of California, Santa Ana Division (the "Bankruptcy Court"). For purposes of this report, unless otherwise referenced, the defined term "Company" shall apply to Clothestime and its consolidated group of subsidiaries, except that references to the Company in connection with any disclosure relating to the Debtors' chapter 11 cases refer solely to the Debtors and exclude Clothestime Insurance Company ("Insurance"), Clothestime's captive insurance company subsidiary. The Debtors decided to seek bankruptcy protection after an extensive review of the retail environment and the Debtors' operations. Management of each of the respective companies determined that filing the chapter 11 petitions would allow the Debtors the needed time and flexibility to restructure their respective operations. Since the Petition Date, the Debtors have continued in possession of their properties and, as debtors in possession, are authorized to operate and manage each of their respective businesses and enter into all transactions, including obtaining services, supplies and inventories, that each could have entered into in the ordinary course of business had there been no bankruptcy filings. As debtors in possession, the Debtors may not engage in transactions outside of the ordinary course of business without approval of the Bankruptcy Court, after notice and hearing. Liabilities subject to compromise in the accompanying consolidated balance sheets represent the Company's estimate of liabilities as of October 26, 1996, subject to adjustment in the reorganization process. Under chapter 11, actions to enforce certain claims against the Company are stayed if the claims arose, or are based on events that occurred, on or before the Petition Date. Other liabilities may arise or be subject to compromise as a result of rejection of executory contracts and unexpired leases, or the Bankruptcy Court's resolution of claims for contingencies and other disputed amounts. As a general matter, the treatment of these liabilities will be determined as a part of the formulation and confirmation of a plan of reorganization. See Note C - Liabilities Subject to Compromise, herein. The accompanying condensed consolidated financial statements have been presented on the basis that the Company is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As a result of the chapter 11 filing and circumstances relating to this event, realization of assets and satisfaction of liabilities is subject to uncertainty. A plan of reorganization could materially change the amounts reported in the accompanying consolidated financial statements, which do not give effect to adjustments to the carrying values of assets and liabilities which may be necessary as a consequence of a plan of reorganization. The ability of the Company to continue as a going concern is dependent on, among other things, confirmation of an acceptable plan of reorganization, future profitable operations, compliance with the debtor in possession financing agreement (see Note B - Debtor in Possession Financing, herein), and the ability to generate sufficient cash from operations and obtain financing sources to meet future obligations. Page 6 of 22 7 THE CLOTHESTIME, INC. NOTE A - REORGANIZATION AND BASIS OF REPORTING (CONTINUED) The principal business of the Company is the retail sale of junior size women's clothing. As of October 26, 1996, the Company operated stores in 17 states and Puerto Rico, with a large concentration of stores in California, Florida and Texas. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The condensed consolidated financial statements include the accounts of The Clothestime, Inc. and its consolidated group of subsidiaries, MRJ, Stores, Insurance, International, Investment and Acquisition. All material intercompany balances and transactions have been eliminated in consolidation. The operating results for the thirty-nine week period ended October 26, 1996 are not necessarily indicative of the results that may be expected for the year ending January 25, 1997 ("Fiscal 1996"). For further information, refer to the financial statements and related notes included in the Company's annual report on Form 10-K for the year ended January 27, 1996 ("Fiscal 1995"). NOTE B - DEBTOR IN POSSESSION FINANCING The Company, through Stores, has a financing agreement with The CIT Group/Business Credit, Inc. (the "DIP Lender") for debtor in possession financing (the "DIP Facility"). At October 26, 1996, the agreement provided for revolving loans to be made up to the lesser of (a) $25 million or (b) the lesser of (i) sixty percent (60%) of eligible inventory valued on a cost basis and (ii) thirty-six and one half percent (36.5%) of eligible inventory valued on a retail basis, subject to adjustment. The revolving line of credit may be in the form of letters of credit determined as provided under the agreement. Cash borrowings bear interest at a reference rate plus one half of one percent (0.5%) per annum or, at the request of Stores, the London Interbank Rate plus two and one half percent (2.5%). The agreement calls for a loan facility fee of $250,000, a semi-annual inventory management fee of $30,000, an unused line fee of 3/8% per annum and a letter of credit fee of 1% per annum. As of October 26, 1996, the Company had not used the direct borrowing capacity on the line and had outstanding letters of credit in the amount of $1.5 million. The agreement contains various restrictive covenants requiring, among other things, minimum levels of earnings before interest, income taxes, depreciation and amortization ("EBITDA"), the establishment of maximum levels of capital expenditures, and a prohibition regarding declaring or making any cash dividends by the Company or its subsidiaries. In addition, the DIP Lender required a negative pledge on Stores' merchandise inventory and proceeds. Effective August 1, 1996, the DIP Facility was amended to revise the covenant relating to the minimum required level of EBITDA for the third quarter of Fiscal 1996 and certain other provisions. The DIP Facility was amended further in October 1996 to revise the covenant relating to the minimum required level of EBITDA for the third quarter of Fiscal 1996. The Company was in compliance with or had obtained waivers for all such covenants as of October 26, 1996. The term of the DIP Facility is the earlier of December 8, 1997 or the effective date of the Debtors' confirmed plan of reorganization, subject to earlier termination. Cash borrowings and letters of credit issued under the agreement have been granted super priority status by the Bankruptcy Court over all obligations except certain administrative expenses, as defined in the agreement. Page 7 of 22 8 THE CLOTHESTIME, INC. NOTE C - LIABILITIES SUBJECT TO COMPROMISE Liabilities subject to compromise include substantially all of the current and noncurrent liabilities of the Company as of the Petition Date. Certain prepetition liabilities have been approved by the Bankruptcy Court for payment. At October 26, 1996 and January 27, 1996, such amounts to the extent not paid, were included in accrued expenses and other payables for the periods set forth below. October 26, 1996 January 27, 1996 ---------------- ---------------- Revolving credit facility debt $18,907,847 $15,607,262 Secured note payable to Well Fargo Bank 1,358,000 1,358,000 Secured notes payable to Union Bank - 1,174,497 Capital lease obligation 345,222 1,001,637 Accounts payable, trade 12,612,832 20,771,240 Estimated lease rejection claims 11,729,355 8,871,043 Other payables and accrued expenses 3,788,243 4,650,024 ----------- ----------- $48,741,499 $53,433,703 =========== =========== Prior to the Petition Date, the revolving credit facility debt bore interest at the bank's prime rate plus 1% and was due February 1, 1997. The banks assert a security interest in substantially all of the assets of the Company and its subsidiaries, excluding merchandise inventories. In the third quarter of Fiscal 1996, pursuant to a settlement of certain claims relating to the revolving credit facility, the Company paid $6,229,417.34 to Wells Fargo Bank, N.A. ("Wells"), as agent. This payment was applied to reduce the amount owed under the revolving credit facility. As a result of the settlement agreement, the Company reclassed $9.8 million previously reported in accounts payable, trade to the revolving credit facility debt to account for the amounts paid under the credit facility pursuant to letters of credit. See Part II, Item 1. Legal Proceedings, of this Report for a complete discussion of the settlement of certain claims relating to the revolving credit facility. The note payable to Wells is secured by an office/warehouse building and underlying real property that the Company uses to house a portion of its administrative offices and warehouse facilities. The note bears interest based on LIBOR plus 1.5% and was due March 1, 2005. The interest rates described above do not consider interest rates that may be applicable in the event of default. The two notes payable to Union Bank of California, N.A. ("Union"), which were secured by limited partnership interests in low-income housing projects, bore interest at 6.1% and 6.2% and were due in September 1998 and January 1999. On August 28, 1996, the Bankruptcy Court approved the sale of, and on August 30, 1996, the Company sold, its interest in the two limited partnerships for an aggregate consideration of $1,550,000. $1,229,443.46 of the net proceeds of the sale were paid to Union in full satisfaction of its secured loans and related accrued interest. The balance of the net proceeds were paid into a segregated account, and are subject to any other liens against the partnership interests, including the lien (if any) of the banks under the revolving credit facility and will not be used by the Debtors without further order of the Bankruptcy Court. The capital lease obligation at January 27, 1996 was secured by certain "point of sale" computer equipment and related software (collectively, the "POS Equipment") acquired in connection with a capital lease with MetLife Capital Corporation ("MetLife"). On May 13, 1996, MetLife filed a motion (the "Motion") for relief from the automatic stay in the Company's chapter 11 case, pursuant to section 362 of the Bankruptcy Code, to permit MetLife to foreclose upon its liens on the POS Equipment or, alternatively, to require the Company to make "adequate protection" payments to MetLife to protect against any diminution to the value of the POS Equipment during the pendency of the Company's chapter 11 case. The Company and MetLife entered into an agreement (the "MetLife Agreement"), which was approved by the Bankruptcy Court on July 22, 1996, settling the matters that were the subject of the Motion and restructuring the Company's loan obligations to MetLife. Under the terms of the MetLife Agreement, MetLife will have an allowed secured claim (the "Secured Claim") in the Company's chapter 11 case in the amount of $670,000 and the balance of MetLife's claim will be an allowed unsecured claim (the "Unsecured Claim") in the Company's chapter 11 case. Page 8 of 22 9 THE CLOTHESTIME, INC. NOTE C - LIABILITIES SUBJECT TO COMPROMISE (CONTINUED) In order to amortize the Secured Claim, the Company will (i) make monthly payments of $5,000 to MetLife, commencing in June 1996, which payments will be applied to reduce the principal amount of the Secured Claim, until the effective date of a plan of reorganization in the Company's chapter 11 case (the "Effective Date") and (ii) pay the remainder of the Secured Claim by making monthly payments to MetLife from and after the Effective Date in an amount equal to remaining principal plus interest at the Bank of America prime rate plus 200 basis points (up to a maximum of 10.5% per annum) amortized over a number of months equal to the difference between 60 and the number of monthly payments made to MetLife prior to the Effective Date. The Secured Claim is reflected on the balance sheet in long-term liabilities and not in liabilities subject to compromise. The Unsecured Claim will be treated and paid in accordance with the terms of any confirmed plan of reorganization in the Company's chapter 11 case. The Company anticipates that it will negotiate with creditors to reconcile claims filed with the Bankruptcy Court to the Company's financial records. The additional liability arising from this reconciliation process, if any, is not subject to reasonable estimation. As a result, no provision has been recorded for these possible claims. The Company will recognize the additional liability, if any, as the amounts become subject to reasonable estimation. Additional bankruptcy claims and prepetition liabilities may arise from the rejection of executory contracts and unexpired leases, resolution of contingent and unliquidated claims and the settlement of disputed claims. A plan of reorganization ultimately approved by the Company's impaired prepetition creditors and shareholders and confirmed by the Bankruptcy Court may materially change the amounts and terms of prepetition liabilities. Consequently, the amounts included in the condensed consolidated balance sheets as liabilities subject to compromise may be subject to future adjustment. In accordance with the American Institute of Certified Public Accountants' Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" (SOP 90-7), the Company is not required to record interest during chapter 11 proceedings on unsecured or undersecured prepetition debt. Interest expense on certain secured debt will continue to be accrued but is subject to settlement. No determination has been made regarding the value of the property interests that secure certain debt and, consequently, whether interest thereon will be paid. The Company has continued accruing interest on its secured prepetition debt obligations, except for the revolving credit facility debt, which the Company believes is undersecured. However, the Bankruptcy Court could determine that postpetition interest should be paid on this obligation. Contractual interest (computed without regard to default rates of interest) exceeds interest expense recorded in the accompanying condensed consolidated statement of operations for the thirty-nine week period ended October 26, 1996 by approximately $1,113,392. NOTE D - REORGANIZATION COSTS Reorganization costs recorded in the third quarter of Fiscal 1996 and the first nine months of Fiscal 1996 consisted of:
Thirteen weeks ended Thirty-nine weeks ended October 26, 1996 October 26, 1996 -------------------- ----------------------- Write-off of leasehold improvements and fixtures associated with store closures net of proceeds $ 146,892 $2,055,664 Estimated store lease rejection claims net of proceeds from lease sales 288,495 2,858,313 Other related store closure costs 15,554 177,067 Professional fees 1,068,874 2,267,755 Interest income (235,149) (645,626) Other 132,414 366,475 ---------- ---------- $1,417,080 $7,079,648 ========== ==========
Page 9 of 22 10 THE CLOTHESTIME, INC. NOTE E - CAPITAL STOCK AND STOCK OPTION TRANSACTIONS The following table summarizes the activity under the Company's Stock Option Plans during the thirty-nine week period ended October 26, 1996: Shares --------- Options Outstanding, January 27, 1996 2,815,788 Activity during the period: Options Granted 10,000 (per share amount: $1.00) Options Exercised - Options Canceled (per share amounts: $1.50 to $12.75) (721,596) --------- Options outstanding, October 26, 1996 2,104,192 ========= At October 26, 1996, options to purchase 1,583,710 shares of the Company's common stock were exercisable on various dates through September 22, 2005, at prices ranging from $1.50 to $12.75 per share. In addition, at October 26, 1996, there were options to purchase 1,737,495 shares of the Company's common stock available for grant under the Company's stock option plans. The computation of net loss per common and common equivalent share is based upon the weighted average number of common shares outstanding during the period. The Company's common stock was delisted from The Nasdaq Stock Market, Inc., effective with the opening of business on July 26, 1996, because the Company no longer complies with the criteria established by The Nasdaq Stock Market, Inc. for continuation of listing. To the extent the market makers in the Company's stock continue to enter bids, the Company's common stock will be quoted in the OTC Bulletin Board, or, in the alternative, in the National Quotation Bureau's Pink Sheets. NOTE F - SUBSEQUENT EVENTS During the third quarter of Fiscal 1996, the Company, in consultation with the official committee of unsecured creditors in the Bankruptcy Cases (the "Committee"), began actively exploring an investment by a third party as an alternative strategy for exiting chapter 11. The Company concluded that one viable alternative for maximization of creditor recoveries is for the Debtors and the Committee, with the assistance of a professional investment advisor, jointly to seek to identify opportunities for a (i) sale or merger of the Company or (ii) a third party willing to make an investment in the Company's assets or business. Accordingly, on November 12, 1996, the Company and the Committee filed, and the Bankruptcy Court approved, a joint application to retain Financo, Inc. ("Financo") as an investment advisor. The Company and the Committee anticipate that an investment could take a variety of forms, including, but not limited to, the provision of new financing, either through direct loans, the purchase of new debt securities or the assumption of existing liabilities; a merger, joint venture or other similar business combination; or the purchase or other acquisition of some or all of the Company's assets. There can be no assurance whether Financo will be successful in identifying an investor or whether any transaction will be acceptable to the Company, the Committee or other creditors and parties in interest. On December 9, 1996, the Company filed a motion seeking Bankruptcy Court approval to (i) close 22 underperforming retail stores, (ii) conduct store closing sales at certain of the closed stores, (iii) retain a lease consultant to market the leases for certain of the closed stores, and (iv) reject the leases for certain of the closed stores unless a motion to assume and assign such leases has been filed by January 31, 1997. The motion is scheduled to be heard on December 30, 1996, and the store closing sales are scheduled to be completed by January 31, 1997. Page 10 of 22 11 THE CLOTHESTIME, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CHAPTER 11 REORGANIZATION On December 8, 1995, Clothestime and five of its subsidiaries commenced reorganization cases by filing voluntary petitions for relief under chapter 11, title 11 of the United States Code in the United States Bankruptcy Court for the Central District of California, Santa Ana Division (collectively, the "Chapter 11 Petitions"). The Company decided to seek bankruptcy protection after an extensive review of the current retail environment and the Company's operations. Management determined that filing the Chapter 11 Petitions would allow the Company the needed time and flexibility to restructure its operations. The consolidated financial statements have been presented on the basis that the Company is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As a result of the chapter 11 filing and circumstances relating to this event, realization of assets and satisfaction of liabilities is subject to uncertainty. A plan of reorganization could materially change the amounts reported in the accompanying consolidated financial statements, which do not give effect to all adjustments to the carrying values of assets and liabilities which may be necessary as a consequence of the confirmation and implementation of a plan of reorganization. The ability of the Company to continue as a going concern is dependent on, among other things, confirmation of an acceptable plan of reorganization, future profitable operations, compliance with the debtor-in-possession financing agreement and the ability to generate sufficient cash from operations and obtain financing sources to meet future obligations. CONSOLIDATED RESULTS OF OPERATIONS The following table sets forth certain items in the consolidated statements of operations as a percentage of total revenues for the thirteen week and thirty-nine week periods ended October 26, 1996 and October 28, 1995.
Thirteen weeks ended Thirty-nine weeks ended ------------------------------ ------------------------------ Oct. 26, 1996 Oct. 28, 1995 Oct. 26, 1996 Oct. 28, 1995 ------------- ------------- ------------- ------------- Total revenues 100% 100% 100% 100% Cost of sales, including buying and distribution and occupancy costs 67.2 72.1 68.5 73.2 Selling, general and administrative expenses 37.7 32.4 35.9 31.0 Interest expense 0.1 0.1 0.1 0.3 Other losses - - - 0.2 ---- ---- ---- ---- Loss before reorganization costs and income taxes (5.0) (4.6) (4.5) (4.7) Reorganization costs 3.0 - 4.7 - ---- ---- ---- ---- Loss before income taxes (8.0) (4.6) (9.2) (4.7) Benefit for income taxes - (1.7) - (1.7) ---- ---- ---- ---- Net loss (8.0)% (2.9)% (9.2)% (3.0)% ==== ==== ==== ====
Net Sales Net sales decreased 41.1% in the third quarter of Fiscal 1996 to $46.4 million compared to $78.7 million in the third quarter of Fiscal 1995. Comparable store sales (stores in operation for at least 15 months) decreased by 19.1% in the third quarter of Fiscal 1996 as compared with the third quarter of Fiscal 1995. For the first nine months of Fiscal 1996, net sales decreased 37.8% to $149.6 million from $240.4 million in the same period of Fiscal 1995. Comparable store sales decreased by 17.4% for the first nine months of Fiscal 1996 compared with comparable store sales for the first nine months of Fiscal 1995. Management attributes this decline in sales to two principal factors: first, the Company ended the third quarter of Fiscal 1996 with 181 fewer stores than at the end of the comparable period in Fiscal 1995; second, despite the Company's new and aggressive advertising campaign, there was a decrease in customer traffic as well as customer resistance to product and pricing. Page 11 of 22 12 THE CLOTHESTIME, INC. The Company's primary target market is women in the 18 to 34 age group. While customer demographics revealed that this age represents a significant portion of our customers, the Company still maintains a lesser customer base in the 14 to 17 and 35 and over age groups. The Company's business is comprised of two principal selling seasons: Spring (the first and second quarters) which includes the periods during which spring and summer styles are introduced; and, Fall (the third and fourth quarters) which includes the back-to-school, winter and Christmas selling seasons. Consistent with the majority of clothing retailers, the Company normally posts its strongest sales during the fourth quarter as a result of a stronger Christmas selling period compared to its summer and early Fall selling periods. First quarter sales are generally lower than sales in the other quarters primarily as a result of the higher sales activity during the fourth quarter. However, during the past two fiscal years, the Company has realized higher sales levels during the Spring seasons rather than the Fall seasons. Management believes that this was primarily due to the highly competitive promotional environment surrounding the holiday seasons as well as the lack of consumer acceptance of merchandise offered. As is the case for most clothing retailers, abnormal seasonal weather also may affect sales because the seasonal merchandise then in the stores may not correspond to the merchandise consistent with the abnormal weather. In addition, since most of the Company's stores are located in non-enclosed retail locations as opposed to enclosed malls, the Company's sales can be adversely affected by abnormal rain or other inclement weather. There was no evidence of adverse weather affecting sales during the first nine months of Fiscal 1996. Interest and Other Income; Interest Expense; Other Losses Interest and other income increased to $552 thousand in the third quarter of Fiscal 1996, compared to $68 thousand in the third quarter of Fiscal 1995. For the first nine months of Fiscal 1996, interest and other income increased to $696 thousand from $508 thousand in the same period of Fiscal 1995. The increase in the third quarter of Fiscal 1996 and for the first nine months of Fiscal 1996 as compared to the respective periods of Fiscal 1995 was attributable to a gain (net of expenses) of $309 thousand from the sale of the Company's interests in two limited partnerships and interest income of $179 thousand earned on segregated cash accounts that have now been released pursuant to a settlement of certain claims relating to the revolving credit facility, partially offset by the fact that the Company maintained a lower invested cash balance during each of the respective periods in Fiscal 1996 after excluding invested cash balances attributable to the bankruptcy proceeding. See Part II, Item 1. Legal Proceedings, in this Report for a complete discussion of the sale of the limited partnership interests and the settlement of certain claims relating to the revolving credit facility. Interest expense decreased to $30.8 thousand in the third quarter of Fiscal 1996, compared to $92 thousand in the third quarter of Fiscal 1995. Interest expense decreased to $123 thousand for the first nine months of Fiscal 1996, from $649 thousand in the same period of Fiscal 1995. This decrease is attributable to the Company not recording approximately $390 thousand and $1.1 million in interest during the third quarter and first nine months of Fiscal 1996, respectively, consistent with certain accounting rules applicable to a company which has filed for chapter 11 protection. The interest expense recorded in the third quarter and first nine months of Fiscal 1995 resulted from borrowings of $1.4 million made during the first quarter of Fiscal 1995, bank loans of $1.9 million taken out in the fourth quarter of Fiscal 1993, a capital lease obligation of $1.9 million entered into during Fiscal 1993, and outstanding borrowings under the revolving credit facility in Fiscal 1995. See Note C to Condensed Consolidated Financial Statements, herein. The $405 thousand in other losses incurred in the first nine months of Fiscal 1995 was attributable to losses from sales of marketable securities. Cost of Sales Cost of sales as a percentage of total revenues decreased to 67.2% in the third quarter of Fiscal 1996 as compared with 72.1% in the third quarter of Fiscal 1995. For the first nine months of Fiscal 1996, cost of sales as a percentage of total revenues decreased to 68.5% from 73.2% for the same period of Fiscal 1995. The decrease for the third quarter of Fiscal 1996 and the first nine months of Fiscal 1996 as compared to the same periods of Fiscal 1995 was primarily the result of the Company taking fewer markdowns due to conservative inventory planning stemming from negative sales trends and higher mark-ups on new merchandise made possible through improved buying practices. Page 12 of 22 13 THE CLOTHESTIME, INC. Selling, General and Administrative Expenses Selling, general and administrative expenses as a percentage of total revenues increased to 37.7% for the third quarter in Fiscal 1996 compared with 32.4% for the third quarter in Fiscal 1995. For the first nine months of Fiscal 1996 and Fiscal 1995, selling, general and administrative expenses as a percentage of total revenues were 35.9% and 31.0%, respectively. The overall increase in expenses as a percentage of total revenues in the third quarter of Fiscal 1996 and the first nine months of Fiscal 1996 as compared to the same periods of Fiscal 1995 was due to increases in (i) store operations and supervisory payroll; (ii) advertising costs; (iii) employee benefits and (iv) other fixed operating expenses. Store operations and supervisory payroll as a percentage of total revenues were higher as a result of staffing to support higher than realized sales levels. Advertising costs as a percentage of total revenues were higher due to the major advertising campaign launched during Fiscal 1996. Employee benefits as a percentage of total revenues were higher due to increased benefit costs necessary to support the planned staffing levels referenced above. As is the case with most operating expenses, increases in other fixed operating expenses as a percentage of total revenues were incurred due to decreased leverage on fixed operating expenses resulting from fewer stores and lower average sales. Reorganization Costs Reorganization costs includes all costs associated with the reorganization under chapter 11. During the third quarter of Fiscal 1996, the Company incurred reorganization costs of $1.4 million, primarily relating to professional fees and estimated store lease rejection claims. Reorganization costs in the first nine months of Fiscal 1996 were $7.1 million, relating primarily to estimated lease rejection claims, professional fees, the write-off of leasehold improvements and fixtures associated with closed stores, and certain other expenses. See Note D to Condensed Consolidated Financial Statements, herein. Benefit for Income Taxes No income tax benefit has been recorded for the third quarter and first nine months of Fiscal 1996 because the Company has exhausted its available net operating loss carrybacks permitted under the Federal and state tax codes. The benefit of net operating loss carryforwards will be reflected in future periods when it becomes more likely than not that the benefit will be realized. The Company's effective benefit rate was 37.0% for the third quarter and first nine months of Fiscal 1995. Net Loss and Loss Per Share Net loss and loss per share for the third quarter of Fiscal 1996 were $3.8 million and $0.27, respectively. This compared with net loss and loss per share of $2.3 million and $0.16, respectively, for the third quarter of Fiscal 1995. Net loss and loss per share for the first nine months of Fiscal 1996 were $13.8 million and $0.97, respectively. This compared with net loss and loss per share of $7.1 million and $0.50, respectively, for the same period of Fiscal 1995. The increase in net loss for the third quarter and first nine months of Fiscal 1996 as compared to the same periods of Fiscal 1995 was primarily due to a reduction in comparable store sales, reorganization charges incurred during the third quarter of Fiscal 1996 and during the first nine months of Fiscal 1996 of $1.4 million and $7.1 million, respectively, and the absence of an income tax benefit. LIQUIDITY AND CAPITAL RESOURCES Chapter 11 Filing As discussed previously, the Company and five of its subsidiaries filed voluntary petitions for relief under chapter 11 of title 11 of the United States Code on December 8, 1995. Under chapter 11, actions to enforce certain claims against the Company are stayed if the claims arose, or are based on, events that occurred on or before the Petition Date. The ultimate terms of settlement of these claims will be determined in accordance with a plan of reorganization which requires the approval of the impaired prepetition creditors and shareholders and confirmation by the Bankruptcy Court. Page 13 of 22 14 THE CLOTHESTIME, INC. Until a plan of reorganization is confirmed by the Bankruptcy Court, only such payments on prepetition obligations that are approved or required by the Bankruptcy Court will be made. Except as approved by the Bankruptcy Court, principal and interest payments on prepetition debt have not been made since the Petition Date and will not be made without the Bankruptcy Court's approval or until a plan of reorganization, defining the repayment terms, has been confirmed by the Bankruptcy Court. At October 26, 1996, liabilities subject to compromise are estimated at $48.7 million. Other liabilities may arise or be subject to compromise as a result of rejection of executory contracts and unexpired leases or the Bankruptcy Court's resolution of claims for contingencies and other disputed amounts. The prohibition on payments of prepetition liabilities as a result of the chapter 11 filing and income tax refunds received in the second quarter of Fiscal 1996 enabled the Company to report $24.3 million in cash and cash equivalents at October 26, 1996. Included in cash and cash equivalents at October 26, 1996 is $470 thousand being held in segregated accounts pursuant to various agreements in the Company's Bankruptcy Cases. Inherent in a successful plan of reorganization is a capital structure which permits the Company to generate sufficient cash flow after reorganization to meet its restructured obligations and fund the current obligations of the reorganized Company. Under the Bankruptcy Code, the rights of and ultimate payment to prepetition creditors may be substantially altered and, as to some classes, eliminated. At this time, it is not possible to predict the outcome of the chapter 11 filing, in general, or its effects on the business of the Company or on the interests of creditors or stockholders. The Company is in the process of developing a long term business plan around which the framework of a plan of reorganization will be developed. As a part of this process, the Company will be assessing the effects of new merchandising and marketing strategies on operating results and assessing the desirability of further store closings. Further store closings and rejections of leases and other executory contracts will result in increased reorganization costs. During the months of June 1996 and July 1996, the Company closed a total of 33 underperforming stores (the "July Closed Stores"). In July, the Company rejected the leases for the July Closed Stores and, in August, assumed and assigned one lease that had been marketed successfully. These store closings have resulted in a withdrawal of the Company from the markets in Hawaii, Oregon and Washington. On December 9, 1996, the Company filed a motion seeking Bankruptcy Court approval to (i) close 22 underperforming retail stores (the "January Closed Stores"), (ii) conduct store closing sales at certain of the January Closed Stores, (iii) retain a lease consultant to market the leases for certain of the January Closed Stores, and (iv) reject the leases for certain of the January Closed Stores unless a motion to assume and assign such leases has been filed by January 31, 1997. The motion is scheduled to be heard on December 30, 1996, and the store closing sales are scheduled to be completed by January 31, 1997. During the third quarter of Fiscal 1996, the Company, in consultation with the Committee, began actively exploring an investment by a third party as an alternative strategy for exiting chapter 11. The Company concluded that one viable alternative for maximization of creditor recoveries is for the Debtors and the Committee, with the assistance of a professional investment advisor, jointly to seek to identify opportunities for a (i) sale or merger of the Company or (ii) a third party willing to make an investment in the Company's assets or business. Accordingly, on November 12, 1996, the Company and the Committee filed, and the Bankruptcy Court approved, a joint application to retain Financo as an investment advisor. The Company and the Committee anticipate that an investment could take a variety of forms, including, but not limited to, the provision of new financing, either through direct loans, the purchase of new debt securities or the assumption of existing liabilities; a merger, joint venture or other similar business combination; or the purchase or other acquisition of some or all of the Company's assets. There can be no assurance whether Financo will be successful in identifying an investor or whether any transaction will be acceptable to the Company, the Committee or other creditors and parties in interest. Page 14 of 22 15 THE CLOTHESTIME, INC. The exclusive period for the filing of a plan of reorganization has been extended to January 31, 1997 and to solicit acceptances of a plan of reorganization to March 31, 1997. The Company may seek a further extension of the exclusive period; however, there can be no assurance that the Bankruptcy Court will grant a further extension. The Company cannot, at the present time, predict the contents of any proposed plan of reorganization or when or whether it will be accepted by the creditors or approved by the Bankruptcy Court. Subsequent to the chapter 11 filing, the Company reached an agreement with The CIT Group/Business Credit, Inc. to provide debtor in possession financing. The DIP Facility was approved by the Bankruptcy Court on January 9, 1996. At October 26, 1996, the DIP Facility provided for revolving loans to be made up to the lesser of (a) $25 million or (b) the lesser of (i) 60% of eligible inventory valued on a cost basis and (ii) 36.5% of eligible inventory valued on a retail basis, subject to adjustment. The revolving line of credit may be in the form of letters of credit determined as provided under the agreement. Cash borrowings bear interest at either a reference rate plus 0.5% or LIBOR plus 2.5%, at the option of the Company. The agreement contains various restrictive covenants requiring, among other things, minimum levels of EBITDA, the establishment of maximum levels of capital expenditures, and a prohibition regarding declaring or making any cash dividends by the Company or its subsidiaries. Effective August 1, 1996, the DIP Facility was amended to revise the covenant relating to the minimum required level of EBITDA for the third quarter of Fiscal 1996 and certain other provisions. The DIP Facility was amended further in October 1996 to revise the covenant relating to the minimum required level of EBITDA for the third quarter of Fiscal 1996. (See Note B to Condensed Consolidated Financial Statements, herein). The Company did not use the direct borrowing capacity on the line during the third quarter of Fiscal 1996. There were $1.5 million of letters of credit outstanding at October 26, 1996. The DIP Facility will terminate on the earlier of December 8, 1997 or the date of consummation of a plan of reorganization, subject to earlier termination. Cash borrowings and letters of credit issued under the agreement have been granted superpriority status by the Bankruptcy Court over all obligations except certain administrative expenses, as defined in the agreement. The DIP Facility is more fully described in Note B to Condensed Consolidated Financial Statements, herein. General The Company's principal needs for liquidity are to finance the purchase of merchandise inventories, fund its operations and pay professional and administrative fees in connection with its reorganization. Net cash used in operating activities was $4.0 million for the third quarter of Fiscal 1996, compared to $13.0 million for the third quarter of Fiscal 1995. The Company's cash used in operations of $4.0 million for the third quarter of Fiscal 1996 resulted primarily from losses incurred during the first nine months of Fiscal 1996 and an increase in merchandise inventories, partially offset by the add back of non-cash charges representing non-cash reorganization costs and income tax refunds received in the second quarter of Fiscal 1996. Merchandise inventories increased to $13.4 million at the end of the third quarter of Fiscal 1996, from $8.6 million at the end of Fiscal 1995. The increase in inventory at the end of the third quarter of Fiscal 1996 can be attributed to seasonal inventory fluctuations and inventory returning to normal levels following aggressive markdowns taken in the fourth quarter of Fiscal 1995. The Company has an indirect relationship with the factoring community, which assists vendors of merchandise inventories in securing up front payment (as opposed to payment terms from the Company directly) for goods shipped to the Company. Subsequent to the approval of the DIP Facility, most factors have been willing to extend credit for goods shipped to the Company. To the extent that (i) cash provided from operating activities is inadequate to meet the Company's liquidity requirements, (ii) the factors require greater credit support and/or (iii) manufacturers are less willing to deliver merchandise pursuant to payment terms, short or long-term liquidity will be adversely impacted. Page 15 of 22 16 THE CLOTHESTIME, INC. Income taxes receivable decreased to $0 by the end of the third quarter of Fiscal 1996, compared to $9.3 million at the end of Fiscal 1995, due to the Company receiving tax refunds of $9.4 million in the second quarter of Fiscal 1996. See Part II, Item 1. Legal Proceedings, herein for a discussion of the settlement involving the tax refund. Investments decreased to $0 at the end of the third quarter of Fiscal 1996, compared to $1.2 million at the end of Fiscal 1995. The decrease was due to the sale of the Company's interests in two limited partnerships. See Part II, Item 1. Legal Proceedings, in this Report for a complete discussion of the sale of the limited partnership interests. Accounts payable decreased to $6.7 million at the end of the third quarter of Fiscal 1996, from $11.1 million at the end of Fiscal 1995. The decrease in accounts payable resulted primarily from (i) professional fees relating to the Company's chapter 11 filing, which were accrued as part of the accounts payable balance at the end of Fiscal 1995 and paid primarily in the second quarter of Fiscal 1996 and (ii) a reclassification of a portion of the accounts payable balance to liabilities subject to compromise done after Fiscal 1995 year-end. Accrued sales tax decreased to $1.6 million at the end of the third quarter of Fiscal 1996 from $2.0 million at the end of Fiscal 1995 primarily due to tax payment timing differences and a reduction in the Company's store base. Accrued payroll and related taxes decreased from $4.6 million at the end of Fiscal 1995 to $3.6 million at the end of the third quarter of Fiscal 1996 primarily due to decreasing group health and payroll- related tax payments as a result of the Company's reduction in its store base. Long-term liabilities consisting of a capital lease obligation increased to $645 thousand from $0 at the end of Fiscal 1995 due to the Company reclassifying a portion of the capital lease obligation from liabilities subject to compromise to long-term liabilities as a result of the settlement involving the MetLife capital lease obligation. The capital lease obligation settlement and the amounts outstanding thereunder are more fully described in Note C to the Notes to Condensed Consolidated Financial Statements, herein. In the first nine months of Fiscal 1996, the Company closed forty-three stores. As a result, property, plant and equipment decreased $4.7 million, from $55.3 million at the end of Fiscal 1995 to $50.6 million at October 26, 1996. During Fiscal 1996, the Company has a capital spending limit of $2.0 million under the DIP Facility. Management believes this amount is more than adequate to meet the capital requirements of the Company. Although the Company plans no new store openings during Fiscal 1996, a small amount of capital expenditures for store maintenance, system enhancements and various other corporate expenditures are anticipated. The DIP Facility, cash on hand, revenues generated from operations, credit terms extended by the vendor and factor community, and anticipated expense reduction measures will be the principal sources of liquidity. To the extent that results of operations continue to decline, short and long term liquidity will be adversely affected, particularly if the availability of funds under the DIP Facility are significantly decreased or are no longer made available. FORWARD-LOOKING STATEMENTS Included in this Item 2., Management's Discussion and Analysis of Financial Condition and Results of Operations, and elsewhere in this Report are certain forward-looking statements reflecting management's current expectations. Although the Company believes that its expectations are based upon reasonable assumptions, there can be no assurance that the Company's financial goals will be realized. Numerous factors may affect the Company's actual results and may cause results to differ materially from those expressed in forward-looking statements made by or on behalf of the Company. Some of these factors include the competition in the retail industry, the general economic factors affecting consumer spending particularly in the geographic markets in which the Company competes, customer acceptance of the merchandise offered by the Company, pricing and other competitive factors. The Company cannot predict how these factors will be additionally impacted by the Company's chapter 11 filing. In addition, there are uncertainties inherent in the process of reconciling claims, rejecting and assuming executory contracts and unexpired leases, formulating and confirming a plan of reorganization and other events in the context of the Company's chapter 11 filing. Page 16 of 22 17 THE CLOTHESTIME, INC. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The following discussion provides general background information regarding developments in the Company's chapter 11 cases since January 27, 1996 through approximately December 9, 1996, but is not intended to be an exhaustive summary. For additional information regarding the Company's chapter 11 cases reference should be made to the Company's Annual Report on Form 10-K for the Fiscal year ended January 27, 1996 (the "Annual Report"), Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations of this Report and the Notes to Consolidated Financial Statements herein. The Company files routine monthly reports with the Office of the United States Trustee for the Central District of California and files various pleadings with the Bankruptcy Court. Copies of these documents may be obtained, upon request, from CPT Group, Inc. ("CPT"), 1151 Dove Street, Suite 170, Newport Beach, California 92660, (714) 852-8240; however, the requesting party will be charged a fee by CPT. Since the Petition Date, the Company has continued in possession of its properties and, as a debtor in possession, is authorized to operate and manage its business and to enter into all transactions (including obtaining services, supplies and inventories) that it could have entered into in the ordinary course of business had there been no bankruptcy. The Company may not engage in transactions outside the ordinary course of business without first complying with the notice and hearing provisions of the Bankruptcy Code and obtaining Bankruptcy Court approval where necessary. The Company has the right, subject to the approval of the Bankruptcy Court, under relevant provisions of the Bankruptcy Code, to assume or reject executory contracts and unexpired leases, including real property leases. Certain parties to such executory contracts and unexpired leases with the Company, including parties to such real property leases, may file motions with the Bankruptcy Court seeking to require the Company to assume or reject those contracts or leases. In this context, "assumption" requires that the Company cure, or provide adequate assurance that it will cure, all existing defaults under the contract or lease and provide adequate assurance of future performance under relevant provisions of the Bankruptcy Code; and "rejection" means that the Company is relieved from its obligations to perform further under the contract or lease. Rejection of an executory contract or lease may constitute a breach of that contract and may afford the non-debtor party the right to assert a claim against the bankruptcy estate for damages arising out of the breach, which claim shall be allowed or disallowed as if such claim had arisen before the date of the filing of the petition. By orders of the Bankruptcy Court, the Company obtained extensions of time within which to assume or reject its non-residential real property leases through and including the confirmation date of its plan of reorganization, except for certain leases of non-residential real property of certain objecting landlords for which the time within which such leases must be assumed or rejected was extended to March 31, 1997. Since the Petition Date and as of December 9, 1996, the Company had rejected 171 retail store leases. By order entered May 6, 1996, the Bankruptcy Court fixed July 15, 1996 as the date by which all creditors (with certain limited exceptions) must file proofs of claim against the Company with respect to prepetition claims (or be forever barred from (i) asserting claims that such person or entity possesses against the Company and (ii) voting upon, or receiving any distribution under, any plan or reorganization). Described below are certain significant actions taken, or proceedings now pending, in the Bankruptcy Court. As discussed in the Company's Annual Report, (i) on January 24, 1996, Wells, individually and as agent for itself and Union, (collectively, the "Banks") commenced an adversary proceeding in the Bankruptcy Court, Adversary Proceeding No. 96-1100, against the Debtors claiming that a tax refund, then estimated to be approximately $9.3 million, is subject to the Banks' prepetition lien on certain of the Company's assets (the "Tax Refund Litigation"); and (ii) on January 5, 1996, the Company commenced an adversary proceeding in the Bankruptcy Court against the Banks, Adversary Proceeding No. 96-1017, seeking a judicial determination and declaration that the Banks do not hold a valid and perfected security interest in certain credit card receivables or a deposit account or, alternatively, that the security interest, if any, held by the Banks in such property can be avoided (the "Credit Card Litigation"). Page 17 of 22 18 THE CLOTHESTIME, INC. On August 28, 1996, the Bankruptcy Court approved the compromise and settlement of the Tax Refund Litigation and the Credit Card Litigation (collectively, the "Adversary Proceedings") and certain related disputes between the Company and the Banks, pursuant to a Settlement Agreement. The Settlement Agreement provides for the resolution of all claims and controversies relating to the Banks' alleged security interests in the following Disputed Collateral: (i) refunds of federal, state and local income taxes in the amount of $9,452,726.29, representing tax refunds from the Internal Revenue Service in the amount of $9,450,146.00, from the State of Illinois in the amount of $2,280.29 and from the City of New York in the amount of $300.00 (collectively, the "Tax Refund"); (ii) certain funds held on deposit in segregated accounts pursuant to the terms of the parties' Amended Stipulation for Order (1) Clarifying Order Approving Centralized Cash Management Systems, etc., (2) Providing Adequate Protection for Alleged Collateral of Wells Fargo Bank, as Agent, to the Extent of Valid Liens and (3) Establishing Schedule for Resolution of Disputes, dated December 27, 1995; (iii) the Company's prepetition credit card accounts receivable; and (iv) fee and expense retainers paid by the Company to professionals prior to the commencement of the Bankruptcy Cases. The Settlement Agreement also fixes the allowed amount of the Banks' prepetition claims under the credit facilities evidenced by the Credit Agreement, dated as of February 28, 1995 between Stores, as borrower, the other Debtors, as Guarantors, and the Banks (the "Bank Claims") at $26,306,481.05, subject to increase for prepetition legal fees and expenses and certain contingent claims on account of letters of credit. Such amount has been and will be reduced by certain payments, including payments made pursuant to the Settlement Agreement. On or about September 5, 1996, pursuant to the terms of the Settlement Agreement and on account of the Banks' alleged security interests in the Disputed Collateral other than the Tax Refunds, the Banks (i) applied $3.1 million of the funds on deposit in certain segregated accounts held by the Company to reduce the Bank Claims (the "Initial Payment"), (ii) released the remainder of all funds (approximately $6.5 million) on deposit in such accounts to the Company and (iii) released the Banks' security interests in all Disputed Collateral other than the Tax Refund. In addition, on September 5, 1996, to secure its obligation to make a remaining payment (the "Remaining Payment"), the Company deposited the sum of $3,126,363.00 into a segregated account (the "Segregated Account"). On September 16, 1996, such amount plus interest of $3,054.34 was applied by the Banks to reduce the amount of the Bank Claims pursuant to the terms of the Settlement Agreement. In consideration for the transactions described above, the Banks: (i) have released the balance of the Tax Refund to the Company and (ii) have released their alleged security interests in the Tax Refund. In addition, under the terms of the Settlement Agreement, the Adversary Proceedings have been dismissed. In May 1993, the Company purchased various "point of sale" computer equipment and related software (collectively, the "POS Equipment") used in certain of the Company's retail stores to record data regarding sales transactions. Such data is simultaneously transferred to the Company's central computer system and used to track, among other things, inventory levels and sales performance. The Company financed the POS Equipment through a capital lease with MetLife Capital Corporation ("MetLife"). The lease obligation was in the aggregate original principal amount of $1,909,725 and was secured by the POS Equipment. See Note C to Condensed Consolidated Financial Statements. As of the Petition Date, the aggregate unpaid amount of the Company's indebtedness to MetLife, including unpaid principal and accrued interest, was $1,035,335. On or about May 13, 1996, MetLife filed a motion (the "Motion") for relief from the automatic stay in the Company's chapter 11 case, pursuant to section 362 of the Bankruptcy Code, to permit MetLife to foreclose upon its liens on the POS Equipment or, alternatively, to require the Company to make "adequate protection" payments to MetLife to protect against any diminution to the value of the POS Equipment during the pendency of the Company's chapter 11 case. The Company and MetLife entered into an agreement (the "MetLife Agreement"), which was approved by the Bankruptcy Court on July 22, 1996, settling the matters that were the subject of the Motion and restructuring the Company's loan obligations to MetLife. Under the terms of the MetLife agreement, MetLife will have an allowed secured claim (the "Secured Claim") in the Company's chapter 11 case in the amount of $670,000 and the balance of MetLife's claim will be an allowed unsecured claim (the "Unsecured Claim") in the Company's chapter 11 case. To amortize the Secured Claim, the Company (i) will make monthly payments to MetLife in the amount of $5,000, commencing in June 1996, which payments will be applied to reduce the principal amount of the Secured Claim, until the effective date of a plan of reorganization in the Company's chapter 11 case (the "Effective Date") and (ii) will pay the remainder of the Secured Claim by making monthly payments to MetLife from and after the Effective Date in an amount equal to remaining principal plus interest at the Bank of America prime rate plus 200 basis points (up to a maximum of 10.5% per annum) amortized over a number of months equal to the difference between 60 and the number of monthly payments made to MetLife prior to the Effective Date. The Unsecured Claim will be treated and paid in accordance with the terms of any confirmed plan of reorganization in the Company's chapter 11 case. Page 18 of 22 19 THE CLOTHESTIME, INC. On July 11, 1996, the Company received Bankruptcy Court approval to (i) close 33 underperforming retail stores (the "July Closed Stores"), (ii) retain a liquidation consultant to conduct store closing sales at 18 of these stores located in Hawaii, Oregon and Washington and (iii) conduct store closing sales at the other 15 locations in other markets. On July 22, 1996, the Company received Bankruptcy Court approval to reject certain of the leases for the July Closed Stores and to retain a marketing consultant to market certain of the other leases. Effective July 31, 1996, the Company rejected the remaining leases for the July Closed Stores and, in August 1996 assumed and assigned one lease that had been marketed successfully. These store closings have resulted in a withdrawal of the Company from the markets in Hawaii, Oregon and Washington. On December 9, 1996, the Company filed a motion seeking Bankruptcy Court approval to (i) close 22 underperforming retail stores (the "January Closed Stores"), (ii) conduct store closing sales at certain of the January Closed Stores, (iii) retain a lease consultant to market the leases for certain of the January Closed Stores, and (iv) reject the leases for certain of the January Closed Stores unless a motion to assume and assign such leases has been filed by January 31, 1997. The motion is scheduled to be heard on December 30, 1996, and the store closing sales are scheduled to be completed by January 31, 1997. On August 28, 1996, the Bankruptcy Court approved the sale of, and on August 30, 1996, the Company sold, its interests in two limited partnerships for an aggregate consideration of $1,550,000. $1,229,443.46 of the net proceeds of the sale were paid to Union in full satisfaction of its secured loans. See Note C to Condensed Consolidated Financial Statements. The balance of the net proceeds were paid into a segregated account, and are subject to any other liens against the partnership interests, including the lien (if any) of the Banks, and will not be used by the Debtors without further order of the Bankruptcy Court. On August 28, 1996, the Bankruptcy Court approved the extension of the Company's exclusive period to file a plan of reorganization until January 31, 1997, and its exclusive period to solicit acceptances of a plan until March 31, 1997. The Company may seek a further extension of the exclusive period; however, there can be no assurance that the Bankruptcy Court will grant a further extension. The Company cannot, at the present time, predict the contents of any proposed plan of reorganization or when or whether it will be accepted by the creditors or approved by the Bankruptcy Court. On September 30, 1996, the Bankruptcy Court approved the assumption of a restructured lease for the Company's headquarters space. The base rent for the space was reduced, effective May 15, 1996, from 67.7 cents per square foot per month to 40 cents per square foot per month, or an annual reduction of approximately $400,000. The lease as amended also provides for an annualized adjustment based on the consumer price index of not less than 103% and not more than 105% of the base rent for the prior year. Any damages incurred by the lessor are capped at the annualized amount of the base rent for the year, and the Company has provided the lessors with a letter of credit for such amount. The term of the lease was also extended to May 15, 2006. During the third quarter of Fiscal 1996, the Company, in consultation with the Committee, began actively exploring an investment by a third party as an alternative strategy for exiting chapter 11. The Company concluded that one viable alternative for maximization of creditor recoveries is for the Debtors and the Committee, with the assistance of a professional investment advisor, jointly to seek to identify opportunities for a (i) sale or merger of the Company or (ii) a third party willing to make an investment in the Company's assets or business. Accordingly, on November 12, 1996, the Company and the Committee filed, and the Bankruptcy Court approved, a joint application to retain Financo as an investment advisor. The Company and the Committee anticipate that an investment could take a variety of forms, including, but not limited to, the provision of new financing, either through direct loans, the purchase of new debt securities or the assumption of existing liabilities; a merger, joint venture or other similar business combination; or the purchase or other acquisition of some or all of the Company's assets. There can be no assurance whether Financo will be successful in identifying an investor or whether any transaction will be acceptable to the Company, the Committee or other creditors and parties in interest. Page 19 of 22 20 THE CLOTHESTIME, INC. On June 28, 1996, the Committee filed a motion (the "Compensation Motion") seeking an order requiring the Company to reduce by 25 percent the annual base compensation of John Ortega II, the Company's Chairman of the Board and Chief Executive Officer, and Norman Abramson, the Company's President and Chief Operating Officer. Thereafter, the Company, the Committee, Messrs. Ortega and Abramson and David Sejpal, the Company's Vice President and Chief Financial Officer, entered into negotiations regarding, and, with the approval of the Compensation Committee of the Board of Directors, entered into a compromise and settlement of, the subject matter of the Compensation Motion. Under the terms of this compromise and settlement (as modified by a stipulation approved by the Bankruptcy Court on November 12, 1996), effective as of August 1, 1996, the annual base compensation paid to Messrs. Ortega and Abramson was reduced by 12.5 percent, such reduction to remain effective during the remaining pendency of the Bankruptcy Cases. In addition, Messrs. Ortega, Abramson and Sejpal will be eligible to receive certain incentive payments based on the Company's financial performance for the second half of Fiscal 1996. If Mr. Sejpal's employment is terminated other than for cause (as defined in the Severance Agreement, dated as of October 10, 1994 (the "Severance Agreement")) or if he terminates his employment for Good Reason within one year after a Change in Control (as defined in the Severance Agreement and including the conversion of any of the Debtors' cases to a case under chapter 7 of the Bankruptcy Code or the confirmation of a plan of reorganization providing for the liquidation of Clothestime or Stores), he shall be entitled to a severance payment in an amount equal to 12 months of his base compensation in effect on July 31, 1996 and a lump sum payment in lieu of benefits. Such amounts shall be treated as allowed administrative expense claims against Clothestime. In addition, Mr. Sejpal agreed to remain employed with the Company until at least the earlier of (i) 60 days after the date of any conversion of any of the Debtors' cases to a case under chapter 7 of the Bankruptcy Code or the date of the confirmation of a plan of reorganization providing for the liquidation of Clothestime or Stores and (ii) the date on which the Debtors (or any successor chapter 11 or chapter 7 trustee of the Debtors) and the Committee notify Mr. Sejpal that his services are no longer required. Finally, the Debtors and the Committee released Mr. Sejpal from any and all claims arising from or related to a bonus payment in the amount of $50,000 paid by the Company prior to the Petition Date. To the best of management's knowledge, there are no other material pending legal proceedings. The Company is, however, subject to other legal proceedings and claims that have arisen in the ordinary course of its business. ITEM 5. OTHER INFORMATION The information set forth in Part II, Item 1. Legal Proceedings in this Report is hereby incorporated by reference in its entirety into this Item 5. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 Amendment to Financing Agreement, dated as of August 1, 1996 by and between The CIT Group/Business Credit, Inc., as Lender, and Clothestime Stores, Inc., as Borrower. 10.2 Amendment to Financing Agreement, dated as of October 1, 1996 by and between The CIT Group/Business Credit, Inc., as Lender, and Clothestime Stores, Inc., as Borrower. 10.3 Agreement, dated as of November 11, 1996 by and among Financo, Inc., as financial advisor, The Clothestime, Inc. and the Creditors' Committee for The Clothestime, Inc. 10.4 Assumption and First Amendment to Lease, dated as of August 1, 1996 by and among Raymond Deangelo, August Deangelo, and Michael P. Deangelo, collectively as Lessor, and MRJ Industries, Inc., as Lessee. 27. Financial Data Schedule. (b) Reports on Form 8-K - There were no reports on Form 8-K filed for the quarterly period ended October 26, 1996. Page 20 of 22 21 THE CLOTHESTIME, INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE CLOTHESTIME, INC. Date: December 16, 1996 By: /s/ JOHN ORTEGA II ------------------------------ John Ortega II Chairman of the Board and Chief Executive Officer Date: December 16, 1996 By: /s/ DAVID A. SEJPAL ------------------------------- David A. Sejpal Vice President - Chief Financial Officer (Principal Financial Officer) Page 21 of 22 22 THE CLOTHESTIME, INC. EXHIBIT INDEX EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.1 Amendment to Financing Agreement, dated as of August 1, 1996 by and between The CIT Group/Business Credit, Inc., as Lender, and Clothestime Stores, Inc., as Borrower. 10.2 Amendment to Financing Agreement, dated as of October 1, 1996 by and between The CIT Group/Business Credit, Inc., as Lender, and Clothestime Stores, Inc., as Borrower. 10.3 Agreement, dated as of November 11, 1996 by and among Financo, Inc., as financial advisor, The Clothestime, Inc. and the Creditors' Committee for The Clothestime, Inc. 10.4 Assumption and First Amendment to Lease, dated as of August 1, 1996 by and among Raymond Deangelo, August Deangelo, and Michael P. Deangelo, collectively as Lessor, and MRJ Industries, Inc., as Lessee. 27. Financial Data Schedule. Page 22 of 22 EX-10.1 2 AMENDMENT TO FINANCING AGREEMENT, DATED 8/1/96 1 EXHIBIT 10.1 AMENDMENT TO FINANCING AGREEMENT This Amendment is dated as of August 1, 1996, and amends the Financing Agreement dated as of December 28, 1995 (the "Financing Agreement"), by and among THE CIT GROUP/BUSINESS CREDIT, INC., a New York corporation ("CITBC"), with offices located at 300 South Grand Avenue, Los Angeles, California 90071, CLOTHESTIME STORES, INC., a Delaware corporation (the "Borrower") with its principal place of business located at 5325 East Hunter Avenue, Anaheim, California 92807, as debtor and debtor in possession in a case commenced under chapter 11 of the United States Bankruptcy Code, 11 U.S.C. Sections 101-1330 (the "Bankruptcy Code"), and THE CLOTHESTIME, INC., MRJ INDUSTRIES, INC., CLOTHESTIME INVESTMENT, INC., CLOTHESTIME INTERNATIONAL, INC., and CLOTHESTIME ACQUISITION CORPORATION, all Delaware corporations (the "Guarantors" and, together with the Borrower, the "Debtors"), with their principal place of business at 5325 East Hunter Avenue, Anaheim, California 92807, as debtors and debtors in possession in cases commenced under chapter 11 of the Bankruptcy Code. RECITALS A. On December 8, 1995, the Debtors filed voluntary petitions for relief under chapter 11 of the United States Bankruptcy Code with the United States Bankruptcy Court for the Central District of California (the "Bankruptcy Court"). They are operating their businesses and managing their affairs as debtors in possession pursuant to sections 1107 and 1108 of the Bankruptcy Code. No trustee or examiner has been appointed in any of the Debtors' chapter 11 cases. B. On December 28, 1995, CITBC, the Borrower and the Guarantors entered into the Financing Agreement. On January 9, 1996, the Bankruptcy Court entered its final order approving the debtor in possession financing facility that is governed by the Financing Agreement. C. On May 2, 1996, the Bankruptcy Court entered its Order Authorizing Debtors and Debtors in Possession, Pursuant to Section 363(b) of the Bankruptcy Code, to Make Payments to Certain Contractors and Subcontractors in Order to Receive Tenant Improvement Allowances (the "Subcontractor Payment Order") in the Debtors' chapter 11 cases. Pursuant to the Subcontractor Payment Order, the Debtors are authorized to make certain payments to subcontractors (the "Subcontractor Payments") in order to satisfy the conditions to receive the payment of 2 tenant improvement allowances. The aggregate amount of such tenant improvement allowances substantially exceeds the aggregate amount of the Subcontractor Payments. D. CITBC and the Borrower wish to amend certain other provisions of the Financing Agreement relating to minimum EBITDA and the amount of borrowing availability under the Financing Agreement. AGREEMENT NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows: SECTION 1. DEFINITIONS Unless otherwise defined in this Amendment, capitalized terms used herein shall have the meanings assigned to them in the Financing Agreement. SECTION 2. AMENDMENTS TO FINANCING AGREEMENT 2.1 AVAILABILITY RESERVE. The dollar amount set forth at the end of clause (iv) of the definition of "AVAILABILITY RESERVE" included in Section 1 of the Agreement shall be reduced from $500,000 to $300,000. 2.2 PRE-PETITION CLAIM PAYMENT. The definition of "PRE-PETITION CLAIM PAYMENT" included in Section 1 of the Agreement shall be amended to add the following new clause (vi), and existing clause (vi) shall be redesignated as clause (vii): "(vi) any payment made by the Borrower or any Guarantor pursuant to the Bankruptcy Court's Order Authorizing Debtors and Debtors in Possession, Pursuant to Section 363(b) of the Bankruptcy Code, to Make Payments to Certain Contractors and Subcontractors in Order to Receive Tenant Improvement Allowances, entered in the Cases on May 2, 1996,". 2.3 MINIMUM EBITDA. The dollar amount set forth in Section 6.7 of the Agreement with respect to minimum EBITDA for the fiscal quarter ending on October 26, 1996 shall be reduced from negative $1,000,000 to negative $2,000,000 ("<$2,000,000>"). 2 3 SECTION 3. Miscellaneous 3.1 REMAINING PROVISIONS OF FINANCING AGREEMENT. Except as expressly amended hereby, all terms and provisions of the Financing Agreement shall remain in full force and effect. 3.2 CAPTIONS. The captions herein are intended for convenience of reference only and shall not be used to define, construe, interpret or limit any of the provisions hereof. 3.3 COUNTERPARTS. This Amendment may be executed in counterparts, each of which shall constitute an original but all of which when taken together shall constitute but one agreement to amend the Financing Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed and delivered by their proper and duly authorized officers as of the date set forth above. THE CIT GROUP/BUSINESS CREDIT, INC. By: /s/ Bonnie Schain ------------------------------- Bonnie Schain Assistant Vice President CLOTHESTIME STORES, INC., AS DEBTOR AND DEBTOR IN POSSESSION By: /s/ David A. Sejpal ------------------------------- David A. Sejpal Vice President and Chief Financial Officer 3 EX-10.2 3 AMENDMENT TO FINANCING AGREEMENT, DATED 10/1/96 1 EXHIBIT 10.2 AMENDMENT TO FINANCING AGREEMENT This Amendment is dated as of October 1, 1996, and amends the Financing Agreement dated as of December 28, 1995, as amended by the Amendment to Financing Agreement dated as of August 1, 1996 (the "Financing Agreement"), by and among THE CIT GROUP/BUSINESS CREDIT, INC., a New York corporation ("CITBC"), with offices located at 300 South Grand Avenue, Los Angeles, California 90071, CLOTHESTIME STORES, INC., a Delaware corporation (the "Borrower") with its principal place of business located at 5325 East Hunter Avenue, Anaheim, California 92807, as debtor and debtor in possession in a case commenced under chapter 11 of the United States Bankruptcy Code, 11 U.S.C. Sections 101-1330 (the "Bankruptcy Code"), and THE CLOTHESTIME, INC., MRJ INDUSTRIES, INC., CLOTHESTIME INVESTMENT, INC., CLOTHESTIME INTERNATIONAL, INC., and CLOTHESTIME ACQUISITION CORPORATION, all Delaware corporations (the "Guarantors" and, together with the Borrower, the "Debtors"), with their principal place of business at 5325 East Hunter Avenue, Anaheim, California 92807, as debtors and debtors in possession in cases commenced under chapter 11 of the Bankruptcy Code. RECITALS A. On December 8, 1995, the Debtors filed voluntary petitions for relief under chapter 11 of the United States Bankruptcy Code withe the United States Bankruptcy Court for the Central District of California (the "Bankruptcy Court"). The Debtors are operating their businesses and managing their affairs as debtors in possession pursuant to section 1107 and 1108 of the Bankruptcy Code. No trustee or examiner has been appointed in any of the Debtors' chapter 11 cases. B. On December 28, 1995, CITBC, the Borrower and the Guarantors entered into the Financing Agreement. On January 9, 1996, the Bankruptcy Court entered its final order approving the debtor in possession financing facility that is governed by the Financing Agreement. C. CITBC and the Borrower wish to amend certain other provisions of the Financing Agreement relating to minimum EBITDA and the amount of borrowing availability under the Financing Agreement. AGREEMENT NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows: SECTION 1. DEFINITIONS Unless otherwise defined in this Amendment, capitalized terms used herein shall have the meanings assigned to them in the Financing Agreement. 2 SECTION 2. Amendment to Financing Agreement MINIMUM EBITDA. The dollar amount set forth in Section 6.7 of the Agreement with respect to minimum EBITDA for the fiscal quarter ending on October 26, 1996 shall be reduced from negative $2,000,000 to negative $3,000,000 ("<$3,000,000>"). SECTION 3. MISCELLANEOUS 3.1 EFFECTIVE DATE. This Amendment shall be effective upon receipt by CITBC of a Documentation Fee in the amount of $10,000. 3.2 REMAINING PROVISIONS OF FINANCING AGREEMENT. Except as expressly amended hereby, all terms and provisions of the Financing Agreement shall remain in full force and effect. 3.2 CAPTIONS. The captions herein are intended for convenience of reference only and shall not be used to define, construe, interpret or limit any of the provisions hereof. 3.3 COUNTERPARTS. This Amendment may be executed in counterparts, each of which shall constitute an original but all of which when taken together shall constitute but one agreement to amend the Financing Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed and delivered by their proper and duly authorized officers as of the date set forth above. THE CIT GROUP/BUSINESS CREDIT, INC. By: /s/ Bonnie Schain ----------------------------------- Bonnie Schain Assistant Vice President CLOTHESTIME STORES, INC., as Debtor and Debtor in Possession By: /s/ Douglas L. Pereira ----------------------------------- Douglas L. Pereira Chief Financial Officer and Treasurer EX-10.3 4 AGREEMENT, DATED NOVEMBER 11, 1996 1 EXHIBIT 10.3 [FINANCO, INC. LETTERHEAD] November 11, 1996 The Clothestime, Inc. 5325 East Hunter Avenue Anaheim, California 92807 Attention: David Sejpal Vice President and Chief Financial Officer Creditors' Committee for The Clothestime, Inc. % Siegel, Sommers & Schwartz, LLP 470 Park Avenue South New York, New York 10016 Attention: Gene Schwartz, Co-Chairman Howard Camhi, Co-Chairman Dear Sirs: This will set forth the understanding and agreement between Financo, Inc., a Delaware corporation ("Financo") and The Clothestime, Inc. (the "Company") and the Creditors' Committee for the Company (the "Creditors' Committee") as follows: 1. The Company and the Creditors' Committee hereby jointly engage Financo as their financial advisor for the purpose of (a) identifying opportunities for the "Sale/Merger" of or "Investment" in (as defined in paragraph 3 below) the Company; (b) advising the Company and the Creditors' Committee concerning opportunities for such a Sale/Merger or Investment, whether or not identified by Financo; (c) as requested by the Company and the Creditors' Committee, participating on their behalf in negotiations concerning such a Sale/Merger or Investment, and (d) assisting the Company and the Creditors' Committee with implementing any such Sale/Merger or Investment in the context of the Company's "Chapter 11" (as hereinafter defined) context. References herein to the "Company" shall be deemed to include any entity that the Company may form to effect any of the transactions contemplated hereby. 2. Financo hereby accepts the engagement described in Paragraph 1 and, in that connection, agrees to: (a) assist with the preparation of financial and descriptive materials concerning the Company, and the distribution of such materials to prospective acquirors/merger partners of or investors in the Company; (b) develop, update and review with the Company and the Creditors' Committee on an ongoing basis a list of parties which might be interested in acquiring, merging with or investing in the Company (the "List") and contact only parties on the List that the Company and the Creditors' Committee consent to in advance; and (c) consult with and advise the Company and the Creditors' Committee concerning any prospective Sale/Merger or Investment and, if so requested by the Company and the Creditors' Committee, participate on the Company's and the Creditors' Committee's behalf in negotiations for such Sale/Merger or Investment. The Company and the Creditors' Committee may refuse to discuss or negotiate a Sale/Merger or Investment with any party for any reason whatsoever and may terminate negotiations with any party at any time. 2 The Clothestime, Inc. Creditors' Committee for The Clothestime, Inc. November 11, 1996 Page 2 3. For the purposes of this agreement: (a) A "Sale/Merger" of the Company shall mean any transaction or series or combination of transactions, other than in the ordinary course of trade or business, whereby, directly or indirectly, control of or a material interest in the Company or its businesses or assets is transferred. A "Sale/Merger" may take the form of any of the following transactions (without limitation): a sale or exchange of capital stock; a sale or exchange of assets (including, without limitation, one or more sales of leases, and one or more bulk sales of inventory, but excluding in-store sales of inventory and sales of leases conducted in connection with the Company's closing of store locations, other than in connection with a transaction as described in the second subparagraph of paragraph 3(c) below), a lease of assets (with or without a purchase option), a merger or consolidation (whether or not the Company is the surviving entity), a tender or exchange offer, a leveraged buy-out, the formation of a joint venture, minority investment or partnership, or any similar transaction. (b) An "Investment" in the Company shall mean any transaction, other than a Sale/Merger, constituting (a) the purchase by a third party of any security issued by the Company (including without limitation equity, debt or convertible securities, and any warrants or options to purchase the same), (b) any material loan (other than a working capital loan made by a financial institution) made by a third party to the Company, (c) the payment or assumption or defeasement by a third party of a material amount of the Company's obligations to third parties, or (d) any similar transaction. (c) Financo's compensation in connection with the consummation of a Sale/Merger or an Investment is based on the transaction's "Aggregate Value". "Aggregate Value" of a Sale/Merger or Investment shall mean the sum of (1) the value of all cash, securities and other property (including contingent consideration) paid or payable by an acquiring/investing party in connection with a Sale/Merger or Investment, (ii) any indebtedness of the Company that is "assumed" (as defined below) in connection with a Sale/Merger or Investment, and (iii) any dividends or other distributions paid by the Company out of the ordinary course from the date hereof through the closing of any Sale/Merger or Investment. Further, if it is determined that the Company's value to its estate is maximized by effecting a Sale/Merger as a multi-step transaction whereby the Company sells or merges its principal operating components to one purchaser/merger partner, with certain remaining assets (i.e., cash, cash equivalents, investments, inventories or receivables) being liquidated, sold or distributed by the estate, then the proceeds of such liquidated, sold or distributed assets shall be deemed to be part of the Aggregate Value of such Sale/Merger. The value of any non-cash portion of Aggregate Value, such as securities (whether debt or equity) or other property, shall be determined as follows: (1) the value of securities that are freely tradable in an established public market will be determined as provided in the definitive agreement governing the Sale/Merger or Investment or, in the absence of such an agreement or provision, on the basis of the last closing price prior to the consummation of a Sale/Merger or Investment; and (2) the value of the securities that are not freely tradable or have no established public market, or of property other than securities, shall be the fair market value thereof. Indebtedness of the Company shall be 3 The Clothestime, Inc. Creditors' Committee for The Clothestime, Inc. November 11, 1996 Page 3 deemed to have been "assumed" if (A) such indebtedness is repaid, assumed or otherwise defeased by an acquiror, investor or a other third party, or (B) in connection with a Sale/Merger in the form of a "stock" transaction (e.g., sale of stock, merger, consolidation, etc.), such indebtedness remains an obligation of the Company (or its successor or assignee) upon consummation of Sale/Merger. The term "indebtedness" shall, in the case of short-term revolving working capital debt, include only the average outstanding amount of such debt for the twelve months preceding the Sale/Merger or Investment. 4. The Company and the Creditor's Committee shall (a) furnish to Financo the names of all parties, if any, with whom they have had, prior to the date hereof, or have, at any time during the term of Financo's engagement hereunder, discussion or contacts concerning a Sale/Merger or Investment (such parties' names shall be hereby deemed to have been added to the List); and (b) make available to Financo all information concerning the business, assets, operations and financial condition of the Company that Financo reasonably requests in connection with the performance of its obligations hereunder. The Company and the Creditors' Committee recognize and confirm that, in advising them and in completing its engagement hereunder, Financo is using and relying on information, data, and material furnished to it by the Company. It is understood that in performing under this Agreement, Financo may assume and rely upon the accuracy and completeness of, but has not assumed any responsibility for independent verification of, such information, data and material so furnished. 5. Financo shall be engaged hereunder from the date hereof until this Agreement is terminated in accordance with the terms set forth below. Subject to the provisions of paragraphs 6 through 11, which shall survive any termination of this Agreement and/or the completion of Financo's engagement hereunder, the Company and the Creditors' Committee may terminate Financo's engagement hereunder at any time by giving Financo at least 10 business days prior written notice. Within 10 business days after the effective date of any termination, Financo will deliver to the Company and the Creditors' Committee a copy of the List as then constituted. 6. As compensation for the services rendered by Financo hereunder, the Company shall pay Financo as follows: (a) A retainer of $125,000 shall be paid to Financo by the Company (the "Retainer Fee") upon the effectiveness of this Agreement under the rules and procedures of the "Bankruptcy Court" (as hereinafter defined). The Retainer Fee shall be credited against any fee paid pursuant to paragraph 6(b) below. (b) Except as provided in paragraph 6(c) below, if a Sale/Merger of or Investment in the Company occurs either (i) with any party during the term of Financo's engagement hereunder, or (ii) at any time during a period of 12 months following the effective date of the Company's termination of Financo's engagement hereunder where the Sale/Merger or Investment involves a party either named on the List or with whom the Company or the Creditors' Committee had contact during the term of Financo's engagement hereunder, then the Company shall pay Financo a fee (a "Success Fee") equal to the greater of (A) $300,000 plus 1-1/2% of the Aggregate Value, or (B) $400,000. 4 The Clothestime, Inc. Creditors' Committee for The Clothestime, Inc. November 11, 1996 Page 4 (c) It is understood by the parties hereto that the Company, prior to the date hereof, has received from Ray DeAngelo and/or any of his affiliates ("DeAngelo") a proposal for a Sale/Merger or Investment (the "DeAngelo Proposal"); and may receive, after the date hereof, from Fast Retailing Ltd. and/or any of its affiliates ("Fast Retailing" and, together with "DeAngelo", each, alternatively, a "Designated Pre-Existing Candidate") a proposal for a Sale/Merger or Investment (a "Fast Retailing Proposal"). In order for a Fast Retailing Proposal to be considered a valid proposal for the purposes of this Agreement, on or before November 25, 1996, Fast Retailing must present a bona fide proposal in writing to the Company and the Creditors' Committee that is not subject to material additional due diligence and which contains the key material terms of a potential Sale/Merger or Investment, including (without limitation) credible details on the realizable value of such a transaction to the Company and its estate, the general structure and manner of implementation of such a transaction, how such a transaction would be financed, and a definitive timetable for consummation. In the event that the Company effects a Sale/Merger or Investment with DeAngelo or with Fast Retailing (but only if Fast Retailing submits a valid proposal as provided above), then the provisions of this paragraph 6(c) shall govern the payment of fees to Financo. (i) If potential acquirors/investors other than the Designated Pre-Existing Candidates conduct on- or off-site financial due diligence on the Company prior to the acceptance by the Court of a Sale/Merger or Investment transaction from one of the Designated Pre-Existing Candidates, but such potential acquirors/investors either submit no proposals to effect a Sale/Merger or Investment, or submit proposals for a Sale/Merger or Investment none of which, in the reasonable opinion of the Company and the Creditors' Committee, present value to the estate materially superior to the DeAngelo Proposal or a valid Fast Retailing Proposal, then, in the event that the Company thereafter enters into an agreement to effect a Sale/Merger or Investment with one of the Designated Pre-Existing Candidates, Financo shall thereupon be paid a fee of $50,000 (the "Termination Fee"). A termination Fee shall not be payable if the only parties that conduct any on- or off-site financial due diligence on the Company are the Designated Pre-Existing Candidates. (ii) If one or more of the potential acquirors/investors other than the Designated Pre-Existing Candidates submit proposals for a Sale/Merger or Investment at least one of which, in the reasonable opinion of the Company or the Creditors' Committee, presents value to the estate materially superior to the DeAngelo Proposal or a valid Fast Retailing Proposal, then, in the event that the Company thereafter effects a Sale/Merger or Investment with a Designated Pre-Existing Candidate within the time parameters outlined in paragraph 6(b) above, the Company shall pay Financo a Success Fee as provided in such paragraph 6(b). (d) Payment of a Success Fee to Financo pursuant to this paragraph 6 shall be paid by the Company to Financo at the closing of a Sale/Merger or Investment by wire transfer or check payable in immediately available funds. Payment of a Termination Fee to Financo pursuant to this paragraph 6 shall be paid by the Company to Financo immediately following the approval by the Court of a Sale/Merger or Investment meeting the conditions of paragraph 6(c)(i) by wire transfer or check payable in immediately available funds. 5 The Clothestime, Inc. Creditors' Committee for The Clothestime, Inc. November 11, 1996 Page 5 The Company and the Creditors' Committee represent that neither has made any agreement with any brokers, representatives or other persons pursuant to which such persons would have an interest in compensation due from the Company to Financo in connection with any transaction contemplated herein. 7. The Company shall, upon prior notice from Financo, pay, in advance, for all travel and lodging expenses, and for any material, publishing or photocopying costs, to be incurred by Financo on the Company's and the Creditors' Committee's behalf in connection with Financo's engagement hereunder. Except as otherwise provided for in the foregoing sentence, the Company shall reimburse Financo, on a monthly basis in arrears for Financo's reasonable out-of-pocket expenses incurred in connection with Financo's activities under or contemplated by this engagement during such preceding month, which out-of-pocket expenses may include, but not be limited to, outside database charges, overtime or outside word processing charges, communication charges, courier services and other necessary and reasonable expenses. 8. Financo will act under this Agreement as an independent contractor with duties solely to the Company and the Creditors' Committee. The Company and the Creditors' Committee expressly acknowledge that their engagement of Financo is not intended to confer rights upon any person not a party hereto, including shareholders, employees or creditors of the Company, as against Financo, Financo's affiliates or their respective directors, officers, agents and employees or each other person, if any, controlling Financo or any of its affiliates. Except as otherwise required by applicable law, any advice to be provided by Financo under this Agreement shall not be disclosed publicly or made available to third parties without prior written approval of Financo, which approval shall not be unreasonably withheld. 9. The Company and the Creditors' Committee agree that, following the completion of any transaction contemplated hereby, Financo will have the right to place advertisements in financial and other newspapers and journals, at its own expense, describing its services to the Company and the Creditors' Committee hereunder, provided that, prior to placing any such advertisements, Financo will submit a copy of any such advertisements to the Company and the Creditors' Committee for their approval. 10. Financo understands that the Company has filed a voluntary bankruptcy petition under Chapter 11 ("Chapter 11") of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court of the Central District of California, Santa Ana Division (the "Bankruptcy Court"). Financo, the Company and the Creditors' Committee acknowledge that this Agreement and its effectiveness are subject to the approval of the Bankruptcy Court. The Company and the Creditors' Committee agree to seek to make this agreement effective either through a joint stipulation or a motion pursuant to the rules and procedures of the Bankruptcy Court as soon as reasonably practicable and to take all reasonable actions necessary to procure such effectiveness. 6 The Clothestime, Inc. Creditors' Committee for The Clothestime, Inc. November 11, 1996 Page 6 11. This Agreement shall be deemed to have been made in the State of New York. This Agreement and all controversies arising from or relating to performance under this Agreement shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to such State's rules concerning conflicts of laws. ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO ANY CLAIM OR ACTION ARISING OUT OF THIS AGREEMENT OR CONDUCT IN CONNECTION WITH THIS ENGAGEMENT IS HEREBY WAIVED. This letter shall constitute the entire agreement between the parties hereto. This Agreement shall remain in full force and effect following completion or termination of Financo's engagement hereunder and shall be binding upon and inure to the benefit of any successors, assigns, heirs and personal representatives of the Company, the Creditors' Committee, and Financo. This Agreement may be executed via facsimile transmission and may be executed in separate counterparts, each of which shall be deemed to be an original and all of which together shall constitute a single instrument. If the foregoing correctly sets forth the understanding and agreement between Financo and the Company, please sign in the space indicated below. FINANCO, INC. By: /s/ Joshua R. Goldberg --------------------------------- Joshua R. Goldberg Managing Director THE CLOTHESTIME, INC. By: /s/ David A. Sejpal ---------------------------------- David A. Sejpal Vice President and Chief Financial Officer CREDITORS' COMMITTEE FOR THE CLOTHESTIME, INC. By: /s/ Gene Schwartz ----------------------------------- Gene Schwartz Co-Chairman By: /s/ Howard Camhi ------------------------------------ Howard Camhi Co-Chairman EX-10.4 5 ASSUMPTION AND FIRST AMENDMENT TO LEASE, 8/1/96 1 EXHIBIT 10.4 ASSUMPTION AND FIRST AMENDMENT TO LEASE 1. Parties. This Assumption and First Amendment to Lease dated for identification purposes August 1, 1996 (this "First Amendment") is entered into by and between Raymond Deangelo, an individual resident of California, August Deangelo, an individual resident of California, and Michael P. Deangelo, an individual resident of California, as tenants in common (collectively, "Lessor") and MRJ Industries, Inc., a Delaware corporation ("Lessee"). 2. Recitals. 2.1. The Lease. Deangelos Partnership No. 8, a California general partnership, formerly known as Deangelos & Ortega Partnership No. 8 ("Original Lessor") and Lessee entered into that Standard Industrial Lease-Net dated March 25, 1988, with an Addendum to Lease of even date attached thereto and made a part thereof, originally made between The Clothestime, Inc., a California corporation ("Original Lessee") and Lessor. Such Lease and Addendum To Lease is herein called the "Lease". The subject of the Lease is the improved real property located at 5325 East Hunter Avenue, Anaheim, California, which is described on Exhibit "A" attached hereto and incorporated herein by this reference (the "Premises"). 2.2. Options. The Lease was subject to: Lease Modification and Option Agreement dated March 25, 1988; First Amendment to Lease and Modification of Option Agreement dated September 20, 1989; and Second Amendment to Lease Modification and Option Agreement dated June 28, 1990 (collectively, the "Option Documents"). The options provided under the Option Documents were not exercised by Lessee and the Option Documents are of no further force and effect. 2.3. Ownership of Property. Lessor has acquired the Premises from Original Lessor and has succeeded Original Lessor as Lessor under the Lease and owns the Premises free and clear of all monetary liens and encumbrances. 2.4. Transfer of Lease. The Original Lessee merged into The Clothestime, Inc., a Delaware corporation, on or about June 20, 1991, and the Lease was transferred by operation of law. The Clothestime, Inc., a Delaware corporation, assigned the Lease to a wholly-owned subsidiary, MRJ Industries, Inc., a Delaware corporation, which is currently the Lessee. Lessor recognizes the Lessee as the holder of the leasehold interest subject to the terms of the Lease as hereby amended. 2 2.5. Lessee's Chapter 11. On or about December 8, 1995, Lessee filed a voluntary petition under chapter 11 of the United States Bankruptcy Code (Title 11, U.S. Code), which commenced that proceeding pending in the United States Bankruptcy Court for the Central District of California (the "Bankruptcy Court") entitled In re MRJ Industries, Inc., a Delaware corporation, Case No. SA 95-22535 JW (the "Bankruptcy Case"), which is jointly administered with Case Nos. SA 95-22533-JW through SA 95-22538-JW. No trustee has been appointed in the Bankruptcy Case and Lessee is a debtor in possession. On July 8, 1996, because of defaults under the Lease by Lessee, Lessor filed in the Bankruptcy Case a motion for relief from the automatic stay ("Stay Motion") in order to pursue its applicable nonbankruptcy law remedies and regain possession of the Premises. The Bankruptcy Court scheduled a hearing on shortened notice on Lessor's Stay Motion for July 22, 1996. The Stay Motion has since been continued to September 30, 1996. 2.6. Assumption. This First Amendment is entered into by Lessor and Lessee for the purpose of amending certain provisions of the Lease, to provide for Lessee's assumption of the Lease, as so amended, and to resolve and settle the Stay Motion. Lessee's assumption of the Lease, as amended hereby, and Lessor's withdrawal of the Stay Motion shall be contingent upon (i) the entry of a final Order by the Bankruptcy Court authorizing such assumption pursuant to 11 U.S.C. Section 365(a), and subject to Lessee's compliance with the provisions of 11 U.S.C. Section 365(b), and (ii) the expiration of any time period in which an appeal to such Order may be filed, or, if an appeal has been filed, such Order shall have been affirmed by the appellate court. 3. Amendments. The Lease is hereby amended as hereinafter set forth in this Article 3. 3.1. Paragraphs 1, 2, 3, 4 and 6 of the Addendum To Lease are hereby deleted in their entirety. 3.2. Extension of Term. Section 3.1 of the Lease is hereby deleted in its entirety and in lieu thereof, Section 3.1 shall provide as follows: "3.1 Term. The term of this Lease commenced on December 1, 1988 ("Commencement Date") and shall continue until May 15, 2006, unless sooner terminated pursuant to any provision hereof." 3.3. No Further Extension Rights. Notwithstanding any provision of the Lease which may be to the contrary, Lessee shall not have the right to extend the term of the Lease beyond May 15, 2006. 2 3 3.4. Monthly Rent. Notwithstanding any provisions of the Lease which may be to the contrary, commencing May 15, 1996 and continuing through the month of May, 1997, rent to be paid by Lessee to Lessor shall accrue at the rate of Forty-Three Thousand Seven Hundred Eighty Dollars ($43,780) per month ("Monthly Rent"). Lessor acknowledges that the Monthly Rent has been paid through and including the installment payable on September 1, 1996. Accordingly, commencing October 1, 1996 and continuing thereafter on the first day of each month through and including May 1, 1997, Lessee shall pay to Lessor installments of Monthly Rent in the amounts of Forty-Three Thousand Seven Hundred Eighty Dollars ($43,780). On June 1, 1997 and on June 1 of each calendar year thereafter during the remainder of the term of the Lease, Monthly Rent, to be paid by Lessee to Lessor on the first (1st) day of each month, shall be increased as follows: (a) On June 1, 1997 and on June 1 of each subsequent year, the Monthly Rent shall be adjusted by the increase, if any, in the Consumer Price Index of the Bureau of Labor Statistics of the Department of Labor for All Urban Consumers, (1982-1984=100), "All items", for the Los Angeles-Anaheim-Riverside area, herein referred to as "C.P.I.", for the preceding twelve (12) month period. Such increase in the Monthly Rent shall be calculated as follows: the Monthly Rent payable during the preceding twelve (12) month period shall be multiplied by a fraction the numerator of which shall be the C.P.I. of the calendar month during which the increase is to take effect, and the denominator of which shall be the C.P.I. for the first calendar month of such preceding twelve (12) month period (the "CPI Fraction"). The sum so calculated shall constitute the new Monthly Rent hereunder. Provided, however, notwithstanding the foregoing the Monthly Rent increase on any June 1 during the term of the Lease shall not be less than three percent (3%) of the amount of the Monthly Rent applicable during the preceding twelve (12) month period nor more than five percent (5%) of the amount of the Monthly Rent for the preceding twelve (12) month period. (b) In the event the compilation and/or publication of the C.P.I. shall be transferred to any other governmental department or bureau or agency or shall be discontinued, then the index most nearly the same as the C.P.I. shall be used to make such calculations. In the event that Lessor and Lessee cannot agree on such alternative index, then the matter shall be submitted for decision to the American Arbitration Association in the county in which the Premises are located, in accordance with the then rules of said association and the decision of the arbitrators shall be binding upon the parties, notwithstanding one party failing to appear after due notice of the proceeding. The cost of said arbitrators shall be paid equally by Lessor and Lessee. 3 4 (c) Lessee shall continue to pay the Monthly Rent at the rate previously in effect until the increase if any, is determined. Within ten (10) days following the date on which Lessor gives to Lessee written notice of the increase, which notice shall set forth the computation of such increase, Lessee shall make such payment to Lessor as will bring the increased Monthly Rent current, commencing with the effective date of such increase through the date of any rental installments then due. Thereafter the Monthly Rent shall be paid at the increased rate. 3.5 Letter of Credit. Concurrently herewith and annually during the term of this Lease, Lessee shall deliver and deposit with Lessor an Irrevocable Letter of Credit (a "Letter of Credit") (in the amount set forth below) issued by Chemical Bank or such other bank as may be designated by Lessee, subject to Lessor's approval, not to be unreasonably withheld, each of which Letters of Credit shall not expire before September 1 of the following calendar year, so that, during the term of this Lease, Lessor shall always be in possession and the beneficiary of a Letter of Credit, in full force and effect. The form of the Letter of Credit shall be in substantially the same form as attached hereto as Exhibit "B" and incorporated herein by this reference. The Letter of Credit delivered concurrently herewith shall be in the amount of Five Hundred Twenty-Five Thousand Dollars ($525,000). Each year hereafter, each replacement Letter of Credit to be delivered as provided below shall be in an amount equal to the amount of the Letter of Credit currently in effect (to expire on September 1 of the current year) multiplied by the CPI Fraction, as such CPI Fraction is set forth in the notice delivered by Lessor to Lessee pursuant to Paragraph 3.4(c) of the First Amendment. Provided, however, notwithstanding the foregoing the increase in the amount of any replacement Letter of Credit shall not be less than three percent (3%) of the Letter of Credit which it replaces nor more than five percent (5%) of the amount of the Letter of Credit which it replaces. In the event of a material default under Section 13.1(b) by reason of Lessee's failure to pay rent or other charges due hereunder, Lessor may draw upon the currently issued Letter of Credit for the payment of such rent or any other charges which are payable under the terms of this Lease. If Lessor so uses and draws upon such Letter of Credit, Lessor shall give written notice to Lessee of such draw and, Lessee shall have ten (10) business days after receipt of such notice to deliver and deposit with Lessor a replacement or amended Letter of Credit (in substantially the same form and substance as the Letter of Credit drawn upon), restoring the amount of the Letter of Credit to the full original amount of such Letter of Credit upon which Lessor shall be entitled to continue to draw as set forth above and as further set forth herein. On or before the later of ten (10) business days after delivery of the notice pursuant to Paragraph 3.4(c) of the First Amendment or forty-five (45) days before the expiration 4 5 of each Letter of Credit held by Lessor, Lessee shall deliver and deposit with Lessor a new Letter of Credit in the same form and substance as the form of Letter of Credit attached hereto as Exhibit "B", the amount of which shall be increased as provided above, and which shall not expire prior to September 1 of the following calendar year, and concurrently Lessor shall return the prior Letter of Credit to Lessee. Lessee's failure to replace a Letter of Credit on or before the later of ten (10) business days after delivery of the notice pursuant to Paragraph 3.4(c) of the First Amendment or forty-five (45) days prior to its expiration, or to replace or amend a Letter of Credit which has been drawn upon within ten (10) business days after receipt of Lessor's notice to Lessee that it has been drawn upon, as provided above, shall be a default, with respect of which there is no period within which to cure, as provided under Paragraph 13.1, whereupon, as provided in Paragraph 13.2(d), Lessor shall be entitled to draw the full balance of the Letter of Credit as Liquidated Damages provided in Paragraph 13.6 of the Lease and terminate Lessee's right to possession of the Premises without further notice other than a three-day Notice to Quit pursuant to California C.C.P. Section 1161. 3.6. Default. Paragraph 13.1 is hereby amended by deleting 13.1(d) in its entirety and adding subsection 13.1(f) immediately following subsection 13.1(e), as follows: "(f) The Lessee's failure to provide, replace or amend a Letter of Credit in accordance with Paragraph 3.5 of the First Amendment." 3.7. Liquidated Damages. Paragraph 13.2 shall be amended by deleting Paragraphs 13.2(b) and 13.2(c) in their entirety and adding Paragraph 13.2(d) immediately following Paragraph 13.2(c), as follows: "(d) In lieu of and in place of the actual damages as provided in the second sentence of Paragraph 13.2(a), Lessor shall be entitled to recover and receive from Lessee Liquidated Damages as provided in Paragraph 13.6." 3.8. Paragraph 13 shall be amended by adding Paragraph 13.6 immediately following Paragraph 13.5, as follows: "13.6 LIQUIDATED DAMAGES. LESSOR AND LESSEE HEREBY ACKNOWLEDGE AND AGREE THAT IN THE EVENT LESSEE DEFAULTS UNDER THIS LEASE AS PROVIDED IN PARAGRAPH 13.1 AND THIS LEASE IS TERMINATED IN ACCORDANCE WITH PARAGRAPHS 3.5 OF THE FIRST AMENDMENT AND 13.2(a), LESSOR WILL SUFFER DAMAGES, INCLUDING, BUT NOT LIMITED TO, THE COSTS OF RECOVERING POSSESSION OF THE PREMISES, EXPENSES OF 5 6 RELETTING, INCLUDING NECESSARY RENOVATION AND ALTERATION OF THE PREMISES, REASONABLE ATTORNEYS' FEES, REAL ESTATE COMMISSIONS AND LOSS IN RENTAL, WHICH, BECAUSE OF THE SPECIAL NATURE OF THE PREMISES AND COMPLEXITY OF THE LOCAL MARKET FOR RENTAL SPACE COMPARABLE TO THE PREMISES, BE IMPRACTICAL OR EXTREMELY DIFFICULT TO ASCERTAIN. IN ADDITION, LESSEE WISHES TO HAVE A LIMITATION PLACED UPON THE POTENTIAL LIABILITY OF LESSEE TO LESSOR IN THE EVENT LESSEE DEFAULTS UNDER THIS AGREEMENT, AND LESSEE WISHES TO INDUCE LESSOR TO WAIVE CERTAIN REMEDIES WHICH LESSOR MAY HAVE IN THE EVENT OF SUCH A DEFAULT. LESSOR AND LESSEE, AFTER DUE NEGOTIATION, HEREBY ACKNOWLEDGE AND AGREE THAT THE FOLLOWING AMOUNT REPRESENTS A REASONABLE ESTIMATE OF THE DAMAGES ("LIQUIDATED DAMAGES") WHICH LESSOR MAY SUSTAIN IN THE EVENT OF SUCH A DEFAULT BY LESSEE: FIVE HUNDRED TWENTY-FIVE THOUSAND DOLLARS ($525,000) UNTIL SEPTEMBER 1, 1997, AND ON SEPTEMBER 1, 1997 AND ON SEPTEMBER 1 OF EACH CALENDAR YEAR AFTERWARDS DURING THE TERM HEREOF AN AMOUNT EQUAL TO THE AMOUNT APPLICABLE TO THE PRECEDING TWELVE (12) MONTH PERIOD MULTIPLIED BY THE CPI FRACTION. ANY SUCH INCREASE SHALL NOT BE LESS THAN THREE PERCENT (3%) OF THE AMOUNT APPLICABLE DURING THE PRECEDING TWELVE (12) MONTH PERIOD NOR MORE THAN FIVE PERCENT (5%) OF THE AMOUNT APPLICABLE DURING THE PRECEDING TWELVE (12) MONTH PERIOD. LESSOR AND LESSEE HEREBY AGREE THAT LESSOR MAY, IN THE EVENT OF A LESSEE DEFAULT AND EXPIRATION OF ANY APPLICABLE CURE PERIOD WITHOUT CURE, TERMINATE THIS LEASE AND THEREUPON LESSEE SHALL PAY TO LESSOR THE AMOUNT OF THE LIQUIDATED DAMAGES, THE AMOUNT OF WHICH SHALL BE AS PROVIDED ABOVE, AND PAYMENT OF WHICH SHALL BE DEEMED TO HAVE BEEN MADE UPON DRAW OF THE FULL BALANCE OF THE LETTER OF CREDIT, AS LESSOR'S SOLE AND EXCLUSIVE REMEDY, AND IN THE EVENT OF SUCH TERMINATION AND PAYMENT OF SUCH LIQUIDATED DAMAGES, LESSEE SHALL THEREAFTER BE DISCHARGED OF ALL OBLIGATIONS OWNING HEREUNDER. LESSOR AND LESSEE HEREBY ACKNOWLEDGE THAT EACH OF THEM HAS READ AND UNDERSTANDS THE TERMS AND PROVISIONS OF THIS PARAGRAPH 13.6, AND BY THEIR INITIALS IMMEDIATELY BELOW, LESSOR AND LESSEE HEREBY AGREE TO BE BOUND BY THESE TERMS AND PROVISIONS. Lessor /s/ RD /s/ MD /s/ AD Lessee /s/ DS ---------------------- --------------------- 4. Assumption. Subject to the entry of the final Order by the Bankruptcy Court described in Section 2.5 hereof, Lessee hereby expressly assumes the Lease, as amended hereby, and agrees to perform all of the obligations and discharge all of the liabilities of Lessee under the Lease, as so amended. 6 7 5. Notices: Designation Of Agent. 5.1. NOTICES. Notwithstanding any provision of the Lease which may be to the contrary, all notices, demands, consents or approvals hereunder shall be in writing and shall be deemed to have been given (a) three (3) business days after the same are sent by certified or registered mail, postage prepaid, return receipt requested, (b) when delivered by hand or transmitted by telecopy or (c) the next business day after the same are sent by a reliable overnight courier service, with acknowledgment of receipt, in each case, to the parties at their respective addresses set forth below (or at such other addresses as such parties may designate by notice to the other parties): To Lessor at: Raymond A. Deangelo R.A.D. & Associates 4721 East Copa de Oro Dr. Anaheim, California 92807 with copy to: Greenberg Glusker Fields Claman & Machtinger LLP 1900 Avenue of the Stars, Suite 2100 Los Angeles, California 90067 Attn: Sidney Machtinger, Esq. To Lessee at: MRJ Industries, Inc. 5325 East Hunter Avenue Anaheim, California 92807 Attn: David Sejpal with copies to: MRJ Industries, Inc. 5325 East Hunter Avenue Anaheim, California 92807 Attn: Real Estate Jones Day Reavis & Pogue 2603 Main Street, Suite 900 Irvine, California, 92714 Attn: Dulcie D. Brand, Esq. 5.2. AGENT. With regard to the contacts and communications, including any reports, notices, approvals, consents and all other communications that are required hereunder on the part of Lessor, Lessor shall designate an agent through whom all such contacts and communications shall be made. Lessee may rely upon the authority of such agent designated by Lessor as the agent of Lessor. Among other things, Monthly Rent to be paid by Lessee to Lessor shall be sent to Lessor's designated agent made payable to such agent at the address for Lessor provided in Section 5.1. Initially, Raymond A. Deangelo shall be the designated agent for Lessor. Lessor may change and replace its designated agent by written notice given to Lessee in accordance with Section 5.1, except that any such notice changing the designation of Lessor's agent must be signed by Raymond A. Deangelo, Michael P. Deangelo and August Deangelo or, in each case, their legal representative. 7 8 6. Continuing Effect. Except as amended hereby, the Lease shall continue in full force and effect. This First Amendment is executed by Lessor and Lessee as of the date first above set forth. "LESSOR" By: /s/ Raymond Deangelo ----------------------------------------- Raymond Deangelo By: /s/ August Deangelo ----------------------------------------- August Deangelo By: /s/ Michael P. Deangelo ----------------------------------------- Michael P. Deangelo "LESSEE" MRJ INDUSTRIES, INC., a Delaware corporation, Chapter 11 Debtor and Debtor in Possession By: /s/ David A. Sejpal ----------------------------------------- David A. Sejpal Vice President and Chief Financial Officer 8 9 ALTA OWNERS POLICY OR-9632362 REGIONAL EXCEPTIONS TITLE OFFICER - OWENS EXHIBIT "A" ALL THAT CERTAIN LAND SITUATED IN THE STATE OF CALIFORNIA, COUNTY OF ORANGE, CITY OF ANAHEIM, DESCRIBED AS FOLLOWS: PARCEL 1 OF PARCEL MAP NO. 83-229, AS SHOWN ON A MAP FILED IN BOOK 179, PAGES 5 AND 6 OF PARCEL MAPS, RECORDS OF ORANGE COUNTY, CALIFORNIA. EXCEPTING THEREFROM ALL OIL, GAS, MINERALS, AND OTHER HYDROCARBON SUBSTANCES, IN, UPON AND UNDER SAID SUBJECT PROPERTY BELOW A DEPTH OF 500 FEET FROM THE SURFACE THEREOF, WITHOUT THE RIGHT OF SURFACE ENTRY FOR THE PURPOSE OF REMOVING OR EXTRACTING THE SAME, AS RESERVED IN DEEDS RECORDED JUNE 21, 1965 IN BOOK 7563, PAGES 252, 257, AND 262, ALL OF OFFICIAL RECORDS, BY AUGUST BEINGER AND OTHERS. PAGE 6 10 EXHIBIT B (Letter of Credit Bank Letterhead] [Address] Date: ________________, 1996 Letter of Credit No.:________________________ Raymond DeAngelo, August DeAngelo and Michael DeAngelo c/o Raymond DeAngelo, as agent under that certain Standard Industrial Lease-Net, dated March 25, 1998, with an Addendum to Lease of even date therewith, as amended by the First Amendment to Lease, dated as of August 1, 1996 4721 East Copa del Ora Drive Anaheim, CA 93807 Attention: Mr. Raymond DeAngelo Dear Mr. DeAngelo: At the request and for the account of MRJ Industries, Inc. (the "Account Party"), we hereby establish our irrevocable Letter of Credit in your favor in the amount of Five Hundred Twenty Five Thousand United States Dollars (U.S. $525,000) available at your sight draft accompanied by your signed and dated statement containing the words set forth in paragraph (a) or paragraph (b) below: (a) "The amount drawn represents the amount payable to Raymond DeAngelo, August DeAngelo and Michael DeAngelo (collectively, "Lessor") by reason of a material default under Section 13.1(b) of the Standard Industrial Lease-Net dated March 25, 1988, with an Addendum to Lease of even date therewith, as amended by the First Amendment to Lease, dated as of August 1, 1996 (collectively, the "Lease"), by and between Lessor and MRJ Industries, Inc. ("Lessee"), by reason of Lessee's failure to pay rent or other charges due under the Lease. The amount of this demand does not exceed the amount so due under the Lease." 11 (b) "The amount drawn represents the amount payable to Raymond DeAngelo, August DeAngelo and Michael DeAngelo (collectively, "Lessor") by reason of a material default under Section 13.1(f) of the Standard Industrial Lease-Net dated March 25, 1998, with an Addendum to Lease of even date therewith, as amended by the First Amendment to Lease, dated as of August 1, 1996, by and between Lessor and MRJ Industries, Inc." Each draft presented hereunder must be certified as true and correct and signed by Raymond DeAngelo, as agent for Lessor under the Lease (the "Agent"). Notice of change of the Agent shall be provided hereunder by a notice signed by each of Raymond DeAngelo, August DeAngelo and Michael DeAngelo, or in each case their legal representative, and delivered to the undersigned at our above-specified officer and to Account Party. Each draft presented hereunder must be marked "DRAWN UNDER LETTER OF CREDIT NO. ____ ISSUED BY [ISSUING BANK]." Partial and multiple drawings are permitted under this Letter of Credit. The aggregate amount available hereunder shall be reduced from time to time upon payment by us of a drawing made hereunder. This Letter of Credit expires at our above-specified office at 5:00 p.m. (New York time) on September 1, 1997 (the "Expiration Date"). The Expiration Date shall be automatically extended to that Banking Day (a day on which we are open at our above address to conduct our letter of credit business) which is ten Banking Days after the Expiration Date if (1) the Expiration Date falls on a day which is not a Banking Day for any reason referred to in Article 17 of the UCP (as defined below) or (2) the Expiration Date falls on a day which is not a Banking Day for any reason other than those referred to in such Article 17 and the next day which would normally be a Banking Day is not a Banking Day for any reason referred to in Article 17. We hereby engage with you that for each demand presented to us by physical delivery at our offices at ___________________________________________ before 11:00 a.m. (New York time), on a Banking Day on or before the Expiration Date which conforms to the terms and conditions of this Letter of Credit, payment shall be effected by us in immediately available funds by wire transfer of funds to an account designated by you by the close of business on such Banking Day. If such demand is presented after 11:00 a.m. (New York time) on a Banking Day on or before the Expiration Date which conforms to the terms and conditions of this Letter of -2- 12 Credit, payment shall be effected by us in immediately available funds by wire transfer of funds to an account designated by you by the close of business on the following Banking Day. Except as otherwise herein provided, this Letter of Credit is subject to the Uniform Customs and Practice for Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500, (the "UCP") and engages us in accordance with the terms thereof. This Letter of Credit may not be transferred by you except to a party to whom the Lease is assigned. All bank charges in connection with this Letter of Credit are for the account of the Account Party. -3- EX-27 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND THE CONSOLIDATED STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS JAN-25-1997 JAN-28-1996 OCT-26-1996 24,254 3,128 0 0 13,397 43,857 50,628 29,810 65,026 20,741 0 0 0 15 (5,587) 65,026 149,561 150,256 102,995 102,995 0 0 123 (13,805) 0 (13,805) 0 0 0 (13,805) (0.97) (0.97)
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