-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, YePaAebw19wPt5gU+rMVyXdbUvnKEUt3gFMPZQJAZ3Hs5N2qmC3wYjADTptuVLTI lfTJc1T+rWm4EUvdaQYh+w== 0000744795-95-000035.txt : 199507030000744795-95-000035.hdr.sgml : 19950703 ACCESSION NUMBER: 0000744795-95-000035 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19950128 FILED AS OF DATE: 19950630 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: STUARTS DEPARTMENT STORES INC CENTRAL INDEX KEY: 0000744795 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-VARIETY STORES [5331] IRS NUMBER: 042817110 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-13184 FILM NUMBER: 95551199 BUSINESS ADDRESS: STREET 1: 16 FORGE PKWY CITY: FRANKLIN STATE: MA ZIP: 02038 BUSINESS PHONE: 5085204540 MAIL ADDRESS: STREET 1: 16 FORGE PARKWAY CITY: FRANKLIN STATE: MA ZIP: 02038 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended January 28, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 0-13184 STUARTS DEPARTMENT STORES, INC. A Delaware corporation I.R.S. Employer Identification No. 04-2817110 16 Forge Parkway Franklin, MA 02038 (508) 520-4540 Securities Registered Pursuant to Section 12(g) of the Act: Title Common Stock, $.01 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Aggregate market value on June 6, 1995 of the voting stock held by non-affiliates of the registrant was approximately $443,125. Common shares outstanding on June 6, 1995: 21,507,175 (excluding 901,899 shares held as treasury shares). Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities and Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes X No PART I ITEM 1. BUSINESS - ------------------------------------------------------------------------- CHAPTER 11 FILING On May 16, 1995, Stuarts Department Stores, Inc. ("Stuarts" or the "Company") filed a voluntary petition for reorganization under Chapter 11 ("Chapter 11"), Title 11 of the United States Code (the "Bankruptcy Code") with the United States Bankruptcy Court for the District of Massachusetts (Western Division) (the "Bankruptcy Court"). The Company's voluntary filing was precipitated by financial and liquidity difficulties. The Company's inability to pay obligations as they became due caused many of its vendors to curtail inventory shipments to the Company, which further impacted adversely the Company's performance. Prior to the Chapter 11 filing, the Company unsuccessfully attempted to locate a buyer for the retail chain. On June 20, 1995, the Company's Board of Directors approved the orderly liquidation or sale in Chapter 11 of the Company. The Company's management is exploring various alternatives by which the liquidation or sale can be effected and intends to formulate a plan for the liquidation or sale as promptly as practicable. The Board of Directors' determination had been affected by a number of factors, including, in particular, poor sales and operating results achieved over the Father's Day selling period. The orderly liquidation or sale will involve the closing or the sale of the remaining Stuarts stores and is likely to take a number of months to complete. Any liquidation or sale will be subject to obtaining the requisite approval of the Company's secured creditor, the Official Committee of Creditors in the bankruptcy proceeding and the Bankruptcy Court and, accordingly, there can be no assurance that a plan for the liquidation or sale formulated by the Company's management will be effected. Although the Company does not presently believe that the liquidation or sale will result in any distribution of liquidation or sale proceeds to the Company's shareholders, the amount, if any, available for distribution to the COmpany's unsecured creditors can not presently be estimated. In connection with the Chapter 11 filing, Stuarts entered into debtor-in-possession financing arrangements with its lender, Foothill Capital Corporation ("Foothill"), and is currently operating its business as a debtor-in-possession, subject to Bankruptcy Court approval for certain of its actions. The financing arrangements with Foothill provide for a $6 million credit facility, which is collateralized by substantially all of the Company's assets. Borrowings under the facility are subject to availability under a borrowing base formula and to compliance with covenants and business plans. Interest is payable at the prime rate plus 4%, with a minimum rate of 9.75%. The facility terminates six months from the date approved by the Bankruptcy Court unless sooner terminated due to failure to achieve financial projections. The Company has failed to achieve projected financial results established in connection with its debtor-in-possession financing arrangements with Foothill. If such failures continue, Foothill would be entitled to terminate the financing arrangements under certain circumstances. The Company's determination to liquidate or sell the Company has caused an event of default under the financing arrangements with Foothill. Consequently, Foothill would be entitled to seek Bankruptcy Court relief from the automatic stay and, if such relief is granted, exercise foreclosure remedies as a secured creditor. The Company intends to seek Foothill's cooperation in connection with the proposed orderly liquidation or sale of the Company. Although there can be no assurance that such cooperation will be obtained, the Company believes that it would be in the interests of the Company and Foothill to extend the financing arrangements with Foothill during any liquidation or sale proceeding. The Company emerged in October 1992 from a previous voluntary Chapter 11 reorganization pursuant to which it had operated as a debtor-in-possession during the period from December 1990 until its emergence. The prior Chapter 11 proceeding was precipitated by the restriction of merchandise shipments by trade suppliers following public disclosure by the Company of covenant violations under its financing arrangements and the unwillingness of its lender to make further advances to the Company thereunder. Pursuant to Section 362 of the Bankruptcy Code, all rights to payment and legal actions which arose against the Company prior to its Chapter 11 filing on May 16, 1995 are stayed. In addition, under the provisions of Section 365 of the Bankruptcy Code and subject to Bankruptcy Court approval, a debtor-in-possession, such as the Company, may elect to assume or reject certain of its unexpired leases and executory contracts. As the Chapter 11 case progresses, Stuarts will continue to analyze which of its executory contracts and unexpired leases it intends to assume or reject. The Company's Common Stock was delisted from trading on the Nasdaq Stock Market effective June 8, 1995 after a hearing held in response to a request by the Company for a temporary exception to the applicable listing requirements. GENERAL Stuarts Department Stores, Inc., as of June 6, 1995, operated a chain of 8 discount department stores located in Massachusetts and Rhode Island and one family apparel and home fashion store located in Massachusetts. Unless the context otherwise requires, the following description of the Company sets forth information concerning the Company's business prior to giving effect to the anticipated liquidation or sale of the Company described above. In view of such anticipated liquidation or sale, the following description may be of limited relevance and utility. The discount department stores sell merchandise selected to satisfy clothing, home, recreational and convenience needs of the low-to-middle income family. The family apparel and home fashion store, which operates under the name "Stuarts too", sells family apparel, shoes and home fashion merchandise similar to that offered in Stuarts' department stores. Due to a determination by the Company that its "Stuarts too" stores, all of which were introduced in fiscal 1995, were not generating sufficient sales, the Company has determined to discontinue the "Stuarts too" concept. Accordingly, two "Stuarts too" stores were closed during February 1995 and the remaining store currently operates only during limited hours only due to applicable lease requirements which expire in January 1996. Stuarts was incorporated in Delaware in September 1983. Unless the context otherwise requires, all references herein to "Stuarts" or the "Company" shall be to Stuarts Department Stores, Inc. and its subsidiary. MERCHANDISING AND MARKETING Stuarts' department stores are organized into specialized departments, each offering merchandise at competitive prices. The major categories of merchandise offered in the Company's department stores are: - Apparel for women, men, - Cosmetics and health and and children beauty aids - Fashion accessories, including - Giftware and small appliances shoes and jewelry - Toys, sporting goods, and - Domestics, including bedspreads, consumer electronics blankets, sheets and towels - Stationery, greeting cards and - Notions and yarn candy - Home furnishings, including - Seasonal merchandise,including curtains, rugs, lamps and patio and garden in Spring/ ready to assemble furniture Summer and trim-a-tree in Fall Stuarts offers assortments which include off-price merchandise in various product categories and manufacturers' excess inventory. The Company's department stores offer an assortment of basic merchandise which consists of a varying mix of items within 92 departments. Accordingly, individual products and departments (other than apparel) in these stores do not account for a significant portion of the Company's revenues. Since management estimates that approximately 80% of its customers are women, its merchandising approach emphasizes a higher percentage of sales from higher margin soft goods (apparel, accessories, domestics, etc.) and a lower percentage of sales from lower margin hard goods (giftware and small appliances, hardware, etc.) than has been the historical average for discount department stores. During fiscal 1995, the Company's apparel departments accounted for approximately 48% of the Company's sales, while non-apparel departments in the aggregate accounted for approximately 52% of the Company's total sales. Stuarts' merchandising policies are centrally administered, but are adjusted at the individual store level in response to competitive conditions. The Company's management information system permits the monitoring of apparel inventories and facilitates the delivery of merchandise to stores. The Company has installed an in-house host computer system, and a point-of-sale cash register system in all of its stores. The Company has full scanning and price look-up in operation in all departments, including leased departments, in each of its stores. All merchandise generally is sold through departments owned and operated by the Company, except for the shoe department in its department stores. Leased shoe departments are maintained by an unaffiliated operator who pays the Company a fee based on the percentage of net sales of their department. The leased department operator is required to adhere to the Company's policies with respect to merchandising, refunds, maintenance of inventories, prices and hours of operation. Merchandise from leased departments is purchased at the stores' regular checkout counters. Leased departments accounted for 6.7% of total sales in the Company's department stores in fiscal 1995, compared with 7.3% of total store sales in fiscal 1994. ADVERTISING The Company's marketing strategy utilizes advertising circulars and newspaper media. The Company's sales and promotions are advertised primarily through periodic multi-page color circulars. Company personnel handle all advertising planning and much of the preparation to facilitate close coordination with merchandising policies and programs. ADMINISTRATION, PURCHASING AND DISTRIBUTION Merchandising, planning, purchasing, finance, advertising and other administrative functions are performed centrally from the Company's general office and warehouse facility in Franklin, Massachusetts. The Company presently is in the process of moving to a smaller facility within the same industrial park in Franklin, see Part I, Item 2, "Properties." The Company purchases merchandise from many manufacturers and distributors. The Company has a long-term purchase commitment with a supplier of greeting cards. The Company has experienced difficulties in receiving current merchandise from its vendors due to the serious cash flow shortages which precipitated its Chapter 11 filing and caused the Company to fail to make timely payments in respect of inventory. Since its Chapter 11 filing, the Company has experienced improved relations with its vendors and presently is receiving current merchandise, although the Company continues to be subject to shorter credit terms from these vendors. The Company believes that additional sources of supply are presently limited. Most merchandise is shipped from the vendor to the Company's central warehouse facility where it is inspected, ticketed and shipped by commercial carrier to the stores. Merchandise which is purchased from distributors is delivered directly to the stores by the distributors. Although the Company's merchandise includes a significant percentage of imported goods, the Company's direct purchases of imports are not significant (less than 2% of fiscal 1995 sales). The Company believes that changes in foreign currency or import restrictions would have a minimal competitive effect should they be imposed in the future. STORE OPERATIONS The Company's stores, with the exception of the "Stuarts too" store located in Springfield, Massachusetts, which operates on a limited schedule, generally are open seven days a week, from 9:00 A.M. to 9:30 P.M. weekdays and Saturday, and from 9:00 A.M. to 6:00 P.M. on Sunday. Most of the Company's sales are made on a cash-and-carry basis, although the Company also accepts certain national credit cards. Credit card sales accounted for approximately 18.1% of fiscal 1995 sales. Layaway sales, which generally require a fee of $2.00 plus a deposit of at least 10% of the purchase price and payment in full within 30 days, accounted for approximately 4.7% of fiscal 1995 sales. Most merchandise is sold on a self-selection basis. Stuarts' stores, however, maintain customer service departments and offer a "satisfaction guaranteed" policy under which merchandise may be returned at any reasonable time. The stores give cash refunds for items returned with the sales slip and merchandise credits when the customer does not have the receipt. Stores are visited periodically by senior management, district manager, merchandise managers and buyers to review inventory levels and merchandise presentation, staff training and personnel performance, expense control, security, cleanliness and adherence to Company operating procedures. In addition, store managers periodically meet with senior management to review store policies and to discuss purchasing, merchandising and advertising strategies. CONTROL SYSTEMS The Company utilizes a computer-based merchandise control system which is administered by its in-house computer system. The system tracks buyer's orders, warehouse receiving, price marking, shipments to stores, inventory markdowns, store sales and individual merchandise item performance. STORE CLOSINGS In November 1994, the Company closed two of its lower producing stores located in Barre, Vermont and Biddeford, Maine. As a result of a poor Christmas season, which created serious cash flow shortages, the Company closed another five stores in March 1995. These stores were located in Malden, Taunton and Haverhill, Massachusetts; Johnston, Rhode Island; and Nashua, New Hampshire. The Company also announced plans in early May 1995 to close an additional four stores located in Athol, Chelsea, and Fitchburg, Massachusetts and Goffstown, New Hampshire. The Company has entered into an arrangement with a liquidator in respect of the sale of the inventory at these stores and is no longer operating these stores. See, Part I, Item 1, "Business" and Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." In addition, the Company has determined that the "Stuarts too" concept did not generate sufficient sales to justify its investment and existence. Consequently, the Company also closed its "Stuarts too" stores located in Fall River and East Providence in March 1995. Although the Company has commenced efforts to close its Springfield, Massachusetts store, the Company presently anticipates that the Springfield store will continue to operate during limited hours through January 1996. Since the filing of its Chapter 11 petition on May 16, 1995, the Company has been operating its business as a debtor-in-possession and, accordingly, certain of the Company's actions are subject to the approval of the Bankruptcy Court. Any additional store closings or new store openings, as to each of which the Company presently has no plans, may require Bankruptcy Court approval. There can be no assurance that such approval, if required, would be obtained. See, Part I, Item 1, "Business" and Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." COMPETITION The discount department business is highly competitive. The Company competes in most of its markets with a variety of national, regional and local discount and other department and specialty stores, many of which are larger chains with substantially greater financial resources than the Company. The Company's principal discount department store competitors include Ames, Bradlees, Rich's, Kmart, Caldor and Wal-mart. The Company believes that competition in its department stores is based in large part on price, breadth and depth of merchandise selection and convenience of store location. The Company's focus on securing a customer base in small and medium size, predominantly low-and-middle-income suburban and metropolitan communities is intended to enable the Company to compete effectively in the discount department store market. Nevertheless, due to difficulties which the Company is experiencing with its vendors, the Company's ability to compete on the basis of its merchandise selection has been seriously impaired. Moreover, the Company believes that competition is intensifying and that new competitors may open stores in markets where the Company now operates stores. In addition, the growth of wholesale clubs and other forms of distribution is changing consumer spending patterns and increasing competition. These developments could adversely affect the Company's future results. EMPLOYEES As of January 28, 1995, Stuarts had approximately 677 employees, of whom approximately 390 were employed on a full-time basis and 287 on a part-time basis. Of these employees, approximately 105 were employed in the main office in Franklin and approximately 572 were employed in its stores. Since the close of fiscal 1995, the Company has reduced its staff to approximately 282 employees, of whom approximately 167 are full-time and 115 are part-time employees. None of the Company's employees are covered by a collective bargaining agreement. Except for problems arising in connection with the financial difficulties experienced by the Company, the Company considers its employee relations to be good. SEASONALITY The Company's business, like that of most retailers, is subject to seasonal influences, with the major portion of sales and earnings realized during the last half of each fiscal year, which includes the back-to-school and Christmas selling seasons. ITEM 2. PROPERTIES - -------------------------------------------------------------------------- The Company's department stores generally are located in well-populated, low-to-middle income suburban and metropolitan communities in Massachusetts and Rhode Island. A majority of these stores are located within a 70 mile radius of the Company's general office, warehouse and distribution facility. The Company's present department store locations are listed below: Massachusetts Rhode Island Billerica Lowell (2 stores) Pawtucket Lawrence New Bedford Tewksbury Worcester These stores average approximately 60,000 square feet of selling floor area, which generally includes a 4,500 to 8,000 square foot area for on-premises storage. Selling space is equal to approximately 80% of total floor space of the stores. In addition to its department stores, the Company operates a "Stuarts too" store in Springfield, Massachusetts. This store is located in a strip shopping center and is approximately 25,000 square feet, of which approximately 23,000 square feet constitute selling space. Total sales of the Company's stores that were open throughout fiscal 1995 ranged from $4 million to $7 million per store. The following table shows the number of Stuarts' department stores operated by the Company, their total floor space, their total selling space and the sales per square foot of selling space for each of the last five fiscal years. Fiscal Fiscal Fiscal Fiscal Fiscal 1995 1994 1993 1992 1991 Number of Stores at End of Period 20 19 20 20 23 Total Floor Area (sq. ft.) 1,092,000 1,158,000 1,220,000 1,257,000 1,257,000 Total Selling Area (sq. ft.) 870,000 917,000 976,000 983,000 983,000 Sales per Square Foot of Selling Area $112 $128 $127 $121 $140 Nine department stores and two "Stuarts too" stores have been closed since the end of fiscal 1995. All of the Company's stores are leased on a long-term basis. All of the leases for the 9 stores operating as of June 6, 1995 have remaining terms ranging from one year to 12 years. Rental payments for both current and renewal terms under most of the leases for the Company's full-line stores include percent-of-sales rent consisting of from .5% to 4.0% of amounts in excess of various formulations ofnet sales ranging from $3,000,000 to $14,900,000. Certain leases provide that rental payments during the renewal terms also will be based on cost-of-living formulas specified in the leases. Net rental payments (including percent-of-sales rent) and excluding common area maintenance, real estate taxes and leasehold amortization for the Company's stores was $3,672,000 for fiscal 1995, or approximately $3.05 per square foot. The Company's store leases typically provide that the Company is responsible for its proportionate share of real property taxes and common area maintenance costs, as well as maintenance of the leased facilities themselves. The Company also is required under most of these leases to maintain specified levels of general liability, property and casualty insurance. The Company owns all store fixtures except those used in the leased shoe department. The Company presently leases an 88,000 square foot general office, warehouse and distribution facility in Franklin, Massachusetts pursuant to a lease which originally was scheduled to expire on December 31, 1999. The Company has renegotiated its arrangements with its landlord and is in the process of relocating to a 31,000 square foot facility in the same industrial park. The Company's new lease will expire on March 31, 1998 unless the Company provides the landlord with at least 60 days' prior notice of its intent to terminate on December 1, 1995. The Company anticipates that its move will be completed by August 15, 1995. The Company's relocation of its home office is subject to Bankruptcy Court approval. See Part I, Item 3 "Legal Proceedings." Substantially all apparel merchandise and certain hard goods are shipped from the Company's vendors to the central warehouse in Franklin, where they are inspected, ticketed and shipped by commercial carrier to the stores. All other merchandise is shipped from vendors directly to the stores. Under the provisions of Section 365 of the Bankruptcy Code and subject to Bankruptcy Court approval, a debtor-in-possession, such as the Company, may elect to assume or reject certain of its unexpired leases and executory contracts. The Company's ongoing policy is to evaluate the performance of all its stores individually in order to target and close stores which fail to meet performance standards. As the Chapter 11 case progresses, Stuarts will continue to analyze which of its executory contracts and unexpired leases it intends to assume or reject pursuant to rights afforded it under the Bankruptcy Code. The Company has until July 15, 1995 to assume or reject, or to move to the Bankruptcy Court to extend the time in which to assume or reject, certain of its store leases. On June 13, 1995, the Bankruptcy Court approved the termination of the Company's Pawtucket, Rhode Island store lease. ITEM 3. LEGAL PROCEEDINGS - ------------------------------------------------------------------------- On May 16, 1995, the Company filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code with the Bankruptcy Court. See Part I, Item 1, "Business -- Chapter 11 Filing," Part I, Item 2, "Properties" and Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." Pursuant to Section 362 of the Bankruptcy Code, during a Chapter 11 case, creditors and other parties in interest may not, without Bankruptcy Court approval: (i) commence or continue a judicial, administrative or other proceeding against a debtor which was or could have been commenced prior to commencement of the Chapter 11 case, or to recover a claim that arose prior to commencement of the case; (ii) enforce any pre-petition judgments against the debtor; (iii) take any action to obtain possession of property of the debtor or to exercise control over property of the debtor or the debtor's estate; (iv) create, perfect or enforce any lien against the property of the debtor; (v) collect, assess or recover claims against the debtor that arose before the commencement of the case; or (vi) set off any debt owing to the debtor that arose prior to the commencement of the case against a claim of such creditor or party-in-interest against the debtor that arose before the commencement of the case. On June 20, 1995, the Company's Board of Directors approved the orderly liquidation or sale of the Company. The Company's management is exploring various alternatives by which the liquidation or sale can be effected and intends to formulate a plan for the liquidation or sale as promptly as practicable. Any liquidation or sale will be subject to obtaining the requisite approval of the Company's secured creditor, the Official Committee of Creditors in the bankruptcy proceeding and the Bankruptcy Court and, accordingly, there can be no assurance that a plan for the liquidation or sale formulated by the Company's management will be effected. The Company is a party to certain other legal actions arising in the ordinary course of its business. Based upon the information presently available to the Company, management is of the opinion that the ultimate outcome of these actions will not materially adversely affect the Company's operations or its financial position. The continuance of such actions by the parties in interest is subject to Bankruptcy Court approval as discussed above. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - -------------------------------------------------------------------------- There were no matters submitted to a vote of security holders during the 13 week period ended January 28, 1995. PART II - OTHER INFORMATION ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS - -------------------------------------------------------------------------- The Company's Common Stock is traded in the over-the-counter market and, until June 8, 1995, was quoted on the Nasdaq National Market System under the symbol STUS. During May 1995, the Company was notified by The Nasdaq Stock Market, Inc. that, as a result of the low trading price and publicly held market value of the Company's Common Stock, the Company may no longer meet the listing requirements for continued inclusion in the Nasdaq National Market and may be subject to delisting. The Company had requested that a temporary exception from the applicable listing requirements be granted in respect of its Common Stock, while the Company develops and implements a reorganization under Chapter 11. The Company received notice on June 7, 1995 that its request for a temporary exception had been denied and that its Common Stock would be delisted from the Nasdaq National Market System effective June 8, 1995. The following table sets forth the range of high and low bid information as quoted in the NASDAQ National Market System for the periods indicated. High Low Fiscal 1995 First quarter............. 9/16 9/32 Second quarter............ 3/8 13/64 Third quarter............. 3/8 7/32 Fourth quarter............ 1/4 1/8 Fiscal 1994 First quarter............. 1 7/16 Second quarter............ 7/8 1/4 Third quarter............. 1/2 7/32 Fourth quarter............ 11/16 9/32 The market prices in the above table reflect inter-dealer quotations without adjustments for retail markup or commissions and may not necessarily represent actual transactions. Notwithstanding the foregoing price information, the Company cannot predict the trading value, if any, of the Common Stock. In recent years, the Company's Common Stock has been thinly traded. If the Company's former creditors that received Common Stock in connection with its prior reorganization proceedings under Chapter 11 (the "Prior Reorganization") seek to sell a substantial number of their shares of Common Stock in the public market, or if there otherwise is a large number of shares for sale in the public market, the market price of the Common Stock could be adversely affected. Pursuant to the reorganization plan confirmed by the Bankruptcy Court in respect of the Prior Reorganization (the "Prior Reorganization Plan"), two former creditors of the Company were granted registration rights in respect of the Common Stock issued to them in connection with the Prior Reorganization. Although those creditors have caused the Company to file a Registration Statement with the Securities and Exchange Commission in respect of an aggregate of 7,271,687 shares of Common Stock, the Registration Statement would need to be updated in order to be utilized in connection with a sale of Common Stock by those creditors and, accordingly, those creditors have been advised that they should not utilize the Registration Statement in connection with any offer of sale by them of Common Stock. As of June 6, 1995, the Company had approximately 1,027 holders of record of its Common Stock (excluding beneficial owners of shares held of record by nominees). The Company has not paid any cash dividends since its incorporation in September 1983. Since the Company is currently in Chapter 11, no dividends can be paid without the approval of the Bankruptcy Court. See Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" for additional information regarding the impact of the Chapter 11 proceedings on the Company's ability to pay dividends. ITEM 6. SELECTED FINANCIAL DATA - -------------------------------------------------------------------------- The selected consolidated financial data for the 39 weeks ended October 31, 1992 give effect to the consummation of the Prior Reorganization Plan as if it occurred on October 31, 1992 and to the adoption of "fresh-start reporting" by the Company as of that date 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-97"). Accordingly, periods prior to October 31, 1992 have been designated "Predecessor Company" and periods subsequent to October 31, 1992 have been designated "Successor Company". Selected historical consolidated balance sheet and income statement data of the Predecessor Company is not comparable to that of the Successor Company and a line has been drawn to separate the Successor Company financial data from that of the Predecessor Company. The following table presents selected (1) historical consolidated financial data of the Predecessor Company for the three fiscal years ended February 1, 1992 (fiscal 1992) and February 2, 1991 (fiscal 1991) and the 39 weeks ended October 31, 1992; (2) historical consolidated financial data of the Successor Company for the 13 weeks ended January 30, 1993, for the fiscal year ended January 29, 1994 (fiscal 1994) and for the fiscal year ended January 28, 1995 (fiscal 1995); and (3) pro forma combining consolidated income statement and operating data for the fiscal year ended January 30, 1993 (pro forma combined fiscal 1993). The pro forma data (a) combine the results of the Predecessor Company for the 39 weeks ended October 31, 1992 with the results of the Successor Company for the 13 weeks ended January 30, 1993; (b) eliminate the effect of non-recurring transactions resulting from the Prior Reorganization included in the results of the Predecessor Company; (c) adjust results of the Predecessor Company to reflect the implementation of "fresh-start reporting" as of February 1, 1992; (d) assume that the Company's fiscal 1993 payments to the unsecured creditors' fund required pursuant to the Prior Reorganization Plan of $5,200,000 and $6,000,000 were made by the Company as of February 1, 1992; and (e) assume the issuance as of February 1, 1992 of 17,205,740 shares of common stock issued to creditors pursuant to the Prior Reorganization Plan. The information below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations", the consolidated financial statements and the related notes. The historical consolidated financial data presented on the following pages for the fiscal years ended February 1, 1992 and February 2, 1991 have been derived from the Company's Consolidated Financial Statements, which were audited by Grant Thornton, independent accountants. The historical consolidated financial data for the 13 weeks ended January 30, 1993, the 39 weeks ended October 31, 1992, the fiscal years ended January 29, 1994 and January 28, 1995 have been derived from the Company's consolidated financial statements, which were audited by Coopers & Lybrand L.L.P., independent accountants. Stuarts Department Stores, Inc. and Subsidiary Selected Financial Data (Dollars in thousands, except per share data and ratios)
Successor Comp Predecessor Company Pro Forma Combined 13 Weeks 39 Weeks Fiscal Fiscal Fiscal Ended Ended Fiscal Fiscal 1995 1994 1993(9) 01/30/93 10/31/92 1992 1991 Income Statement Data (1)(2) Total store sales $105,269 $117,082 $123,533 $37,352 $86,181 $119,330 $148,741 Net store sales 98,165 108,563 114,865 34,942 79,923 110,889 138,780 Leased department and other income 1,592 1,802 1,834 543 1,291 1,949 2,552 Costs and expenses: Costs of sales, buying and distribution...... 73,962 79,289 83,040 26,438 56,152 80,142 103,732 Restructuring and asset impairment charges. 4,555 Selling and administrative 34,389 33,012 31,875 8,818 23,057 31,432 38,190 Depreciation and amortization 2,105 1,941 1,730 486 1,694 2,182 2,234 Total Costs and Expenses 115,011 114,242 116,645 35,742 80,903 113,756 144,156 Income (loss) before interest, reorganization items, income taxes, and extraordinary gain (15,254) (3,877) 54 (257) 311 (918) (2,824) Interest expense (contractual amounts of approximately $1,157 for 39 weeks ended 10/31/92, $1,953 for Fiscal 1992 and $2,053 for Fiscal 1991) (6) 973 52 16 8 8 26 1,703 Interest(income) 0 (71) (280) (34) (496) (1,099) (198) Income (loss) before reorganization items, income taxes and extraordinary gain (16,227) (3,858) 318 (231) 799 155 (4,329) Reorganization items: Reorganization expenses(4) (7,132) (1,722) (3,235) Adjust accounts to fair value (6,657) Income (loss) before income taxes and extraordinary gain (16,227) (3,858) 318 (231) (12,990) (1,567) (7,564) Income tax expense (127) Income (loss) before extraordinary gain (16,227) (3,858) 191 (231) (12,990) (1,567) (7,564) Extraordinary gain on discharge of pre-petition liabilities (8) 8,835 Net income (loss) ($16,227) ($3,858) $191 ($231) ($4,155) ($1,567) ($5,635) Income (loss) before extraordinary gain per share(3) ($0.75) ($0.18) $0.01 ($0.01) ($2.98) ($0.36) ($1.31) Net income (loss) per share (3) ($0.75) ($0.18) $0.01 ($0.01) ($0.95) ($0.36) ($1.31) * See Footnotes for Selected Financial Data on page 15
Stuarts Department Stores, Inc. and Subsidiary Selected Financial Data (Dollars in thousands, except per share data and ratios)
Successor Comp Predecessor Company Proforma Combined 13 Weeks 39 Weeks Fiscal Fiscal Fiscal Ended Ended Fiscal Fiscal 1995 1994 1993(9) 01/30/93 10/31/92 1992 1991 Operating Data: Number of stores beginning of period...... 19 20 20 20 20 20 23 Opened during period 3 1 2 0 2 0 0 Closed during period 2 2 2 0 2 0 3 Number of stores end of period 20 19 20 20 20 20 20 Total square footage 1,092,000 1,158,000 1,220,000 1,220,000 1,220,000 1,257,000 1,257,000 Total selling square foot 870,000 917,000 976,000 976,000 976,000 983,000 983,000 Sales per selling square $112 $128 $127 $121 $140 Successor Compnay Predecessor Company Balance Sheet Data: (1)(2) 01/28/95 01/29/94 01/30/93 02/01/92 02/02/91 Total assets $24,378 $33,397 $43,449 $64,501 $62,028 Amount due creditors 5,000 Long-term debt 6,394 1,495 Liabilities subject to compromise (5)...... 46,156 46,545 Total liabilities. 16,553 9,345 15,539 54,717 50,677 Stockholders' equity 7,825 24,052 27,910 9,784 11,351 Working capital 7,171 15,263 18,174 42,061 32,572 * See Footnotes for Selected Financial Data on page 15
ITEM 6. FOOTNOTES (Dollars in thousands, except share data) 1) On December 7, 1990, the Company filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code. The Company operated as a debtor-in-possession until October 19, 1992, when the Reorganization Plan was consummated. 2) The historical financial data give effect to the Reorganization Plan (including the issuance of all Common Stock issuable pursuant to the Reorganization Plan) as of October 31, 1992. 3) Earnings per share of the Predecessor and Successor Companies are not comparable due to reorganization and revaluation entries as well as the issuance of 17,205,740 shares of Common Stock pursuant to the Reorganization Plan. 4) Reorganization expenses consist of the following: 39 Weeks Ended Fiscal Fiscal 10/31/92 1992 1991 Costs of bankruptcy: Allowed claims in excess of recorded liabilities......... $2,900 Professional Fees.............. 3,232 Administrative Claims.......... 1,000 Costs to close stores........... $1,722 $2,553 Other........................... - 682 Total reorganization expenses... $7,132 $1,722 $3,235 5) Liabilities subject to compromise consist of liabilities which arose before the Company filed its petition for reorganization and which were subject to adjustment depending on the nature of the claim, Bankruptcy Court actions and the plan of reorganization negotiated by the Company with its creditors. 6) In accordance with the Bankruptcy Code, no interest expense was recorded by the Company on its unsecured pre-petition debt which it operated as a debtor-in-possession. If the Company had recorded interest expense in accordance with its contractual commitments during this period, interest expense would have been $1,157 for the 39 week period ended October 31, 1992, $1,953 for the year ended February 1, 1992 and $2,053 for the year ended February 2, 1991. 7) Sales per selling square foot data on other than an annual basis are not meaningful due to the seasonality of the Company's sales. 8) The Company recorded an extraordinary gain of $8,835 relating to the discharge of pre-petition liabilities during the 39 weeks ended October 31, 1992. 9) See Note 2 to Consolidated Financial Statements of the Company filed herewith. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------- CHAPTER 11 FILING On May 16, 1995, the Company filed for reorganization under Chapter 11 with the Bankruptcy Court. The Company's voluntary filing was precipitated by financial and liquidity difficulties, which caused the Company to fail to make timely payments to its vendors and other suppliers as well as to certain of its landlords under store leases. The Company's inability to pay these obligations as they became due caused many of its vendors to curtail inventory shipments to the Company, which further impacted adversely the Company's performance. Prior to the Chapter 11 filing, the Company unsuccessfully attempted to locate a buyer for the retail chain. On June 20, 1995, the Company's Board of Directors approved the orderly liquidation or sale in Chapter 11 of the Company. The Company's management is exploring various alternatives by which the liquidation or sale can be effected and intends to formulate a plan for the liquidation or sale as promptly as practicable. The Board of Directors' determination had been affected by a number of factors, including, in particular, poor sales and operating results achieved over the Father's Day selling period. The orderly liquidation or sale will involve the closing or the sale of the remaining Stuarts stores and is likely to take a number of months to complete. Any liquidation or sale will be subject to obtaining the requisite approval of the Company's secured creditor, the Official Committee of Creditors in the bankruptcy proceeding and the Bankruptcy Court and, accordingly, there can be no assurance that a plan for the liquidation or sale formulated by the Company's management will be effected. Although the Company does not presently believe that the liquidation will result in any distribution of liquidation or sale proceeds to the Company's shareholders, the amount, if any, available for distribution to the Company's unsecured creditors can not presently be estimated. In connection with the Chapter 11 filing, Stuarts entered into debtor-in-possession financing arrangements with its lender, Foothill, and is currently operating its business as a debtor-in-possession, subject to Bankruptcy Court approval for certain of its actions. The financing arrangements with Foothill provide for a $6 million credit facility, which is collateralized by substantially all of the Company's assets. Borrowings under the facility are subject to availability under a borrowing base formula and to compliance with covenants and business plans. Interest is payable at the prime rate plus 4%, with a minimum rate of 9.75%. The facility terminates six months from the date approved by the Bankruptcy Court unless sooner terminated due to failure to achieve projected results. The Company has failed to achieve financial projections established in connection with its debtor-in-possession financing arrangements with Foothill. If such failures continue, Foothill would be entitled to terminate the financing arrangements under certain circumstances. The Company's determination to liquidate or sell the Company has caused an event of default under the financing arrangements with Foothill. Consequently, Foothill would be entitled to seek Bankruptcy Court relief from the automatic stay and, if such relief is granted, exercise foreclosure remedies as a secured creditor. The Company intends to seek Foothill's cooperation in connection with the proposed orderly liquidation or sale of the Company. Although there can be no assurance that such cooperation will be obtained, the Company believes that it would be in the interests of the Company and Foothill to extend the financing arrangements with Foothill during any liquidation or sale proceeding. The Company emerged in October 1992 from a previous voluntary Chapter 11 reorganization pursuant to which it had operated as a debtor-in-possession during the period from December 1990 until its emergence. The prior Chapter 11 proceeding was precipitated by the restriction of merchandise shipments by trade suppliers following public disclosure by the Company of covenant violations under its financing arrangements and the unwillingness of its lender to make further advances to the Company thereunder. Pursuant to Section 362 of the Bankruptcy Code, all rights to payment and legal actions which arose against the Company prior to its recent Chapter 11 filing are stayed. In addition, under the provisions of Section 365 of the Bankruptcy Code and subject to Bankruptcy Court approval, a debtor-in-possession, such as the Company, may elect to assume or reject certain of its unexpired leases and executory contracts. As the Chapter 11 case progresses, Stuarts will continue to analyze which of its executory contracts and unexpired leases it intends to assume or reject. See Part I, Item 2, "Properties" for additional information regarding the assumption and rejection of leases by the Company. The Company's Common Stock was delisted from trading on the Nasdaq Stock Market effective June 8, 1995 after a hearing held in response to a request by the Company for a temporary exception to the applicable listing requirements. EMERGENCE FROM PRIOR REORGANIZATION/FRESH-START REPORTING On the date of confirmation of the Prior Reorganization Plan, the sum of the allowed claims plus post-petition liabilities of the Company exceeded the value of its pre-confirmation assets. In addition, the Company experienced a change in control in connection with the implementation of the Prior Reorganization Plan as its unsecured creditors received 80% of the Common Stock and pre-organization equity holders retained only 20% of the Common Stock pursuant to the Prior Reorganization Plan. "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7") requires that, under these circumstances, a new reporting entity be created and assets and liabilities be recorded at their fair values based upon the allocation thereto of the Company's reorganization value. This accounting treatment is referred to herein as "fresh-start reporting". In accordance with SOP 90-7, the Company adopted "fresh-start reporting" and reflected the effects of such adoption as of October 31, 1992. Financial statements for periods subsequent to October 31, 1992 are designated as "Successor Company" to signify that they are those of a new entity for financial reporting purposes and have been prepared on a basis not comparable to prior periods. Financial statements for periods prior to October 31, 1992 have been designated "Predecessor Company" and a black line has been drawn to separate Successor Company financial statements from Predecessor Company financial statements. The following discussion reflects the Company's implementation of "fresh-start reporting." For additional information regarding the Company's prior reorganization proceedings, see Part I, Item 1, "Business". RESULTS OF OPERATIONS FIFTY-TWO WEEK PERIOD ENDED JANUARY 28, 1995 COMPARED TO THE FIFTY-TWO WEEK PERIOD ENDED JANUARY 29, 1994 Total store sales and net store sales for the 52 week period ended January 28, 1995 decreased by 10.1% and 9.7%, respectively, from the comparable period last year. After extracting the sales of the four stores opened (Taunton, Fall River, East Providence and Springfield) and the four stores closed (Grafton, Salisbury, Biddeford and Barre) during fiscal 1994 and fiscal 1995, total and net store sales of the remaining 16 stores decreased by 7.2% and 6.7%, respectively. Subsequent to January 28, 1995, the Company closed or commenced the closing of eleven additional stores. The Company continues to face intense competitive activity, including intense promotional activity from competitors, who principally are larger full-line discount department stores with greater financial resources than the Company. The Company believes that this competitive activity resulted in reduced customer traffic which adversely impacted revenues for the 52 weeks ended January 28, 1995. The Company also was affected adversely by a continued weak New England retailing environment. These factors have continued to materially adversely impact revenues during the first and second quarters of fiscal 1996. In addition, the Company's failure to make timely payments to its vendors has resulted in inventory shortages, beginning in February 1995, which also have had a material adverse impact upon the Company's sales. During the 52 weeks ended January 28, 1995, Stuarts operated 17 general purpose discount department stores, selling a varying mix of thousands of items within 92 departments and, therefore, individual products and departments (other than apparel) did not account for a significant portion of the Company's revenues from these stores. Stuarts also operated three family apparel and home fashion stores during this period. During fiscal 1995, the Company's apparel departments accounted for approximately 49% of the Company's total sales. No other single department constituted a material portion of the Company's total sales. Apparel departments generally produce higher gross profits than non-apparel departments. Cost of sales, buying and distribution expense was 75.3% of net store sales for the 52 week period ended January 28, 1995, compared with 73.0% for the 52 week period ended January 29, 1994. The increase in cost of sales, buying and distribution expense as a percentage of net store sales during the 52 weeks ended January 28, 1995 was due primarily to higher markdown activity. This higher than normal promotional activity resulted, in part, from a heightened competitive retail market and has continued into the first and second quarters of fiscal 1996. Selling and administrative expenses for the 52 week period ended January 28, 1995 as a percentage of net sales increased to 35.0% from 30.4% for the 52 week period ended January 29, 1994. This increase resulted primarily from the cost of closing two stores (Biddeford, Maine and Barre, Vermont) ($900,000), along with increased common area maintenance charges ($93,000), preopening expense ($105,000), real estate taxes ($54,000), professional fees ($113,000), legal fees ($94,000), health insurance ($61,000), warehouse expense ($45,000) and merchandise payroll ($69,000). During fiscal 1995, the Company incurred restructuring and asset impairment charges of $4,555,000. In accordance with FASB EITF 94-3 (liability recognition for certain costs incurred in a restructuring), a restructuring and asset impairment reserve was established in fiscal 1995. During the fourth quarter of fiscal 1995, expenses relating to this reserve were incurred in connection with the store closings. It is anticipated that the Company will incur expenses of approximately $1,900,000 and $2,875,000 pursuant to FASB EITF 94-3 during the second quarter of fiscal 1996, respectively, in connection with store closings. Depreciation and amortization for the 52 week period ended January 28, 1995 increased by approximately $163,000 from the 52 week period ended January 29, 1994. This increase resulted principally from capital expenditures for the three new "Stuarts too" stores that were opened during the period. There was no interest income for the 52 week period ended January 28, 1995 as compared to approximately $71,000 for the 52 week period ended January 29, 1994. This decrease in interest income is attributable principally to the lack of cash investment balances. Interest expense for the 52 week period ended January 28, 1995 was approximately $973,000 compared to approximately $52,000 for the 52 week period ended January 29, 1994. This increase is primarily attributable to interest on larger balances outstanding under the Company's credit facility during fiscal 1995. The net loss for the 52 week period ended January 28, 1995 was approximately $16,227,000 compared with a net loss of approximately $3,858,000 for the 52 week period ended January 29, 1994. Factors contributing to this year's loss include a 6.7% decrease in net store sales on a same store basis, combined with higher than normal markdowns and the closing costs of the two stores closed in November 1994 located in Biddeford, Maine and Barre, Vermont. In addition, a restructuring and asset impairment charge in the amount of $4,555,000 was established in January 1995. See Note 10 of the Notes to Consolidated Financial Statements. THIRTEEN WEEK PERIOD ENDED JANUARY 29, 1994 COMPARED TO 13 WEEK PERIOD ENDED JANUARY 30, 1993 Total store sales and net store sales for the 13 week period ended January 29, 1994 decreased 9.2% and 9.6%, respectively, from the prior year. After extracting the sales of the new store opened in Taunton and the store closed in Grafton during these periods, the total and net store sales of the existing 19 stores decreased by 10.3% and 10.7%, respectively. This decline is largely attributable to a continued weak retail environment in New England and lower customer activity. In the fourth quarter of fiscal 1994, the Company's apparel departments accounted for approximately 46% of the Company's total sales, while non-apparel departments in the aggregate accounted for approximately 54% of the Company's total sales. Cost of sales, buying and distribution expense was 78.8% of net store sales for the 13 week period ended January 29, 1994, compared with 75.7% of net store sales for the 13 week period ended January 30, 1993. This percentage increase principally resulted from higher promotional markdowns in response to increased promotional activity by the Company's competitors, combined with a higher shrinkage during the 13 weeks ended January 29, 1994. Selling and administrative expense for the 13 week period ended January 29, 1994 was $9,304,000 (29.4% of net store sales) versus $8,819,000 (25.2% of net store sales) for the 13 week period ended January 30, 1993. This increase of $485,000 compared to the prior period is largely attributable to the following expense areas: advertising $276,000; and legal fees $90,000. The increase in depreciation and amortization of $13,000 for the 13 week period ended January 29, 1994 compared to the 13 week period ended January 30, 1993 resulted from expenditures for capital improvements during the 13 week period ended January 29, 1994. Interest income for the 13 week period ended January 29, 1994 amounted to $14,000 compared to $34,000 for the 13 week period ended January 30, 1993. This decrease in interest income is primarily attributable to lower cash balances due to the payments to unsecured creditors of the Company in connection with the Company's emergence from reorganization proceedings. Interest expense for the 13 week period ended January 29, 1994 amounted to $34,000 compared to $8,000 for the 13 week period ended January 30, 1993. This increase is principally attributable to the interest paid on long term debt incurred during the 13 weeks ended January 29, 1994. The Company experienced a net loss of $2,632,000 for the 13 week period ended January 29, 1994 as compared to a net loss of $231,000 for the 13 week period ended January 30, 1993. Factors contributing to the loss for the 13 weeks ended January 29, 1994 include a 9.6% decrease in net store sales due largely to the continued weak New England retail environment, higher markdowns and shrinkage and increased advertising costs of $276,000. THIRTY-NINE WEEKS ENDED OCTOBER 30, 1993 VERSUS 39 WEEKS ENDED OCTOBER 31, 1992 Total store sales and net store sales for the 39 week period ended October 30, 1993 decreased by 3.5% and 3.7%, respectively, from the comparable period ended October 31, 1992. After extracting the sales of the three new stores opened (Lawrence, Haverhill, Taunton) and the two stores closed (Brockton and Swansea) during these periods, the total and net store sales of the comparable 18 stores decreased by 3.4% and 3.7%, respectively. Sales in February and March 1993 were seriously impacted by severe winter storms in New England which caused certain stores to be closed during certain portions of such periods. Sales during the 39 week period ended October 30, 1993 also were adversely affected by a continued weak New England retailing environment and lower customer activity. In the first three quarters of fiscal 1994, the Company's apparel departments accounted for approximately 50% of the Company's total sales. No other single department constituted a material portion of the Company's total sales during this period. Cost of sales, buying and distribution expense was 70.7% of net store sales for the 39 week period ended October 30, 1993 compared with 70.3% of net store sales during the 39 week period ended October 31, 1992. The increase in cost of goods sold as a percentage of sales for the 39 week period ended October 30, 1993 versus the comparable period during the prior year resulted primarily from "fresh-start reporting" adjustments whereby the Company revalued its inventory to reflect the full impact of retail price adjustments in cost of goods sold. For the 39 week period ended October 30, 1993, the impact of the inventory revaluation was to increase cost of goods sold by approximately $826,000. Selling and administrative expense for the 39 week period ended October 30, 1993 was $23,708,000 (30.8% of net store sales) versus $23,057,000 (28.8% of net store sales) for the 39 week period ended October 31, 1992. This increase of $651,000 compared to the prior period is largely attributable to the following expense areas: advertising $303,000; amortization of preopening expenses $183,000; health and workers' compensation insurance $189,000; and store common area maintenance and real estate taxes $258,000; and is offset in part by a decrease in leasehold amortization expense of $389,000. The decrease in depreciation and amortization of $252,000 for the 39 week period ended October 31, 1992 principally resulted from adjustments to leasehold amortization required in connection with the Company's adoption of "fresh-start reporting" during October 1992, which offset expenditures for capital improvements during the period ended October 30, 1993. Interest income for the 39 week period ended October 30, 1993 amounted to $39,000 compared to $488,000 for the 39 week period ended October 31, 1992. This decrease in interest income is largely attributable primarily to lower cash balances due to the payment of $11,200,000 to unsecured creditors of the Company in connection with the Company's emergence from reorganization proceedings during fiscal 1993. Loss before reorganization items and extraordinary gain for the 39 week period ended October 30, 1993 was $1,226,000 compared with income before reorganization items and extraordinary gain of $799,000 for the 39 week period ended October 31, 1992. This loss is principally attributable to lower sales as well as to increased costs of goods sold due to "fresh-start reporting" adjustments and higher selling and administrative expense during the more recent period. In addition, interest income for the first 39 weeks of fiscal 1994 was below the comparable prior period by $449,000. The Company experienced a net loss of $1,226,000 during the 39 week period ended October 30, 1993 compared with a net loss of $4,155,000 during the 39 week period ended October 31, 1992. During the 39 week period ended October 31, 1992 the Company incurred certain bankruptcy related charges of $7,132,000 and $6,657,000, for reorganization expenses and to adjust accounts to fair value, respectively. The Company also recognized an extraordinary gain of $8,835,000 as the result of the discharge of pre-petition liabilities. FIFTY-TWO WEEK PERIOD ENDED JANUARY 29, 1994 COMPARED TO THE PRO FORMA COMBINED 52 WEEK PERIOD ENDED JANUARY 30, 1993 To facilitate comparisons, the operating results for the 52 week period ended January 29, 1994 are compared to the pro forma combined results of operations for the 52 week period ended January 30, 1993. The pro forma data combine the results of the Predecessor Company for the 39 weeks ended October 31, 1992 with the results of the Successor Company for the 13 weeks ended January 30, 1993. The pro forma income statement assumes that the Company implemented "fresh-start reporting" as of February 1, 1992. The effect of this adjustment is to increase historical cost of sales by approximately $450,000 and decrease depreciation and amortization by an equal amount for the 39 weeks ended October 31, 1992. In addition, the pro forma results eliminate the effect of nonrecurring transactions related to the Prior Reorganization: reorganization expenses of $7,132,000, fair value adjustments of $6,657,000 and the extraordinary gain of $8,835,000 realized upon discharge of pre-petition liabilities. Pro forma interest income has been calculated assuming the fiscal 1993 payments to the creditor fund required pursuant to the Prior Reorganization Plan of $5,200,000 and $6,000,000 were made by the Company as of February 1, 1992. Pro forma net income is net of income taxes provided at an effective rate of 40%. Pro forma earnings per share reflect the issuance as of February 1, 1992 of 17,205,740 shares of common stock issued to creditors in connection with the Prior Reorganization Plan. Total store sales and net store sales for the 52 week period ended January 29, 1994 decreased 5.2% and 5.5%, respectively, over the pro forma combined 52 week period ended January 30, 1993. During fiscal 1993, the Company closed two stores (Brockton and Swansea) and opened two stores (Lawrence and Haverhill). During fiscal 1994, the Company closed two stores (Grafton and Salisbury) and opened one store (Taunton). On a same store basis (16 stores), total store sales and net store sales also decreased by 6.1% and 6.5%, respectively. Sales in February and March 1993 were seriously impacted by severe winter storms in New England which caused certain stores to be closed during certain portions of such periods. Sales during the 52 week period ended January 29, 1994 also were adversely affected by a continued weak New England retailing environment. Cost of sales, buying and distribution expense was 73.0% of net store sales for the 52 week period ended January 29, 1994, compared with 72.3% for the pro forma combined 52 week period ended January 30, 1993. The increase in cost of goods sold as a percentage of net sales during the 52 weeks ended January 29, 1994 was due primarily to decreased initial markup percentages combined with higher shrinkage. Selling and administrative expense as a percentage of net sales for the 52 week period ended January 29, 1994 increased to 30.4% from 27.8% for the pro forma combined 52 weeks ended January 30, 1993. This increase resulted primarily from increased advertising expenditures of $1,102,000. Depreciation and amortization for the 52 week period ended January 29, 1994 increased by $211,000 from the prior pro forma combined 52 week period. This increase principally resulted from fiscal 1994 expenditures for capital improvements. Interest income for the 52 week period ended January 29, 1994 amounted to $71,000 as compared to $280,000 for the pro forma combined 52 week period ended January 30, 1993. This decrease in interest income from the pro forma period is attributable principally to lower cash balances. Interest expense for the 52 week period ended January 29, 1994 was $52,000 compared to $16,000 for the pro forma period. This increase is primarily attributable to interest on long term debt incurred during fiscal 1994. The Company experienced a net loss for the 52 week period ended January 29, 1994 of $3,858,000 compared with income of $191,000 for the pro forma 52 week period ended January 30, 1993. Factors contributing to the fiscal 1994 loss included a 5.5% decrease in net store sales largely due to a continued weak New England retail environment, increased advertising expenditures of $1,102,000 and increased depreciation and amortization during fiscal 1994. LIQUIDITY AND CAPITAL RESOURCES During the 52 week period ended January 28, 1995, the net cash used by operating activities amounted to approximately $3,100,000. This resulted principally from the net loss for such period which was offset in part by regular inventory and inventory held for sale, depreciation and amortization and impaired equipment and leasehold improvements. During the 52 week period ended January 28, 1995, the net cash used in investing activities amounted to approximately $2,078,000 which resulted primarily from the purchase of fixtures and leasehold improvements. During the 52 week period ended January 28, 1995, the net cash provided by financing activities amounted to approximately $4,899,000, which was comprised solely of proceeds from the issuance of long-term debt under the Company's credit facility. The Company's working capital at January 28, 1995 decreased by approximately $14,486,000 from January 29, 1994. This decrease is primarily due to the loss for the year ended January 28, 1995 and proceeds from short term debt. Capital expenditures during fiscal 1995 amounted to approximately $2,119,000. Of this amount, approximately $1,555,000 was for capital expenditures of the three new "Stuarts too" stores opened in fiscal 1995. The Company also closed two existing stores located in Biddeford, Maine and Barre, Vermont. The costs associated with these closings amounted to approximately $880,000. During fiscal 1995, the Company incurred restructuring and asset impairment charges of $4,555,000. In accordance with FASB EITF 94-3 (liability recognition for certain costs incurred in a restructuring), a restructuring and asset impairment reserve was established in fiscal 1995. During the fourth quarter of fiscal 1995, expenses relating to this reserve were incurred in connection with store closings. Management presently expects that expenditures during the first half of fiscal 1996 will include approximately $4,800,000 to be incurred in connection with the closing of stores in accordance with FASB EITF 94-3 (liability in recognition for certain costs incurred in a restructuring) (see Note 10). The Company does not anticipate that any new stores will be opened during fiscal 1996. In connection with the Chapter 11 filing, Stuarts entered into debtor-in-possession financing arrangements with Foothill and is currently operating its business as a debtor-in-possession, subject to Bankruptcy Court approval for certain of its actions. The financing arrangements with Foothill provide for a $6 million credit facility, which is collateralized by substantially all of the Company's assets. Borrowings under the facility are subject to availability under a borrowing base formula and to compliance with covenants and business plans. Foothill also has agreed to permit the Company to use cash collateral from its pre-petition financing arrangements during the reorganization proceeding. Both the debtor-in-possession financing arrangement and the cash collateral arrangement will require the approval of the Bankruptcy Court. The Company has failed to achieve financial projections established in connection with its debtor-in-possession financing arrangements with Foothill. If such failures continue, Foothill would be entitled to terminate the financing arrangements under certain circumstances. The Company's determination to liquidate or sell the Company has caused an event of default under the financing arrangements with Foothill. Consequently, Foothill would be entitled to seek Bankruptcy Court relief from the automatic stay and, if such relief is granted, exercise foreclosure remedies as a secured creditor. The Company intends to seek Foothill's cooperation in connection with the proposed orderly liquidation or sale of the Company. Although there can be no assurance that such cooperation will be obtained, the Company believes that it would be in the interests of the Company and Foothill to extend the financing arrangements with Foothill during any liquidation or sale proceeding. In Chapter 11 cases, substantially all of the liabilities of a debtor, such as the Company, as of the date of the filing of the petition for reorganization are subject to settlement under a plan of reorganization to be voted upon by the debtor's impaired creditors and stockholders and confirmed by the Bankruptcy Court. There are certain risks to a Company operating as a debtor-in-possession. Such risks may include (i) potential deterioration of the business of the Company during the bankruptcy proceedings, (ii) a reduced ability to attract and retain employees, (iii) additional expenses associated with the bankruptcy reorganization process and (iv) liquidation of the Company's assets under Chapter 7 of the Bankruptcy Code or, as may be the case with the Company, under a liquidation plan under Chapter 11. Because the bankruptcy proceedings are in an early stage, the Company is not yet able to estimate the total financial effect of the bankruptcy on its financial condition. Current payments due on almost all pre-petition liabilities are deferred except as may be required by Bankruptcy Court order. The Company has not paid dividends since its inception. Since the Company is currently in Chapter 11, no dividends can be paid without the approval of the Bankruptcy Court. Impact of Inflation Stuarts has generally been able to pass on inflationary cost increases through higher merchandise selling prices. Therefore, inflation has not had a material negative impact on operating results. Stuarts Department Store Item 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Financial Statements and Schedules Page Consolidated Statements of Operations 26 Successor Company Fiscal 1995 Fiscal 1994 Pro Forma Combined Fiscal 1993 (Unaudited) 13 Weeks Ended 01/30/93 Predecessor Company 39 Weeks Ended 10/31/92 Consolidated Balance Sheets 27 Successor Company January 28, 1995 January 29, 1994 Consolidated Statements of Cash Flows 28 Successor Company Fiscal 1995 Fiscal 1994 13 Weeks Ended 01/30/93 Predecessor Company 39 Weeks Ended 10/31/92 Consolidated Statements of Stockholders' Equity 29 Successor Company Fiscal 1995 Fiscal 1994 13 Weeks Ended 01/30/93 Predecessor Company 39 Weeks Ended 10/31/92 Notes to Consolidated Financial Statements. 30-46 Report of Independent Certified Public Accountants. 47-48 Stuarts Department Stores, Inc. and Subsidiary Consolidated Statements of Operations
Successor Company Predecessor Pro Forma Company Combined Fiscal 1993 13 Weeks 39 Weeks Fiscal Fiscal (Unaudited) Ended Ended 1995 1994 (Note 2) 01/30/93 10/31/92 Total store sales $105,268,774 $117,081,640 $123,533,511 $37,352,125 $86,181,386 Less leased department sales 7,104,156 8,518,795 8,668,466 2,410,232 6,258,234 Net store sales 98,164,618 108,562,845 114,865,045 34,941,893 79,923,152 Leased department and other income 1,591,726 1,801,912 1,833,164 542,551 1,290,613 99,756,344 110,364,757 116,698,209 35,484,444 81,213,765 Costs and expenses Cost of sales buying and distribution 73,961,741 79,288,505 83,039,081 26,437,682 56,151,399 Restructuring and asset impairment charges (Note 11) 4,555,000 0 0 0 0 Selling and administrative 34,389,132 33,011,767 31,875,260 8,818,581 23,056,679 Depreciation and amortization 2,104,748 1,941,440 1,730,479 486,094 1,694,385 Total costs and expenses 115,010,621 114,241,712 116,644,820 35,742,357 80,902,463 Income (loss) before interest, reorganization items,income taxes and extraordinary gain (15,254,277) (3,876,955) (53,389) (257,913) 311,302 Interest income 0 71,085 280,156 34,316 495,840 Interest expense (Contractual amounts are approximately $1,157,00 for 39 Weeks ended October 31, 1992 and $1,953,000 for Fiscal 1992) (973,212) (52,162) (15,517) (7,805) (7,712) Income (loss) before reorganization items, income taxes and extraordinary gain (16,227,489) (3,858,032) 318,028 (231,402) 799,430 Reorganization items (Note 2): Reorganization expenses (7,132,303) Adjust accounts to fair value (6,657,432) Income (loss) before income taxes and extraordinary gain (16,227,489) (3,858,032) 318,028 (231,402) (12,990,305) Income tax expense (127,211) Income (loss) before extraordinary gain (16,227,489) (3,858,032) 190,817 (231,402) (12,990,305) Extraordinary gain on discharge of pre-petition liabilities (Note 2) 8,835,028 Net income (loss) (16,227,489) (3,858,032) 190,817 (231,402) (4,155,277) Income (loss) before extraordinary gain per share ($0.75) ($0.18) $0.01 ($0.01) ($2.98) Net income (loss) per share ($0.75) ($0.18) $0.01 ($0.01) ($2.98) Number of weighted average common shares outstanding 21,507,175 21,507,175 21,507,175 21,507,175 4,364,460 The accompanying notes are an integral part of these financial statements.
Stuarts Department Stores, Inc. and Subsidiary Consolidated Balance Sheets Successor January 28, 1995 and January 29,1994 Company 1995 1994 Assets Current Assets Cash and cash equivalents $64,731 $344,075 Merchandise Inventory 12,376,497 20,511,040 Merchandise available for sale (Note 12) 3,282,000 0 Other 1,288,541 1,848,006 Total current assets 17,011,769 22,703,121 Equipment and leasehold improvements at cost Store fixtures 8,527,424 10,822,134 Store leasehold improvements 2,582,584 2,908,736 Office and warehouse equipment 3,183,232 2,998,037 14,293,240 16,728,907 Less allowance for depreciation and amortization 9,313,761 9,084,935 4,979,479 7,643,972 Leaseholds (less accumulated amortization of $5,995,289 in 1995 and $5,545,873 in 1994) 1,010,209 1,380,470 Reorganization value in excess of amounts allocable to identifiable assets (less accumulated amortization $157,415 in 1995 and $87,275 in 1994) 543,585 613,725 Deferred finance costs (less accumulated amortization of $167,197 in 1995 and $12,132 in 1994) 321,062 424,624 Other assets 511,692 631,358 Total assets $24,377,796 $33,397,270 Liabilities and Stockholders' Equity Current liabilities Accounts payable - trade 3,868,470 3,993,054 Accrued expenses Rent 693,644 942,641 Compensation and fringe 251,951 271,421 Other (Note 13) 5,026,372 2,233,146 Current portion of long term debt (Note 6) 6,394,185 Total current liabilities 16,234,622 7,440,262 Long term debt (Note 6) 1,494,801 Other liabilities 318,567 410,111 Stockholders' equity Common stock - authorized 25,000,000 shares of $.01 par value, issued 22,409,074 shares 224,091 224,091 Additional paid in capital 29,725,274 29,725,274 Retained earnings (deficit) (20,316,923) (4,089,434) 9,632,442 25,859,931 Less treasury stock at cost (901,899 shares) (1,807,835) (1,807,835) Total stockholders' equity 7,824,607 24,052,096 Total liabilities and stockholders' equity $24,377,796 $33,397,270 The accompanying notes are an integral part of these financial statements. Stuarts Department Stores, Inc. and Subsidiary Consolidated Statements of Cash Flows
Successor Predecessor Company Company 13 Weeks 39 Weeks Fiscal Fiscal Ended Ended 1995 1994 01/30/93 10/31/92 Increase(decrease)in cash and cash equivalents Cash flows from operating activities: Net loss ($16,227,489) ($3,858,032) ($231,402) ($4,155,277) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 2,381,142 1,941,442 486,094 1,704,087 Inventory available for sale (3,282,000) Impairment of equipment and leasehold improvements 2,393,294 Restructuring Accural 1,988,694 (Increase)decrease in inventory 8,134,543 1,742,027 9,402,509 (11,656,378) (Increase)decrease in other current assets 559,465 349,542 613,709 (1,458,681) Increase(decrease) in accounts payable and accrued expenses 1,043,570 (2,593,478) (2,124,434) 1,613,678 Increase in liabilities subject to compromise 889,455 (Decrease) in other liabilities (91,545) (94,736) (137,280) (55,992) Reorganization items: Reorganization expenses 6,203,451 To adjust accounts to fair value 6,657,432 Extraordinary gain on discharge of pre-petition liabilities (8,835,028) Net cash provided (used) by operating activities (3,100,326) (2,513,235) 8,009,196 (9,093,253) Cash flows from investing activities: Purchases of equipment & leasehold improvements (2,118,914) (1,657,601) (93,994) (1,316,454) (Increase) decrease in leaseholds and other assets 40,512 265,785 (56,648) Net cash used in investing activities (2,078,402) (1,391,816) (150,642) (1,316,454) Cash flows from financing activities: Proceeds from issuance of debt 4,899,384 Proceeds from issuance of long-term debt 1,494,801 Cost of obtaining debt (436,756) Release of restricted cash 11,416,219 Cash distribution pursuant to reorganization plan (5,000,000) (6,993,989) (6,389,411) Net cash (used in) provided by financing activities 4,899,384 (3,941,955) (6,993,989) 5,026,808 Net increase (decrease) in cash and cash equivalents (279,344) (7,847,006) 864,565 (5,382,899) Cash and cash equivalents at beginning of period 344,075 8,191,081 7,326,516 12,709,415 Cash and cash equivalents at end of period $64,731) $ 344,075 $8,191,081 $ 7,326,516 Supplemental disclosures of cash flows information: Cash paid during the period for: Interest $ 747,013 $ 35,730 $ 26,061 $ 4,404 Income taxes 53,584 60,900 17,550 63,536 The accompanying notes are an integral part of these financial statements.
Stuarts Department Store s, Inc. and Subsidiary Consolidated Statements of Stockholders' Equity For the 52 Weeks Ended 01/28/95, the 52 Weeks Ended 01/29/94, the 13 Weeks Ended 01/30/93,and the 39 Weeks Ended 10/31/92. [CAPTION] Additional Common Paid-in Retained Treasury Stock Capital Earnings Stock Total Predecessor Company Balance 02/01/92 $52,034 $11,402,487 $137,121 ($1,807,835) $9,783,807 Income before restructuring for the 39 weeks ended 10/31/92 799,430 799,430 Reorganization expenses (7,132,303) (7,132,303) Adjust to Fair Value (6,657,432) (6,657,432) Extraordinary gain - debt discharge 8,835,028 8,835,028 Issuance of new shares 172,057 22,340,943 22,513,000 Elimination of retained earnings (4,018,156) 4,018,156 0 Balance 10/31/92 $224,091 $29,725,274 $0 ($1,807,838) $28,141,530 Successor Company Balance 10/31/92 $224,091 $29,725,274 $0 ($1,807,838) $28,141,530 Net loss for 13 weeks ended 01/30/93 (231,402) (231,402) Balance 01/30/93 $224,091 $29,725,274 ($231,402) ($1,807,838) $27,910,128 Net loss for 52 weeks ended 01/29/94 (3,858,032) (3,858,032) Balance 01/29/94 $224,091 $29,725,274 ($4,089,434) ($1,807,838) $24,052,096 Net loss for 52 weeks ended 01/28/95 (16,227,489) (16,227,489) Balance 01/29/95 $224,091 $29,725,274 ($20,316,923) ($1,807,838) $7,824,607 The accompanying notes are an integral part of these financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - CHAPTER 11 FILING On May 16, 1995, Stuarts Department Stores, Inc. ("Stuarts" or the "Company") filed a voluntary petition for reorganization under Chapter 11 ("Chapter 11"), Title 11 of the United States Code (the "Bankruptcy Code") with the United States Bankruptcy Court for the District of Massachusetts (Western Division) (the "Bankruptcy Court"). The Company is presently operating as a debtor-in-possession under Chapter 11 and is subject to the jurisdiction of the Bankruptcy Court. In Chapter 11 cases, substantially all liabilities as of the date of the filing of the petition for reorganization are subject to settlement under a plan of reorganization to be voted upon by the Company's impaired creditors and stockholders and confirmed by the Bankruptcy Court. Although the Company has an exclusive period until September 13, 1995 to file such a plan with the Bankruptcy Court, as more fully discussed below, the Company's Board of Directors has approved the orderly liquidation or sale in Chapter 11 of the Company. If a plan of reorganization is not filed with the Bankruptcy Court by such date or such date is not extended, other parties in interest may submit proposed plans. If a reorganization plan is filed by the Company by September 13, 1995, the Company has until November 13, 1995 to solicit acceptances with respect to such plan and no other party may solicit acceptances with respect to any other plan during this period. No plan of reorganization has yet been filed with the Bankruptcy Court. The Company continues to manage its affairs and operate its business as a debtor-in-possession, subject to the supervision of the Bankruptcy Court while these cases are pending. Schedules are due to be filed with the Bankruptcy Court on June 30, 1995 setting forth the assets and liabilities of the Company and its subsidiary as of the filing date as shown by the Company's accounting records. Differences between amounts shown by the Company and claims filed by creditors will be investigated and resolved. The ultimate amount and settlement terms of such liabilities are subject to a plan of reorganization, and accordingly, are not presently determinable. Under the Bankruptcy Code, the Company may elect to assume or reject in the future, real estate leases, employment contracts, personal property leases, service contracts and other unexpired executory pre-petition contracts, subject to Bankruptcy Court approval. As the Chapter 11 case progresses, the Company will continue to analyze which of its executory contracts and unexpired leases it intends to assume or reject. The Company cannot presently determine or reasonably estimate the ultimate liability which may result from the filing of claims for all contracts which may be rejected. The Chapter 11 filing, uncertainty regarding the eventual outcome of the reorganization case and effect of other unknown adverse factors raise substantial doubt about the Company's ability to continue in existence as a going concern. In connection with the Chapter 11 filing, Stuarts has entered into debtor-in possession financing arrangements with its lender, Foothill Capital Corporation ("Foothill"), and is currently operating its business as a debtor-in-possession, subject to Bankruptcy Court approval for certain of its actions. The financing arrangements with Foothill provide for a $6 million credit facility, which is collateralized by substantially all of the Company's assets. Borrowings under the facility are subject to availability under a borrowing base formula and to compliance with covenants and business plans. Foothill also has agreed to permit the Company to use cash collateral from its pre-petition financing arrangements during the reorganization proceeding. Both the debtor-in-possession financing arrangement and the cash collateral arrangement will require the approval of the Bankruptcy Court. On June 20, 1995, the Company's Board of Directors approved the orderly liquidation or sale in Chapter 11 of the Company. The Company's management is exploring various alternatives by which the liquidation or sale can be effected and intends to formulate a plan for the liquidation or sale as promptly as practicable. The Board of Directors' determination had been affected by a number of factors, including, in particular, poor sales and operating results achieved over the Father's Day selling period. The orderly liquidation or sale will involve the closing or the sale of the remaining Stuarts stores and is likely to take a number of months to complete. Any liquidation or sale will be subject to obtaining the requisite approval of the Company's secured creditor, the Official Committee of Creditors in the bankruptcy proceeding and the Bankruptcy Court and, accordingly, there can be no assurance that a plan for the liquidation or sale formulated by the Company's management will be effected. Although the Company does not presently believe that the liquidation or sale will result in any distribution of liquidation or sale proceeds to the Company's shareholders, the amount, if any, available for distribution to the Company's unsecured creditors can not presently be estimated. NOTE 2 - PRIOR REORGANIZATION On October 19, 1992, Stuarts emerged from reorganization proceedings under Chapter 11 pursuant to the terms of a Joint Plan of Reorganization (the "Prior Reorganization Plan") filed by the Company and its Official Committee of Unsecured Creditors (the "Creditors' Committee") on July 23, 1992. The Prior Reorganization Plan, which was confirmed by the United States Bankruptcy Court for the District of Massachusetts, Western Division (the "Bankruptcy Court"), on October 13, 1992 following receipt of requisite creditor and stockholder approval, provided for the cancellation of approximately $47,000,000 of allowed unsecured claims in exchange for (i) payment to the Company's unsecured creditors of $16,200,000 in the form of three cash payments as follows: $5,200,000 upon consummation of the Prior Reorganization Plan; $6,000,000 on December 31, 1992; and $5,000,000 on December 31, 1993; and (ii) the issuance of eighty percent (80%) of the common stock of the reorganized Company to the Company's unsecured creditors. The Prior Reorganization Plan also provided for, among other things, the discharge and payment in full of certain administrative, priority, secured party and small claims aggregating approximately $2,900,000. In addition, upon confirmation of the Prior Reorganization Plan, the Company assumed 18 existing store leases. The Company's financial statements give effect to such reorganization as of October 31, 1992. The prior Chapter 11 proceedings of the Company were commenced on December 7, 1990 by the filing of voluntary petitions by the Company with the Bankruptcy Court. During the pendency of the prior Chapter 11 proceedings, the Company operated its business as a debtor-in-possession, subject to the approval of the Bankruptcy Court. No interest accrued on unsecured pre-petition liabilities during the pendency of the prior Chapter 11 proceedings. For financial reporting purposes, those liabilities and obligations whose disposition was dependent upon the outcome of the Chapter 11 case were segregated and classified as liabilities subject to compromise on the Consolidated Balance Sheet as of February 1, 1992. All payments and distributions in respect of pre-petition claims against the Company have been made as of January 28, 1995 and no further recourse to the Company may be had by any person with respect to such pre-petition claims. Professional fees for attorneys and accountants of the debtor and creditors' committee and bank fees associated with the debtor-in-possession financing arrangements which existed during the prior reorganization proceeding were deferred pending the confirmation of the Prior Reorganization Plan and the approval of such costs by the Bankruptcy Court. These costs were expensed during the 39 week period ended October 31, 1992 upon the Company's emergence from the prior reorganization proceedings. During this period, the Company also provided for certain costs associated with other bankruptcy claims. Reorganization expenses associated with the 39 week period ended October 31, 1992 were: 39 Weeks Ended 10/31/92 Costs of bankruptcy: Allowed claims in excess of recorded liabilities $2,900,000 Professional fees 3,232,003 Administrative claims 1,000,000 $7,132,003 ========= The value of the cash and securities required to be distributed pursuant to the Prior Reorganization Plan was less than the allowed claims and, accordingly, the Company recorded an extraordinary gain of $8,835,000 relating to the discharge of pre-petition liabilities. On the date of confirmation of the Prior Reorganization Plan, the sum of the allowed claims plus post-petition liabilities exceeded the value of pre-confirmation assets. The Company experienced a change in control in connection with the consummation of the Reorganization Plan as its unsecured creditors received 80% of the Company's common stock and pre-reorganization equity holders retained 20% of such common stock pursuant to the Reorganization Plan. AICPA Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7") requires that, under these circumstances, a new reporting entity be created for financial reporting purposes and assets and liabilities be recorded at their fair values based upon the allocation thereto of the Company's reorganization value. This accounting treatment is referred to herein as "fresh-start reporting." Financial statements for periods subsequent to October 31, 1992 are designated as "Successor Company" to signify that they are those of a new entity for financial reporting purposes and have been prepared on a basis not comparable to prior periods. Financial statements for periods prior to October 31, 1992 have been designated "Predecessor Company" and a black line has been drawn to separate Successor Company financial statements from Predecessor Company financial statements. "Fresh-start reporting" reorganization value represents a negotiated value which was determined with the assistance of the financial advisors employed by the Creditors' Committee using a discounted cash flow analysis based, in part, on five-year cash flow projections prepared by management. The discounted cash flow analysis of the Company over the five fiscal years beginning in 1993 through 1997 was determined by adding the projected cash flow for the first four years to a "capitalization" of the fifth year's projected cash flow. The fifth year's projected cash flow was capitalized by establishing a terminal value for the Company as of the end of such period equal to 6.5 times the Company's projected earnings before interest and taxes for the fifth year. The aggregate cash flow value was then discounted to its present value, using an 11% discount rate to establish a going concern value. The five-year cash flow projections were based on estimates and assumptions about circumstances and events that had not yet taken place. Such estimates and assumptions are inherently subject to significant economic and competitive uncertainties and contingencies beyond the control of the Company, including, but not limited to, those with respect to the course of the Company's business activity after the date of preparation of such projections. Accordingly, there usually will be, and, in the case of the Company, have been, differences between projections and actual results, because events and circumstances frequently do not occur as expected, and those differences may be material. Differences between the Company's projected and actual results following its emergence from Chapter 11 did not alter the determination of "fresh-start reporting" reorganization value because such reorganization value was not contingent upon the Company achieving the projected results. In accordance with SOP 90-7, the Company adopted "fresh-start reporting" and reflected the effects of such adoption in its consolidated balance sheet as of October 31, 1992. The value of the cash and securities distributed pursuant to the Prior Reorganization Plan was less than the allowed claims and, accordingly, the Company recorded an extraordinary gain of $8,835,000 in connection with the discharge of pre-petition liabilities. The adjustments to reflect the consummation of the Prior Reorganization Plan, including the subsequent gain on debt discharge of pre-petition liabilities and the adjustment to record assets and liabilities at their fair values (including the establishment of a reorganization value in excess of amounts allocable to identifiable assets), were reflected in the accompanying consolidated financial statements for the 39 week period ended October 31, 1992. Reorganization value in excess of amounts allocable to identifiable assets is being amortized on a straight-line basis over ten years. In connection with "fresh-start reporting," at October 31, 1992, the Company revalued its inventory to reflect the full impact of retail price adjustments in cost of goods sold. The impact during the 13 week period ended January 30, 1993 of the "fresh-start" inventory revaluation was to increase cost of goods sold by approximately $500,000. Reorganization costs deferred during the period in which the Company operated as a debtor-in-possession were expensed when the Company emerged from bankruptcy proceedings and were included in the reorganization expenses reflected in the statement of operations for the 39 weeks ended October 31, 1992. In connection with the adoption of "fresh-start reporting," the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109") as of October 31, 1992. The cumulative effect of the adoption of SFAS No. 109 was not material. Prior to the adoption of "fresh-start reporting," the Company accounted for income taxes under Statement of Financial Accounting Standards No. 96 ("SFAS 96"). Under both SFAS 109 and SFAS 96, deferred income taxes are provided for at the statutory rates on the differences between financial statement basis and tax basis of assets and liabilities and, under SFAS No. 109, are classified in the balance sheet as current or non-current, consistent with the assets and liabilities which give rise to such deferred income taxes. The effect of the Prior Reorganization Plan on the Company's balance sheet as of October 31, 1992 was as follows (amounts in thousands): Adjustments to Record Confirmation of Plan Pre- Stuarts' Confirmation Reorganized Balance Debt Fresh Balance Sheet Discharge Start Sheet CURRENT ASSETS Cash and cash equivalents $ 13,716 $ (6,389) $ 7,327 Merchandise inventory 35,443 $ (3,788) 31,655 Income tax receivable 52 (52) Other 3,722 (345) 3,377 Total current assets 52,933 (6,389) (4,185) 42,359 EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET 7,907 7,907 LEASEHOLDS, NET 3,557 (2,100) 1,457 GOODWILL, NET 399 (399) DEFERRED REORGANIZATION COSTS 2,432 (2,432) REORGANIZATION VALUE IN EXCESS OF AMOUNTS ALLOCABLE TO IDENTIFIABLE ASSETS 701 701 OTHER ASSETS 512 512 TOTAL ASSETS $ 67,740 $ (6,389) $ (8,415) $52,936 ====== ======= ======= ====== Adjustments to Record Confirmation of Plan Pre- Stuarts' Confirmation Reorganized Balance Debt Fresh Balance Sheet Discharge Start Sheet LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable-trade $ 7,054 $7,054 Accrued expenses Rent 1,079 1,079 Compensation and fringe benefits 304 $ 570 874 Reorganization items 1,063 800 1,863 Other 1,288 1,288 Amount due to creditors $ 6,994 6,994 TOTAL CURRENT LIABILITIES 10,788 6,994 1,370 19,152 LIABILITIES SUBJECT TO COMPROMISE 49,945 (49,945) AMOUNT DUE CREDITORS 5,000 5,000 OTHER LIABILITIES 324 214 105 643 STOCKHOLDERS' EQUITY Common stock - authorized 25,000,000 shares of $.01 par value; issued 22,409,740 shares upon reorganization 52 172 224 Additional paid-in capital 11,402 22,341 (4,018) 29,725 Retained earnings (2,963) 8,835 (5,872) 0 8,491 31,348 (9,890) 29,949 Less treasury stock at cost (901,899 shares) 1,808 1,808 Total stockholders' equity 6,683 31,348 (9,890) 28,141 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 67,740 $ (6,389) $ (8,415) $52,936 ====== ====== ====== ====== NOTE 3 - PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE 52 WEEKS ENDED JANUARY 30, 1993 (UNAUDITED) The pro forma data contained in the following table (i) combine the results of the Predecessor Company for the 39 weeks ended October 31, 1992 with the results of the Successor Company for the 13 weeks ended January 30, 1993; (ii) eliminate the effect of non-recurring transactions resulting from the prior reorganization included in the results of the Predecessor Company; (iii) adjust results of the Predecessor Company to reflect the implementation of "fresh-start reporting" as of February 1, 1992; (iv) assume that the fiscal 1993 payments to the Company's creditors required pursuant to the Prior Reorganization Plan of $5,200,000 and $6,000,000 were made by the Company as of February 1, 1992; and (v) assume issuance of the 17,205,740 shares of Common Stock issuable to creditors pursuant to the Prior Reorganization Plan as of February 1, 1992. Table for Note 2 Consolidated Statements of Operations Pro Forma Combined Consolidated Statement of Operations for the 52 Weeks Ended January 30, 1993 (Unaudited)
Successor Predessor Pro Forma Pro Forma Company Company Combined Adjustments Combined 13 Weeks 39 Weeks 52 Weeks 52 Weeks Ended Ended Ended Ended 01/30/93 10/31/92 Jan. 30,1993 Jan. 30, 1993 Total store sales $ 37,352,125 $ 86,181,386 $ 123,533,511 $ 123,533,511 Less leased department sales 2,410,232 6,258,234 8,668,466 8,668,466 Net store sales 34,941,893 79,923,152 114,865,045 114,865,045 Leased department and other income 542,551 1,290,613 1,833,164 1,833,164 35,484,444 81,213,765 116,698,209 116,698,209 Costs and expenses Cost of sales, buying and distribution 26,437,682 56,151,399 82,589,081 450,000 83,039,081 Selling and administrative 8,818,581 23,056,679 31,875,260 31,875,260 Depreciation and amortization 486,094 1,694,385 2,180,479 (450,000 1,730,479 Total costs and expenses 35,742,357 80,902,463 116,644,820 0 116,644,820 Income (loss) before interest, reorganization items, income taxes and extraordinary gain (257,913) 311,302 53,389 0 53,389 Interest (income), net (26,511) (488,128) (514,639) 250,000 (264,639) Income (loss) before reorganization items, income taxes and extraordinary gain (231,402) 799,430 568,028 (250,000) 318,028 Reorganization items (13,789,735) (13,789,735) 13,789,735 Income (loss) before income taxes and extraordinary gain (231,402) (12,990,305) (13,221,707) 13,539,735 318,028 Income Taxes (127,211) (127,211) Income (loss) before extraordinary gain (231,402) (12,990,305) (13,221,707) 13,412,524 190,817 Extraordinary gain on discharge of pre-petition liabilities 8,835,028 8,835,028 (8,835,028) Net income (loss) (231,402) (4,155,277) (4,386,679) 4,577,496 190,817 Net income per share of common stock ($0.01) ($0.95) $0.01 (i) In connection with "fresh-start reporting," at October 31, 1992 the Company revalued its inventory to reflect the full impact of retail price adjustments in cost of goods sold. The pro forma adjustment reflects the impact of this inventory revaluation upon results for the 52 week period ended January 30, 1993 assuming that "fresh-start reporting" had been implemented on February 1, 1992. (ii) In connection with "fresh-start reporting", the Company revalued its leaseholds. The pro forma adjustment reflects the impact upon leasehold amortization for the 52 weeks ended January 30, 1993 assuming this reduction in value had been made at February 1, 1992. (iii) Pro forma interest (income) was adjusted giving effect to the payment to creditors of approximately $11,200,000 on February 1, 1992. (iv) Pro forma shares outstanding at January 30, 1993 are 21,507,175. (v) Pro forma adjustment assumes an effective tax rate of 40%. (vi) Eliminate the effect of non-recurring transactions resulting from the prior reorganization included in the results of the Predecessor Company. NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The accompanying consolidated financial statements include the accounts of Stuarts Department Stores, Inc. and its subsidiary. All significant intercompany transactions and balances have been eliminated in consolidation. Fiscal Year The Company's fiscal year ends on the last Saturday nearest the end of January. The fiscal years ended January 28, 1995, January 29, 1994 and January 30, 1993 included fifty-two weeks. Nature of Business At January 28, 1995, the Company operated 17 self-service full-line discount department stores and three "Stuarts too" stores (see Notes 10 and 11). Merchandise Inventory Merchandise inventory is valued at the lower of cost or market using the retail inventory method on a first-in, first-out basis. Depreciation and Amortization Depreciation and amortization are provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives using the straight-line method. Leasehold improvements are amortized over the lives of the respective lease or the service lives of the improvements, whichever is shorter. The estimated useful lives for depreciation of equipment and leasehold improvements are seven to ten years for store fixtures and office and warehouse equipment, and ten years for store leasehold improvements. Leaseholds have been purchased and are being amortized over the remaining period of each lease. Loss Per Share Loss per common share has been calculated based upon the weighted average number of common shares outstanding for the respective periods. The effects of stock options have been excluded as the result would be anti-dilutive for each period presented. Store Opening Costs Store opening costs are amortized over the first year of store operations. Cash and Cash Equivalents All liquid investments with a maturity of three months or less at the date of purchase are considered to be cash equivalents. Reclassification Certain amounts in prior periods' financial statements have been reclassified for comparative purposes. NOTE 5 - LEASE COMMITMENTS (SEE ALSO NOTE 1) The Company conducts its business in leased facilities. At January 28, 1995, the leased facilities consisted of 20 retail store locations and a combination warehouse and office facility. The leases are classified as operating leases; remaining lease terms vary from 3 months to 12 years, and 20 leases have an option to renew. Rental payments for the facilities are based on a minimum rental plus a percentage of sales in excess of a stipulated amount. Certain leases provide for payments of real estate tax cost and common area maintenance charges. Total rental expense for the thirty-nine week period ended October 29, 1994 was approximately $4,413,000. Of this amount, real estate taxes and common area charges were $1,622,000 and percentage rentals of $113,000. Total rental expense for the thirty-nine week period ended October 29, 1993 was approximately $4,423,000. Of this amount, real estate taxes and common area charges were $1,495,000 and percentage rentals of $140,000. Total rental expense for the thirteen week period ended January 28, 1995 was approximately $1,438,000. Of this amount, real estate taxes and common area charges were $557,000. Total rental expense for the thirteen week period ended January 29, 1994 was approximately $1,380,000. Of this amount, real estate taxes and common area charges were $551,000. Total rental expense for the 52 week period ended January 28, 1995 was approximately $5,851,000. Of this amount, real estate taxes and common area charges were $2,179,000 and percentage rentals were $82,000. Total rental expense for the 52 week period ended January 29, 1994 was approximately $6,044,000. Of this amount, real estate taxes and common area charges were $2,046,000 and percentage rentals were $127,000. The following is a schedule of future minimum rental payments, as of January 28, 1995, required under operating leases: Year ending January Total 1996 $ 4,226,000 1997 3,637,000 1998 3,236,000 1999 2,939,000 2000 2,523,000 Later Years 5,891,000 Total minimum payments required $22,452,000 ========== NOTE 6 - LONG TERM DEBT (SEE ALSO NOTE 1) The Company entered into a Loan and Security Agreement (the "Agreement") dated December 16, 1993 with Foothill which provided the Company with a three year revolving line of credit with a maximum amount of $15,000,000 (the "Credit Facility"), subject to availability under a borrowing base formula. Interest was payable at the prime rate (8.25% at January 28, 1995) plus 1.75% (minimum rate of 7.5%). Payment of a monthly commitment fee of $2,000 plus 0.375% per annum of the average unused portion of the Credit Facility during the preceding month also was required. The Agreement prohibited the payment of dividends and required the Company to maintain certain minimum amounts of net worth and working capital. The Company and Foothill, on March 20, 1995, entered into Amendment One to the Credit Facility, which amended the tangible net worth and working capital covenants to reduce the applicable thresholds. A facility fee of $25,000 was paid to Foothill in connection with the Amendment. The Credit Facility is collateralized by substantially all of the Company's assets. The Agreement also restricted the Company's ability to incur additional indebtedness and to make capital expenditures and provided for payment of a penalty upon termination prior to December 27, 1996. The Company incurred certain costs in order to obtain the Credit Facility; these costs are being amortized over the initial three year life of the Credit Facility. Included in these costs is a fee of $250,000 which was paid to an investment banking firm of which a director of the Company is an officer. No principal or interest payments will be made on pre-petition debt without Bankruptcy Court approval or until a reorganization plan defining the repayment terms has been approved. If the Company is determined to have been insolvent as of the date of the filing, interest does not continue to accrue on unsecured pre-petition debt. The Bankruptcy Court has not yet determined this issue. NOTE 7 - COMMITMENTS (SEE ALSO NOTE 1) The Company has employment agreements with two of its executive officers, which were effective in August 1994 and provide for terms expiring on February 1, 1997. Beginning in fiscal 1994, each of these executives is entitled to a cash bonus based on base salary and achievement of operating profit targets. The Company entered into an agreement with Gibson Greetings, Inc. ("Gibson") for a period of five years commencing on October 1, 1992. Pursuant to this agreement, Gibson will serve as the exclusive supplier of greeting cards, everyday gift wrap and related products. The Bankruptcy Court has not yet approved the assumption or rejection of these contracts. NOTE 8 - INCOME TAXES In connection with "fresh-start reporting," the Company adopted SFAS No. 109 as of October 31, 1992. Prior periods have not been restated to apply the provisions of SFAS No. 109. The Company had previously accounted for income taxes under the liability method described in SFAS 96. Under SFAS No. 109, deferred income taxes are recognized for the tax consequences of differences between financial statement carrying amounts and the tax bases of existing assets and liabilities ("temporary differences") by applying enacted statutory tax rates applicable to future years. Under SFAS No. 109, the effect of a change in tax rates on deferred taxes is included in the income for the period in which the rate change occurs. There was no income tax benefit for the fiscal year ended January 28, 1995, the fiscal year ended January 29, 1994, the 13 weeks ended January 30, 1993 or the 39 weeks ended October 31, 1992. The effective tax rate differs from the statutory rate as follows: Successor Company | Predecessor Company 52 Weeks 52 Weeks 13 Weeks | 39 Weeks Ended Ended Ended | Ended 1/28/95 1/29/94 1/30/93 | 10/31/92 | Statutory Federal | tax rate (34.0%) (34.0%) (34.0%) | (34.0%) State Income taxes - - - | - Unused net operating | loss 34.0 34.0 34.0 | 34.0 | | - - - | - ====== ====== ====== | ====== As of January 28, 1995, the Company had approximately $580,000 of deferred tax liabilities, $13,180,000 of deferred tax assets, and a valuation allowance of $12,600,000. The approximate amounts of the principal temporary differences resulting in the deferred tax assets and liabilities are: net operating loss carryforwards - $9,290,000, depreciation - $(580,000), fair value adjustments to assets recorded upon the adoption of Fresh Start reporting - $2,070,000 and $1,820,000 relating to restructuring reserves. As a result of the implementation of the Prior Reorganization Plan, the Company's creditors received consideration in extinguishment of debt which is worth less than such debt. Accordingly, the Company recorded an extraordinary gain of $8,835,000 on debt discharged in connection with the Prior Reorganization Plan. No income tax was recorded related to this extraordinary gain as no income will be recognized for tax purposes because it results from a discharge of debt pursuant to a case under the Bankruptcy Code. At January 28, 1995, the Company had approximately $23,220,000 of operating loss carryforwards available to reduce future payments of federal income taxes. These carryforwards expire in varying amounts through 2008. The effects of the Prior Reorganization Plan together with transactions that have occurred within the three year period preceding the consummation of the Prior Reorganization Plan have caused an "ownership change" for federal income tax purposes. As a result, utilization of the Company's net operating loss carryforward will be subject to an annual limitation determined by multiplying the federal long-term tax exempt bond rate by the fair market value of the Company's stock immediately prior to such "ownership change." As a result of the ownership change, $4,680,000 of the loss carryforward is subject to limitation. In accordance with SFAS No. 109 and SOP 90-7, benefits realized subsequent to October 31, 1992 from reductions in the valuation allowance (primarily attributable to the use of net operating loss carryforwards) will first reduce reorganization value in excess of amounts allocable to identifiable assets and other intangible assets until exhausted and thereafter be reported as a direct addition to paid-in capital. As of January 28, 1995, $4,600,000 of the $12,600,000 valuation allowance arose prior to the confirmation of the Prior Reorganization Plan. NOTE 9 - COMMON STOCK In connection with the confirmation of the Prior Reorganization Plan, authorized capital stock of the Company increased to 25,000,000 shares of common stock, par value $.01 per share. In addition, in accordance with the Prior Reorganization Plan, the general unsecured creditors of the Company received 17,205,740 shares of common stock. The accompanying financial statements reflect the issuance of all 17,205,740 shares required to be issued to general unsecured creditors as of October 31, 1992. On October 28, 1992, as contemplated by the Prior Reorganization Plan, the Board of Directors of the Company adopted the 1992 Employee Stock Option Plan ("the 1992 Plan"). The 1992 Plan was amended in May 1994 to increase the number of shares available for awards thereunder and presently provides for the issuance of up to 2,000,000 shares of the Company's common stock to officers and other key employees of the Company and its subsidiary. Transactions under the 1992 Plan are summarized as follows: No. of Shares Option Price Option Shares Outstanding at January 30, 1993 $.66 Granted 197,000 $.36-.94 Cancelled (200,000) .66 Outstanding at January 29, 1994 697,000 $.36-.94 Granted -0- Cancelled 100,000 $.66 Outstanding at January 28, 1995 597,000 $.36-.94 ======= All options were issued at an exercise price equal to the fair market value of the Company's common stock at the date of grant. The 1992 Plan was approved by the stockholders of the Company on October 14, 1993. Upon such approval, all options granted prior to such date became immediately exercisable. As of January 28, 1995, 403,000 shares were available for future grant under the 1992 Plan. On July 13, 1995, the Company's 1994 Directors Stock Option Plan (the "Directors' Plan") became effective upon being approved by the Company's shareholders. The Directors' Plan provides for the issuance of stock options exercisable for up to an aggregate of 1,000,000 shares of the Company's common stock (subject to adjustment in the event of any stock dividend, stock split, recapitalization or similar event) to directors of the Company who are not also full-time employees of the Company, subject to annual maximum awards of options which are exercisable for no more than 150,000 shares of the Company's common stock. Awards under the plan may only be in the form of non-qualified stock options. The exercise price for each option will be equal to the greater of $.75 and the fair market value of the Company's Common Stock at the time of grant. For this purpose, fair market value will be the closing price of the Company's Common Stock as quoted on the National Association of Securities Dealers Automated Quotation System on the business day immediately preceding the date of grant. Transactions under the Directors' Plan are summarized as follows: Option Shares No. of Shares Option Price Outstanding at January 29, 1994 -0- -- Granted 220,000 $ .75 Cancelled -0- -- Outstanding at January 28, 1995 220,000 $ .75 ======= NOTE 10 - RETIREMENT PLAN The Company maintains a 401(k) savings plan to which eligible employees make pre-tax contributions. The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974. The Company made matching contributions to this plan of approximately $46,235 during the year ended January 28, 1995, $41,500 during the year ended January 29, 1994, $11,000 during the 13 weeks ended January 30, 1993, and $33,000 during the 39 weeks ended October 31, 1992. NOTE 11 - RESTRUCTURING AND ASSET IMPAIRMENT CHARGES In accordance with FASB EITF 94-3 (liability in recognition for certain costs incurred in a restructuring), a restructuring and asset impairment reserve was established in fiscal 1995. The reserve covers the closing of two stores in Nashua, New Hampshire and Johnston, Rhode Island. In addition, this reserve covers the asset impairment in connection with the closing of additional stores, the closing of which was announced in fiscal 1996 (February 1995). The total amount of this charge to fiscal 1995 was approximately $4,555,000 as outlined below. In addition, as per the rules outlined in FASB EITF 94-3, approximately $1,913,000 of additional expense will be charged to the first quarter of fiscal 1996. Impairment of fixed assets and leaseholds $ 2,566,000 (8 stores) Rental commitments 351,000 Store preopening cost 220,000 Loss on sale of inventory (5 stores) 753,000 Deferred cost of goods sold charges 408,000 Other store closing costs 257,000 $ 4,555,000 ========= NOTE 12 - MERCHANDISE AVAILABLE FOR SALE On February 26, 1995, the merchandise inventory of the five stores located in Malden, Taunton and Haverhill, Massachusetts, Nashua, New Hampshire and Johnston, Rhode Island was sold to the Great American Asset Management Co. This inventory became impaired as of fiscal year end 1995 and is reported on a separate line on the balance sheet. NOTE 13 - SUBSEQUENT EVENT On April 30, 1995, The Company's Board of Directors approved the closing of four additional stores located in Athol, Chelsea and Fitchburg, Massachusetts and Goffstown, New Hampshire. As per rules outlined in FASB EITF 94-3, approximately $2,875,000 in expense will be charged to the second quarter of fiscal 1996 to cover the closing of these stores. REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Stuarts Department Stores, Inc. and Subsidiary, Debtor-in-Possession: We have audited the accompanying consolidated balance sheets of Stuarts Department Stores, Inc. and Subsidiary, Debtor-in-Possession, as of January 28, 1995 and January 29, 1994, and the related consolidated statements of operations, cash flows and stockholders' equity for the years ended January 28, 1995 and January 29, 1994, the thirteen week period ended January 30, 1993 and the thirty-nine week period ended October 31, 1992. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Stuarts Department Stores, Inc. and Subsidiary, Debtor-in-Possession, as of January 28, 1995 and January 29, 1994 and the consolidated results of its operations and its cash flows for the years ended January 28, 1995 and January 29, 1994, the thirteen week period ended January 30, 1993 and the thirty-nine week period ended October 31, 1992 in accordance with generally accepted accounting principles. On October 19, 1992, the Company emerged from reorganization proceedings under Chapter 11 of the U.S. Bankruptcy Code. As described in Note 2 to the consolidated financial statements, the Company accounted for this reorganization and adopted "fresh start reporting" as of October 31, 1992. As a result, the consolidated statements of operations for the years ended January 28, 1995 and January 29, 1994, and the thirteen week period ended January 30, 1993, are not comparable to the Company's consolidated statements of operations for prior periods. The consolidated financial statements of the Company do not reflect any adjustments which may result from the outcome of the following uncertainties: (1) As discussed in Note 1 on May 16, 1995, Stuarts Department Stores, Inc. and its subsidiary, filed a petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. The process of determining the amount of allowable pre-petition claims has just begun, and the ultimate settlement of these claims will be determined when a plan of reorganization has been confirmed by the Bankruptcy Court. The Company is a debtor-in-possession under Chapter 11 of the U.S. Bankruptcy Code and is subject to the jurisdiction of the Bankruptcy Court; (2) As discussed in Notes 5 and 8, the Company is subject to a number of commitments. Although some provision has been made for these matters, the final outcomes and their effect, if any, on the Company's consolidated financial statements is not presently determinable; (3) The accompanying consolidated financial statements have been prepared in conformity with accounting principles applicable to a going concern. Continuation of the Company as a going concern and realization of its assets and the liquidation of its liabilities are dependent upon, among other things: (a) confirmation of a Plan of Reorganization (which will, among other things, result in significant adjustments and reclassifications in the amounts reflected as assets, liabilities and stockholders' equity in the accompanying consolidated financial statements), (b) the ability of the Company to maintain adequate financing combined with achievement of profitable operations, and (c) obtaining adequate shipments of merchandise from vendors with reasonable credit terms; (4) As discussed in Note 11, the consolidated financial statements for fiscal 1995 include a restructuring charge resulting from the Company's decision to close facilities. As part of the Chapter 11 proceedings, the Company is reviewing the potential closing of stores, and its warehouse, and distribution center. Depending on the outcome of the review, the actual facilities to be closed will be determined. The costs related to these closings may be greater or less than the amount provided in the consolidated financial statements. The Chapter 11 filing, uncertainty regarding the eventual outcome of the reorganization case and effects of other unknown adverse factors raise substantial doubt about the Company's ability to continue as a going concern. The eventual outcome of these matters is not presently determinable and the consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue its existence because of the above uncertainties. Coopers & Lybrand L.L.P. Boston, Massachusetts March 29, 1995, except for Note 13, as to which the date is April 30, 1995 and except for Note 1 and paragraph two of Note 6, as to which the date is May 16, 1995 Item 9. CHANGES IN DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE - ------------------------------------------------------------------------- None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - -------------------------------------------------------------------------- Directors and Executive Officers The executive officers of the Company, their positions with the Company, business history and certain other information, as of January 28, 1995, are set forth below. NAME OFFICE AGE David S. Ferguson President, Chief Operating Officer 50 and Director S. Joseph Hoffman Chairman of the Board 75 Antone F. Moreira Executive Vice President, Chief Financial 58 Officer, Secretary and Treasurer Eugene W. Twomey Senior Vice President - Real Estate 59 Margaret Coughlin Director 39 Ronald C. Curhan Director 64 Joshua R. Goldberg Director 37 Joseph A. Lategano Director 62 Morton H. Sigel Director 65 David S. Ferguson has been President, Chief Operating Officer and a director of the Company since August 1994. Prior to such time, Mr. Ferguson served as Senior Vice President-Operations from October 1992 until August 1994 and as Senior Vice President-Stores and Store Operations of the Company beginning in February 1989. Mr. Ferguson was formerly Vice President of Stores for Upton's Department Stores, a division of Amcena Corporation, from September 1985 to January 1989. Prior to his association with Upton's Department Stores, Mr. Ferguson served as Divisional Vice President of Richway, a division of Federated Department Stores, from July 1983 to September 1985. S. Joseph Hoffman has been Chairman of the Board of the Company since November 1993 and a director of the Company since October 1992. Mr. Hoffman served as acting Chairman and acting President of the Company from June 1993 until November 1993, while the Company conducted an executive search. Mr. Hoffman also has served as a consultant to Balsams Spring Water Co., Inc., a producer of bottled spring water and affiliate of Veryfine Products, Inc., since February 1994, President and a director of Advintage, a wine distributor, since April 1993, Treasurer and a director of BWC, Inc. (formerly known as Balsams Water Co., Inc.) since 1992. Chairman Emeritus of and a consultant to Ingalls, Quinn & Johnson, Inc., an advertising firm, since 1988, President and a director of Andover Distributors, Inc. a spring water distributor, since 1987, and President and a director of Andover Liquors, a package store, since 1976. Mr. Hoffman was President of Balsams Water Co., Inc. from 1991 through 1992 and Chairman and Chief Executive Officer of Ingalls, Quinn & Johnson from 1982 until his retirement in 1988. Prior thereto, Mr. Hoffman served in various other capacities with that firm beginning in 1960. Mr. Hoffman also served as a director of TJX Companies, Inc., an off-price apparel retailer, from 1988 until its merger with Zayre Corp. in 1989. Antone F. Moreira has been Executive Vice President of the Company since August 1994 and Chief Financial Officer, Secretary and Treasurer of the Company since October 1992. Mr. Moreira also served as Senior Vice President of the Company from October 1992 until August 1994 and as Senior Vice President-Finance from February 1991 to October 1992. From May 1990 to February 1991, Mr. Moreira was a principal of Advantage Resources, Inc., a consulting firm specializing in retail companies. From October 1987 to May 1990, Mr. Moreira was Senior Vice President and Chief Financial Officer of Brooks Brothers, Inc., a division of Allied Stores Corp. Mr. Moreira also served as Senior Vice President of Finance and Operations for Plymouth Shops, a division of Allied Stores Corp. from 1982 to 1987 and as Executive Vice President and Chief Financial Officer for Maison Blanche & Richards, divisions of City Stores Company, from 1974 to 1982. Eugene W. Twomey was Senior Vice President-Real Estate of the Company from July 1993 until January 31, 1995. From November 1992 to July 1993, Mr. Twomey served as Vice President-Real Estate of the Company. From April 1989 to November 1992, Mr. Twomey was President of EWT Inc., a real estate consulting firm. Prior thereto, Mr. Twomey was Senior Vice President-Real Estate and Property Development of Zayre Stores, a division of Zayre Corp., an operator of a diversified group of chain stores, from March 1979 through January 1989. Margaret Coughlin has been President of Cone/Coughlin, an advertising and public relations firm, since 1993. From 1992 until her appointment as President of Cone/Coughlin, Ms. Coughlin served as Executive Vice President of Cone/Coughlin. For more than three years prior thereto, Ms. Coughlin served as Executive Vice President of Ingalls, Quinn & Johnson. Ms. Coughlin has been a director of the Company since July 1994. Ronald C. Curhan has been a Professor of Marketing at the School of Management, Boston University, since 1975 and a consultant to corporations and organizations regarding marketing strategy, marketing research, distribution practices and operations; and a seminar leader in executive education and management development programs for corporations since 1970. Mr. Curhan served as a director of TJX Companies Inc., a national discount retailer, from its formation in 1987 through its merger in 1989. Mr. Curhan has been a director of the Company since October 1993. Joshua R. Goldberg has been Managing Director of Financo, Inc., an investment banking firm, since January 1993. Prior thereto, Mr. Goldberg was Senior Vice President of Financo, Inc. from June 1989 until January 1993 and Vice President of Shearson Lehman Brothers, Inc.'s Merchandising Group from December 1986 until June 1989. Mr. Goldberg has been a director of the Company since October 1992. Joseph A. Lategano has been an independent consultant to various law firms, banks and companies since January 1992. Prior thereto, Mr. Lategano was a senior consultant to National Westminster Bank USA from June 1988 until May 1992. Mr. Lategano has been a director of the Company since October 1992. Morton H. Sigel has been Chairman of the Board and President of Tekscan Inc., a technology based company, since 1992 and President of A.S.R. Associates, a chain of card and gift stores, for over 20 years. Mr. Sigel was Chairman of the Board and President of Millbrook Distributors, Inc., a distributor of general merchandise, health and beauty aids and gourmet foods, from 1960 until December 1991. Mr. Sigel has been an advisory member of the Board of Directors of Shawmut Bank, N.A. since 1991 and a director of the Company since October 1993. Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules promulgated thereunder require the Company's officers and directors and persons who own more than ten percent of a registered class of the Company's equity securities to file reports of ownership and changes in ownership with the Securities and Exchange Commission and to furnish the Company with copies of all such filings. Based solely upon a review of (i) those reports and amendments thereto furnished to the Company during and with respect to the year ended January 28, 1995 and (ii) written representations from certain reporting persons stating that no Form 5's are required to be filed by such reporting persons, the Company has determined that (i) Ms. Coughlin failed to file a Form 3 upon becoming a director of the Company, (ii) each of Ms. Coughlin and Messrs. Curhan, Goldberg, Hoffman, Lategano and Sigel failed to file a Form 4 or Form 5 reporting three transactions eligible for deferred reporting under Section 16, and (iii) Denis T. Lemire failed to file a Form 4 or Form 5 reporting one transaction. ITEM 11. EXECUTIVE COMPENSATION - -------------------------------------------------------------------------- The following table summarizes, for the fiscal years ended January 28, 1995, January 29, 1994 and January 30, 1993, all compensation paid to those persons who served or acted as the Company's Chief Executive Officer during the fiscal year ended January 28, 1995 and the four most highly compensated executive officers other than the Chief Executive Officer whose salary and bonus exceeded $100,000 for the fiscal year ended January 28, 1995.
Stuarts Department Stores, Inc. and Subsidiary Summary Compensation Table
Long Term Compensation Annual Compensation Awards Name and Principal Fiscal Other Annual All Other Position Year Salary($) Bonus($)(1) Compensation($)(2) Options(#) Compensations($) David S. Ferguson 1995 $ 188,942 ---- -------- ------ $ 1,103 (3) President and director 1994 166,923 (4) ---- -------- ------ 1,124 (3) 1993 154,327 100,000 (5) 1,079 (3) Denis T. Lemire(6) 1995 $ 116,731 $ 894 (3) President and director 1994 171,730 (7) 1,214 (3) 1993 143,654 100,000 (5) 95 (3) S. Joseph Hoffman(8) 1995 52,000 50,000 (9) -- Chairman of the 1994 34,500 -- Board and director 1993 -- Antone F. Moreira 1995 $ 176,923 $ 655 (3) Executive Vice 1994 166,923 (10) 743 (3) President,Chief 1993 150,769 100,000 (5) 349 (3) Financial Officer Secretary and Treasurer Eugene W. Twomey(11) 1995 $ 155,769 $1,095 (3) Vice President- 1994 135,096 50,000 (5) -- Real Estate 1993 131,140 (12) 50,000 (5) -- (footnotes appear on following page)
(1) The Company did not, and does not plan to, award bonuses to any of the named executives during or in respect of fiscal 1993, 1994 or 1995. (2) Other Annual Compensation amounts paid to the named executive officers did not meet the threshold reporting requirements during fiscal 1993, 1994 or 1995. (3) Consists of matching contributions made to such officer's account under the Company's 401(k) Plan. (4) Includes $1,923 in respect of a salary increase granted to Mr. Ferguson on April 14, 1994, which was retroactive to November 17, 1993 but received by Mr. Ferguson (and expensed by the Company) in fiscal 1995. (5) Issued pursuant to the Company's 1992 Employee Stock Option Plan approved by the Company's shareholders on October 14, 1993. (6) Fiscal 1995 information provided in respect of Mr. Lemire represents compensation for his services as an officer of the Company during the period from January 30, 1994 through August 8, 1994, the date of Mr. Lemire's resignation from the Company. No other amounts were paid to Mr. Lemire during fiscal 1995. (7) Includes $6,730 in respect of a salary increase granted to Mr. Lemire on April 14, 1994 which was retroactive to November 19, 1993 but received by Mr. Lemire (and expensed by the Company) in fiscal 1995. (8) Mr. Hoffman first served as an officer of the Company in June 1993. From June 1993 until November 1993, Mr. Hoffman served as acting Chairman and acting President and since November 1993, Mr. Hoffman has served as Chairman of the Company. Accordingly, no information for fiscal 1993 is provided in this table in respect of Mr. Hoffman. (9) Issued pursuant to the Company's 1994 Directors Stock Option Plan approved by the Company shareholders on July 13, 1994. (10) Includes $1,923 in respect of a salary increase granted to Mr. Moreira on April 14, 1994, which was retroactive to November 19, 1993 but received by Mr. Moreira (and expensed by the Company) in fiscal 1995. (11) Mr. Twomey joined the Company as Vice President-Real Estate on November 16, 1992. Accordingly, no information for fiscal 1992 is provided in this table in respect of Mr. Twomey. (12) Includes $115,756 paid indirectly to Mr. Twomey through EWT Inc. pursuant to a consulting arrangement with the Company prior to the date Mr. Twomey became an officer of the Company. EWT Inc. is a real estate consulting firm of which Mr. Twomey is the President and sole shareholder. See Part III, Item 13, "Certain Relationships and Related Transactions." The following table sets forth certain information, as of January 28,1995 concerning individual grants of stock options made during the fiscal year then ended to the persons named in the Summary Compensation Table above. Option Grants in Fiscal 1995 Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation Individual Grants For Option Term Number of Percent of Securities Total Options Underlying Granted to Options Employees in Exercise Expiration Name Granted(#) Fiscal Year Price ($/sh) Date 5% ($) 10% ($) S. Joseph Hoffman 40,000 (1) 18.2% $ 0.75 07/12/04 $17,800 $44,570 5,000 2.3% 0.75 08/31/04 $ 2,812 $5,608 5,000 2.3% 0.75 11/30/04 $ 2,310 $5,829
(1) Granted pursuant to the Company's 1994 Directors' Stock Option Plan. No stock options were exercised during the fiscal year ended January 28,1995 by ther persons named in the Summary Compensation Table above. The following table sets forth certain information, as of January 28, 1995, concerning unexercised stock options for each of such persons. Fiscal Year-End Option Values Value of Number of Unexercised Unexercised In-the-Money Options (#) Options ($) Name (1) Exercisable Unexercisable Exercisable(2)(3) Unexercisable(3) David S. Ferguson 100,000 (2) --- ----- ------ S. Joseph Hoffman ----- 50,000 (4) ----- ------ Antone F. Moreira 100,000 (2) --- ----- ------ Eugene W. Twomey 100,000 (2) --- ----- ------
(1) Options granted during fiscal 1993 to one of the persons named in the Summary Compensation Table above were cancelled effective upon his resignation from the Company on August 8, 1994. (2) Options became exercisable upon approval of the Company's 1992 Employee Stock Option Plan by the Company's shareholders on October 14, 1993. (3) Calculated based on $0.12 per share closing market value at January 30,1995. (4) Options become exercisable in annual increments of 33 1/3% beginning one year from the date of grant pursuant to the Company's 1994 directors Stock Option Plan. Certain Employment Arrangements. During August 1994, the Company entered into employment agreements with each of Messrs. Ferguson and Moreira, which provide for base salaries of $200,000 and $175,000 per year and terms expiring on February 1, 1997, subject to renewal upon the mutual agreement of the Company and such executives prior to the termination thereof. The employment agreements also provide that, each of these executive officers is entitled to participate in the Company's Management Cash Bonus Plan. In addition, Mr. Moreira is entitled to moving expenses of up to $25,000 associated with his permanent relocation. Life insurance on the executive's life as well as certain other benefits also are provided for in these new employment agreements. Pursuant to employment agreements which were in effect prior to the August agreements, these officers were entitled, beginning in fiscal 1994, to a cash bonus equal to 10% of base salary for the prior year if the Company achieved its projected operating profit, plus an additional bonus of 0.5% of base salary for each 1% of operating profit above projected operating profit if the Company exceeded projected operating profit by more than 10%, provided, in each case, that the Company did not exceed its projected capital expenditures in meeting its projections. In addition, each of such officers were entitled to receive a bonus of 0 to 10% of his base salary at the discretion of the Board of Directors, provided that the total of the formula and discretionary bonuses did not exceed 25% of base salary. No such bonus payments have been made pursuant to these provisions. Each of the new employment agreements also provides that if the Company terminates the executive for reasons other than cause prior to the expiration of fiscal 1996, the Company must continue to pay such executive's base salary for the one-year period following such termination and that if such a termination occurs subsequent to the expiration of fiscal 1996, the Company must continue to pay such executive's base salary for the greater of the remainder of the employment term or three months. In addition to these severance provisions, each of the executives is entitled to severance payments for a period of one year if the executive's employment is terminated during the term of the employment agreement after the occurrence of any change in control of the Company. Prior to his resignation effective August 8, 1994, Mr. Lemire had an employment agreement with the Company, which provided for an annual base salary of $200,000 and benefits of the nature described above in respect of Messrs. Ferguson and Moreira. Effective May 18, 1995, severance arrangements for Messrs. Ferguson and Moreira were adopted to provide for payment of six (6) months salary in the event such executive's employment was terminated following the Company's Chapter 11 filing, subject to Bankruptcy Court approval. Effective as of June 1, 1993, the Company entered into a letter agreement with Mr. Hoffman providing for the payment of $1,000 per week to Mr. Hoffman in return for his services as acting Chairman and acting President of the Company on an interim basis pending engagement by the Company of a full-time successor to Joseph Ettore, who resigned as Chairman of the Board, President and Chief Executive Officer of the Company effective June 4, 1993. On November 19, 1993, Mr. Lemire was elected President of the Company and Mr. Hoffman was elected as Chairman of the Company. On August 8, 1994, Mr. Ferguson replaced Mr. Lemire as President of the Company. The letter agreement with Mr. Hoffman remains in effect and provides for the payment of $1,000 per week to Mr. Hoffman in return for Mr. Hoffman's services as Chairman. Effective July 1, 1993, the Company entered into an employment agreement with Mr. Twomey pursuant to which Mr. Twomey would serve as Senior Vice President-Real Estate of the Company for a term beginning July 1, 1993 and ending two years from the Consummation Date at a base salary of $150,000. The contract also provides for bonus payments identical to these contained in the old employment agreements of the senior officers as well as stock option grants, life insurance and other benefits as described above (other than relocation expenses) in respect of Messrs. Ferguson, Moreira and Lemire. 1992 Employee Stock Option Plan. The Company's 1992 Employee Stock Option Plan was adopted by the Company's Board of Directors on October 28, 1992 and approved by the Company's shareholders on October 14, 1993. The plan was amended on July 13, 1994 to increase the number of shares of the Company's Common Stock available for issuance thereunder to 2,000,000 shares (subject to adjustment). Pursuant to the terms of the plan, executive officers and certain other key employees are eligible for awards in the form of incentive stock options or non-qualified options. Annual awards are limited to options for the purchase of no more than 150,000 shares of Common Stock. The plan is administered by the Stock Incentive Committee of the Company's Board of Directors, the members of which are ineligible for any grants under the plan. The Stock Incentive Committee is authorized, among other things, to determine the executive officers and key employees to whom stock options are granted under the plan, the number of shares subject to awards and the terms and conditions applicable to such awards. No awards may be made under the plan after the tenth anniversary of the plan. The plan permits the grant of incentive stock options within the meaning of Section 422 of the Internal Revenue Code as well as options which do not meet the requirements of that section. All options will expire not more than 10 years after the date of grant. The exercise price per share for any option under the plan shall be equal to the greater of $.75 and the fair market value of the Common Stock at the time such option is granted. Payment of an option's exercise price may be made in cash, by check or by delivery of shares of Common Stock registered in the name of the grantee, duly assigned by the grantee to the Company in the manner required by the plan, or by a combination of the foregoing. Options are not transferrable other than by will or by the laws of descent and distribution and may be exercised only by the optionee, his guardian or his legal representative. The plan may be amended by the Stock Incentive Committee or the shareholders, provided that the Stock Incentive Committee may not, without shareholder approval, materially increase the benefits accruing to participants under the plan, increase the maximum number of shares as to which options may be granted under the plan, change the minimum exercise price, change the class of eligible persons, extend the period for which options may be granted or exercised, or withdraw the authority to administer the plan from the Stock Incentive Committee. Options to purchase an aggregate of approximately 497,500 shares of Common Stock were outstanding under the plan as of June 6, 1995. Under the Company's 1992 Employee Stock Option Plan, in the event an unaffiliated third party acquires 30% or more of the Company's voting stock (other than through acquisition of such shares directly from Shawmut Bank NA within two years from the date of acquisition of such shares by Shawmut pursuant to the Prior Reorganization Plan), all options issued under the plan will become immediately exercisable. 1994 Directors Stock Option Plan. The 1994 Directors Stock Option Plan was adopted by the Company's Board of Directors on May 3, 1994 and approved by the shareholders of the Company on July 13, 1994. A total of 1,000,000 shares of the Company's Common Stock has been reserved for issuance under the plan to directors of the Company who are not also full-time employees of the Company or its subsidiary. Awards under the plan may be in the form of non-qualified stock options. The plan is administered by the Stock Incentive Committee of the Board of Directors, which has the authority to interpret the plan and prescribe rules, but may not act with respect to the selection of award recipients, the timing or amounts of awards or the terms and conditions of such awards. No awards may be made under the plan after the tenth anniversary thereof. The plan provides that each eligible director will be granted options to purchase 5,000 shares of Common Stock on a quarterly basis beginning on September 1, 1994. In addition, upon the approval of the plan by the Company's shareholders, each director received options to purchase 20,000 shares of Common Stock for each prior year that the director had served on the Company's Board. The exercise price per share for any option under the plan shall be equal to the greater of $.75 and the fair market value of the Common Stock at the time such option is granted. Payment of an option's exercise price may be made in cash, by check or, in certain circumstances, by delivery of shares of Common Stock assigned to the Company, or by a combination of the foregoing. Options granted under the plan vest over a three-year period in respect of one-third of the shares subject thereto on each of the first, second and third anniversaries of the grant date. Options are not transferable other than by will or by the laws of descent and distribution and may be exercised only by the optionee, his guardian or his legal representative. If a participant terminates employment as a director for any reason, all unvested options shall be forfeited. The plan may be amended by the shareholders or the Board, provided that the provisions relating to the amount, price and timing of awards may not be amended more than once every six months and that the Board may not, without shareholder approval, materially increase the benefits accruing to participants under the plan, increase the maximum number of shares as to which awards may be granted under the plan, change the minimum exercise price, change the class of eligible persons, extend the period for which options may be granted or exercised, or withdraw the authority to administer the plan from the Board. To date, awards in respect of 220,000 shares have been made under the plan. The Company's 1994 Directors Stock Option Plan provides that upon the occurrence of any one or more of the following (each, a "change in control"): (i) the acquisition by any entity, person or group (other than the Company, a subsidiary of the Company or any employee benefit plan (including, without limitation, an employee stock ownership plan) of the Company) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20 percent or more of the outstanding voting stock of the Company; (ii) the occurrence of a transaction requiring shareholder approval for the acquisition of the Company through purchase of stock or assets, by merger, or otherwise; or (iii) the election during any period of 24 months or less of 20 percent or more of the members of the Board of Directors without the approval, prior to or after the effective date of the plan, of the nomination of such members by a majority of the Board of Directors consisting of members who were serving at the beginning of the period, all options under the Plan will become immediately exercisable. 401(k) Plan. The Company has a 401(k) Plan (the "401(k) Plan"), which covers all non-union employees who are at least 21 years of age and who complete one year of service. An eligible employee can elect to reduce his pay in any year in an amount between 3% and 15% and have the Company contribute his reduced pay to the 401(k) Plan. The Company elected to match 20% of the employee's contributions up to a maximum of 5% of the employee's earnings during fiscal 1995. Employee contributions in excess of 5% of the employee's contributions will not be matched by the Company. All contributions are subject to limitations imposed on retirement plans generally and 401(k) plans in particular. All contributions are fully vested at all times. Participants have the right to designate the investment of all contributions to the 401(k) Plan in one or more investment funds designated by the 401(k) Plan's trustee. Amounts generally remain invested in the 401(k) Plan until retirement or termination of employment. In-service distributions are permitted, however, in the event of financial hardship and loans are permitted from a participant's account. During the fifty-two weeks ended January 28, 1995, matching contributions in the aggregate amount of $45,354 were made pursuant to the 401(k) Plan. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee of the Company's Board of Directors consisted of Messrs. Goldberg, Lategano and Sigel during fiscal 1995. In addition, Mr. Curhan became a member of the Compensation Committee on July 13, 1994 and continued to serve thereon throughout the remainder of fiscal 1995. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ----------------------------------------------------------------- The following table sets forth, as of June 6, 1995, the beneficial ownership of Common Stock by (i) each person known to the Company to own beneficially more than five percent of the Company's common stock, (ii) each director who is a shareholder, (iii) each of the executive officers named in the Summary Compensation Table who is a shareholder, and (iv) all directors and executive officers as a group. Under the rules adopted by the Securities and Exchange Commission, a person is deemed to be the beneficial owner of securities with respect to which he, directly or indirectly, has or shares voting power or investment power. Amount Beneficially Percent of Class Name Owned (1) Outstanding SB Asset Recovery Incorporated(2) 4,319,553 20.08% One Federal Street Boston, MA 02111 National Westminster Bank USA 3,001,723 13.96% 175 Water Street New York, NY 10038 David S. Ferguson 111,000(3) * Antone F. Moreira 100,000(4) * Ronald C. Curhan 10,000(5) * Denis T. Lemire 7,000(6) * Eugene W. Twomey 771(7) * All executive officers and directors as a group (8 persons) 221,000(3)(4)(5)(8) 1.03% * Less than 1% (1) Except to the extent otherwise provided herein, the persons named in the table have sole voting and dispositive power with respect to the shares of Common Stock shown as beneficially owned by them. (2) Shawmut Bank NA and Shawmut National Corporation are the direct and indirect parent corporations, respectively, of SB Asset Recovery Incorporated, the assignee of Shawmut Bank NA in respect of the Common Stock issued to it pursuant to the Prior Reorganization Plan, and may be deemed to share voting and dispositive power in respect to such Common Stock. (3) Includes 100,000 shares of Common Stock issuable upon the exercise of options granted to Mr. Ferguson pursuant to the Company's 1992 Employee Stock Option Plan. See "Executive Compensation." (4) Includes 100,000 shares of Common Stock issuable upon the exercise of options granted to Mr. Moreira pursuant to the Company's 1992 Employee Stock Option Plan. See "Executive Compensation." (5) Does not include 30,000 shares of Common Stock issuable upon the exercise of options granted to Mr. Curhan pursuant to the Company's 1994 Directors Stock Option Plan which are not yet exercisable. (6) Does not include 100,000 shares of Common Stock issuable upon the exercise of options granted to Mr. Lemire pursuant to the Company's 1992 Employee Stock Option Plan which were cancelled following his resignation from the Company on August 8, 1994. (7) Includes 771 shares owned by E.W.T., Inc., a consulting corporation, of which Mr. Twomey is President. Does not include 100,000 shares of Common Stock issuable upon the exercise of options granted to Mr. Twomey pursuant to the Company's 1992 Employee Stock Option Plan which were cancelled following the termination of his employment on January 31, 1995. (8) Does not include 190,000 shares of Common Stock issuable upon the exercise of options granted to directors pursuant to the Company's 1994 Directors Stock Option Plan which are not yet exercisable. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - --------------------------------------------------------------------- CERTAIN TRANSACTIONS Since the beginning of fiscal 1995, the Company has not been party to any transactions required to be disclosed hereunder. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - ----------------------------------------------------------------- (a) 1. The following financial statements are filed herewith in Part II, Item 8: Consolidated Statements of Operations - Successor Company Fiscal 1995 Fiscal 1994 Pro Forma Combined Fiscal 1993 (Unaudited) 13 Weeks Ended 1/30/93 - Predecessor Company 39 Weeks Ended 10/31/92 Consolidated Balance Sheets - Successor Company January 28, 1995 January 29, 1994 Consolidated Statements of Cash Flows - Successor Company Fiscal 1995 Fiscal 1994 13 Weeks Ended 1/30/93 - Predecessor Company 39 Weeks Ended 10/31/92 Consolidated Statements of Stockholders' Equity - Successor Company Fiscal 1995 Fiscal 1994 13 Weeks Ended 1/30/93 - Predecessor Company 39 Weeks Ended 10/31/92 Notes to Consolidated Financial Statements Report of Independent Certified Public Accountants 2. Exhibits The following exhibit is incorporated by reference from the Company's Annual Report on Form 10-K for the 52 week period ended January 28, 1989, File No. 0-13184: Exhibit 10-1 - Retirement Savings Plan (401(k) Plan) of the Company. The following exhibit is incorporated by reference from the Company's Annual Report on Form 10-K for the 52 week period ended February 1, 1992, File No. 0-13184: Exhibit 22-1 - Subsidiary of the Company. The following exhibit is incorporated by reference from the Company's Current Report on Form 8-K dated October 23, 1992, File No. 0-13184: Exhibit 2-1 - Joint Plan of Reorganization under Chapter 11 of the Bankruptcy Code filed in Cases No. 90-42184-JFQ through 90-42185-JFQ in District of Massachusetts (Western Division) dated July 22, 1992, confirmed on October 13, 1992. The following exhibit is incorporated by reference from the Company's Quarterly Report on Form 10-Q for the 13 weeks ended October 31, 1992, File No. 0-13184: Exhibit 10-2 - Agreement dated October 1, 1992 between Gibson Greetings, Inc. and the Company. The following exhibits are incorporated by reference from the Company's Registration Statement on Form S-1, File No. 33-58342: Exhibits 3-1 - Restated Certificate of Incorporation of the Company dated October 13, 1992. 4-1 - Specimen Common Stock Certificate. 4-2 - Articles Fourth and Fifth of the Restated Certificate of Incorporation of the Company dated October 13, 1992 (included in Exhibit 3-1). The following exhibit is incorporated by reference from Amendment No. 2 to the Company's Registration Statement on Form S-1, File No. 33-58342: Exhibit 10-3 - *Letter Agreement between the Company and S. Joseph Hoffman dated as of June 1, 1993. The following exhibit is incorporated by reference from the Company's Current Report on Form 8-K dated December 29, 1993, File No. 0-13184: Exhibit 10-4 - Loan and Security Agreement between the Company and Foothill Capital Corporation dated as of December 16, 1993. The following exhibits are incorporated by reference from the Company's Annual Report on Form 10-K for the fiscal year ended January 29, 1994, File No. 0-13184: Exhibits 3-2 - By-Laws of the Company, as amended. 4-3 - Article 1 of the Amended By-Laws of the Company (included in Exhibit 3-2). 10-5 - Depository Account Agreement among the Company, Foothill Capital Corporation and Worcester County Institution for Savings dated January 26, 1994. The following exhibit is incorporated by reference from the Company's Current Report on Form 8-K dated December 2, 1994, File No. 0-131984: Exhibit 10-6 - Agency Agreement between the Company and Gordon Brothers Partners, Inc. dated as of November 3, 1994. The following exhibit is incorporated by reference from the Company's Current Report on Form 8-K dated March 5, 1995, File No. 0-13184: Exhibit 10-7 - Agency Agreement between the Company and Garcel, Inc. dated February 24, 1995. The following exhibits are filed herewith: Exhibit 10-8 - *1992 Employee Stock Option Plan, as amended. 10-9 - *1994 Directors Stock Option Plan. 10-10 - *1994 Cash Bonus Plan. 10-11 - *Employment Agreement between the Company and David S. Ferguson dated as of August 5, 1994. 10-12 - *Employment Agreement between the Company and Antone F. Moreira dated as of August 8, 1994. 10-13 - Amendment No. One to the Loan and Security Agreement between the Company and Foothill Capital Corporation dated March 20, 1995. 10-14 - Second Amendment to Loan and Security Agreement between the Company and Foothill Capital Corporation dated May 16, 1995. 10-15 - Stipulation Regarding Post-Petition Financing and Use of Cash Collateral dated as of May 16, 1995. 10-16 - Agency Agreement between the Company and Garcel, Inc. d/b/a Great American Asset Management dated May 3, 1995. * Indicates a management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(a)(3). ** Not deemed filed for purposes of Section 11 of the Securities Act of 1933, Section 18 of the Securities Exchange Act of 1934 and Section 323 of the Trust Indenture Act of 1939, or otherwise subject to the liabilities of such sections and not deemed part of any registration statement to which such exhibit relates. (b) Reports on Form 8-K. During the 13 weeks ended January 28, 1995, the following report was filed on Form 8-K: On December 5, 1994, the Company filed a current report on Form 8-K dated November 23, 1994 with the Securities and Exchange Commission, which stated that the Company had entered into an Agency Agreement with Gordon Brothers Partners, Inc. in connection with the sale of certain inventory from the Company's Biddeford, Maine and Barre, Vermont stores. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. STUARTS DEPARTMENT STORES, INC. June 28, 1995 By /s/ David S. Ferguson David S. Ferguson President and Chief Operating Officer Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Capacity Date /s/David S. Ferguson President, Chief Operating June 28, 1995 David S. Ferguson Officer and Director /s/Antone F. Moreira Executive Vice President and June 28, 1995 Antone F. Moreira Chief Financial Officer (Principal Financial and Accounting Officer) /s/S. Joseph Hoffman Chairman of the Board June 28, 1995 S. Joseph Hoffman and Director /s/Margaret Coughlin Director June 28, 1995 Margaret Coughlin /s/Ronald C. Curhan Director June 28, 1995 Ronald C. Curhan /s/Joshua R. Goldberg Director June 28, 1995 Joshua R. Goldberg /s/Joseph Lategano Director June 28, 1995 Joseph Lategano /s/Morton H. Sigel Director June 28, 1995 Morton H. Sigel EXHIBIT INDEX Exhibit Number Exhibit Location 2-1 Joint Plan of Reorganization Incorporated by reference from under Chapter 11 of the Exhibit 2-1 to the Company's Bankruptcy Code filed in Cases Current Report on Form 8-K No. 90-42184-JFQ through 90- dated October 23, 1992 42185-JFQ in District of Massachusetts (Western Division) dated July 22, 1992, confirmed on October 13, 1992 3-1 Restated Certificate of Incorporated by reference from Incorporation of the Company Exhibit 3-1 to the Company's dated October 13, 1992 Registration Statement on Form S-1 File No. 33-58342 ("Registration Statement No. 33-58342") 3-2 By-laws of the Company, as Incorporated by reference from amended Exhibit 3-2 to the Company's Annual Report on Form 10-K for the fiscal year ended January 29, 1994, File No. 0-13184 (the "1994 Form 10-K") 4-1 Specimen Common Stock Incorporated by reference from Certificate Exhibit 4-1 to Registration Statement No. 33-58342 4-2 Articles Fourth and Fifth of Included in Exhibit 3-1 the Restated Certificate of Incorporation of the Company dated October 13, 1992 4-3 Article 1 of the Amended Included in Exhibit 3-2 By-laws of the Company 10-1 Retirement Savings Plan Incorporated by reference from (401(k) Plan) of the Company Exhibit 10-9 to the Company's Annual Report on Form 10-K for the fiscal year ended January 28, 1989 10-2 Agreement dated October 1, Incorporated by reference from 1992 between Gibson Greetings, Exhibit 10-6 to the Company's Inc. and the Company Quarterly Report on Form 10-Q for the 13 weeks ended October 31, 1992, File No. 0-13184 10-3 Letter Agreement between the Incorporated by reference from Company and S. Joseph Hoffman Exhibit 10-12 to Amendment No. dated as of June 1, 1993 2 to Registration Statement No. 33-58342 Exhibit Number Exhibit Location 10-4 Loan and Security Agreement Incorporated by reference from between the Company and Exhibit 10-1 to the Company's Foothill Capital Corporation Current Report on Form 8-K dated as of December 16, 1993 dated December 29, 1993, File No. 0-13184 10-5 Depository Account Agreement Incorporated by reference from among the Company, Foothill Exhibit 10-10 to the 1994 Form Capital Corporation and 10-K Worcester County Institution for Savings dated January 26, 1994 10-6 Agency Agreement between the Incorporated by reference from Company and Gordon Brothers Exhibit 10-1 of the Company's Partners, Inc. dated as of Current Report on Form 8-K November 3, 1994 dated December 2, 1994, File No. 0-13184 10-7 Agency Agreement between the Incorporated by reference from Company and Garcel, Inc. dated Exhibit 10-1 to the Company's February 24, 1995 Current Report on Form 8-K dated March 15,1995, File No. 0-13184 10-8 1992 Employee Stock Option Sequentially numbered pages Plan, as amended 10-9 1994 Directors Stock Option Sequentially numbered pages Plan 10-10 1994 Cash Bonus Plan Sequentially numbered pages 10-11 Employment Agreement between Sequentially numbered pages the Company and David S. Ferguson dated as of August 5, 1995 10-12 Employment Agreement between Sequentially numbered pages the Company and Antone F. Moreira dated as of August 8, 1995 10-13 Amendment No. One to the Loan Sequentially numbered pages and Security Agreement between the Company and Foothill Capital Corporation dated March 20, Exhibit Number Exhibit Location 10-14 Second Amendment to the Loan Sequentially numbered pages and Security Agreement between the Company and Foothill Capital Corporation dated May 16, 1995 10-15 Stipulation Regarding Post- Sequentially numbered pages Petition Financing and Use of Cash Collateral dated as of May 16, 1995 10-16 Agency Agreement between the Sequentially numbered pages Company and Garcel, Inc. d/b/a Great American Asset Management dated May 3, 1995 EX-10.8 2 1992 EMPLOYEE STOCK OPTION PLAN, AS AMMENDED 1992 EMPLOYEE STOCK OPTION PLAN, AS AMENDED 1. PURPOSE The purpose of this Employee Stock Option Plan (the "Plan") is to enable Stuarts Department Stores, Inc. (the "Company") to attract and retain key employees and provide them with an incentive to maintain and enhance the Company's long-term performance record. It is intended that this purpose will best be achieved by granting eligible key employees incentive stock options ("ISOs") and/or non-qualified stock options ("NQSOs") under this Plan pursuant to the rules set forth in Sections 83 and 422 of the Internal Revenue Code, as amended from time to time. 2. ADMINISTRATION The Plan shall be administered by a committee consisting of three or more members of the Company's Board of Directors (the "Committee") none of whom during the twelve months prior to commencement of service on the Committee, or during such service, has been granted or awarded any equity security or derivative security of the Company pursuant to the Plan or, except as permitted by Rule 16b-3(c)(2)(i) pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), any other plan of the Company. Subject to the provisions of the Plan, the Committee shall possess the authority, in its discretion, (a) to determine the key employees of the Company to whom, and the time or times at which, ISOs and/or NQSOs (collectively referred to as "options") shall be granted and the number of shares to be subject to each option; (b) to determine at the time of grant whether an option will be an ISO or a NQSO; (c) to prescribe the form of the option agreements and any appropriate terms and conditions applicable to the options; (d) to interpret the Plan; (e) to make and amend rules and regulations relating to the Plan; and (f) to make all other determinations necessary or advisable for the administration of the Plan. The Committee's determinations shall be conclusive and binding. No member of the Committee shall be liable for any action taken or decision made in good faith relating to the Plan or any option granted hereunder. 3. ELIGIBLE KEY EMPLOYEES Options may be granted under the Plan only to key employees of the Company and its wholly-owned subsidiary, S.D.S., Inc. who have the capability of making a substantial contribution to the success of the Company. 4. SHARES AVAILABLE An aggregate of 2,000,000 shares of the Common Stock (par value $.01 per share) of the Company (subject to adjustment or substitution as provided in Section 8 hereof) shall be available for the grant of options under the Plan. Such shares may be authorized and unissued shares. If an option expires, terminates or is cancelled without being exercised, new options may thereafter be granted covering such shares. Annual awards are limited to options for the purchase of no more than 150,000 shares of Common Stock (subject to adjustment or substitution as provided in Section 8 hereof). No option may be granted more than ten years after the effective date of the Plan. 5. TERMS AND CONDITIONS OF ISOs Each ISO granted under the Plan shall be evidenced by an ISO option agreement in such form as the Committee shall approve from time to time, which agreement shall conform with this Plan and contain the following terms and conditions: (a) Exercise Price. The exercise price per share of stock under each option shall be equal to the greater of $.75 and the fair market value of the Common Stock at the time such option is granted, as determined by the Committee. If an ISO is granted to an employee who at the time of such grant owns stock possessing more than 10 percent of the total combined voting power of all classes of stock of the Company or a subsidiary (a "10% Shareholder"), the purchase price per share of stock under such option shall be equal to the greater of $.75 and 110 percent of the fair market value of such stock on the date such option is granted. (b) Duration of Option. Each option by its terms shall not be exercisable after the expiration of ten years from the date such option is granted provided that, in the case of an ISO granted to a 10% Shareholder, such option shall not be exercisable more than five years from the date such option is granted. (c) Options Nontransferable. Each option by its terms shall not be transferable by the optionee otherwise than by will or the laws of descent and distribution, and shall be exercisable, during the optionee's lifetime, only by the optionee, the optionee's guardian or the optionee's legal representative. (d) Exercise Terms. Each option granted under the Plan may be exercised at such time and in such manner as specified by the Committee which may, among other things, provide that options may become subject to exercise in installments. (e) Maximum Value of ISO Shares. No ISO shall be granted to an employee under this Plan or any other ISO plan of the Company or its subsidiaries to purchase shares as to which the aggregate fair market value (determined as of the date of grant) of the Common Stock which first become exercisable by the employee in any calendar year exceeds $100,000. (f) Payment of Exercise Price. An option shall be exercised upon written notice to the Company accompanied by payment in full for the shares being acquired. The payment shall be made in cash, by check or, if the option agreement so permits, by delivery of shares of Common Stock of the Company registered in the name of the optionee, duly assigned to the Company with the assignment guaranteed by a bank, trust company or member firm of the New York Stock Exchange, or by a combination of the foregoing. Any such shares so delivered shall be deemed to have a value per share equal to the fair market value of the shares on such date. (g) General Restriction. The Company shall not be required to deliver any certificate upon the exercise of an option until it has been furnished with such opinion, representation or other document as it may reasonably deem necessary to insure compliance with any law or regulation of the Securities and Exchange Commission or any other governmental authority having jurisdiction under this Plan. Certificates delivered upon such exercise may bear a legend restricting transfer absent such compliance. Each option shall be subject to the requirement that, if at any time the Committee shall determine, in its discretion, that the listing, registration or qualification of the shares subject to such option upon any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the granting of such option or the issue or purchase of shares thereunder, such option may not be exercised in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Committee of Directors in the exercise of its reasonable judgment. 6. TERMS AND CONDITIONS FOR NQSOs Each NQSO granted under the Plan shall be evidenced by a NQSO option agreement in such form as the Committee shall approve from time to time, which agreement shall conform to this Plan and contain the same terms and conditions as the ISO option agreements except that the 10% Shareholder rules of Sections 5 (a) and (b) and the maximum value of share rules of Section 5(e) shall not apply to NQSO grants. To the extent an option initially designated as an ISO exceeds the value limit of Section 5(e), it shall be deemed a NQSO and shall otherwise remain in full force and effect. 7. TERMINATION OF EMPLOYMENT If the employment of an optionee terminates by reason of death or disability (as determined by the Committee), any option may be exercised by the optionee or, in the event of the optionee's death, by the optionee's personal representative at any time prior to the earlier of the expiration date of the option or the expiration of one year after the date of termination, but only if, and to the extent that, the optionee was entitled to exercise the option at the date of such termination. Upon termination of the optionee's employment for any reason other than death or disability, any vested option that was exercisable immediately preceding termination may be exercised at any time prior to the earlier of the expiration date of the option or the expiration of three months after the date of such termination. In the event of retirement, the three month period specified in the preceding sentence shall be extended to one year in the case of NQSOs. Notwithstanding the foregoing, an option may not be exercised after termination of employment if the Committee reasonably determines that the termination of employment of such optionee resulted from willful acts, or failure to act, by the optionee detrimental to the Company or any of its subsidiaries. Unless otherwise determined by the Committee, an authorized leave of absence shall not constitute a termination of employment for purposes of this Plan. For purposes of this Section, retirement means that an optionee terminates employment at or after the date on which the optionee reaches any normal retirement age specified in any policy adopted by the Board or, in the absence of such policy, age 65. 8. ADJUSTMENT OF SHARES In the event of any change in the Common Stock of the Company by reason of any stock dividend, stock split, recapitalization, reorganization, merger, consolidation, split-up, combination, or exchange of shares, or rights offering to purchase Common Stock at a price substantially below fair market value, or of any similar change affecting the Common Stock, the number and kind of shares which thereafter may be subject to an option under the Plan and the number and kind of shares set forth in options under outstanding agreements and the price per share shall be appropriately adjusted consistent with such change in such manner as the Committee may deem equitable to prevent substantial dilution or enlargement of the rights granted to, or available for, participants in the Plan. 9. WITHHOLDING TAXES Whenever the Company proposes or is required to issue or transfer shares of Common Stock under the Plan, the Company shall have the right to require the optionee to remit to the Company an amount sufficient to satisfy any federal, state and/or local withholding tax requirements prior to the delivery of any certificate or certificates for such shares. Whenever under the Plan payments are to be made in cash, such payments shall be net of an amount sufficient to satisfy any federal, state and/or local withholding tax requirements. 10. NO EMPLOYMENT RIGHTS The Plan and any options granted under the Plan shall not confer upon any optionee any right with respect to continuance as an employee of the Company or any subsidiary, nor shall they interfere in any way with the right of the Company or any subsidiary to terminate the optionee's position as an employee at any time. 11. RIGHTS AS A SHAREHOLDER The recipient of any option under the Plan shall have no rights as a shareholder with respect thereto unless and until certificates for shares of Common Stock are issued to the recipient. 12. CHANGE IN CONTROL Upon acquisition (other than pursuant to that certain Joint Plan of Reorganization of the Company dated July 22, 1992, as confirmed by the United States Bankruptcy Court for the District of Massachusetts, Western Division, on October 13, 1992 (the "Joint Plan of Reorganization")) of thirty percent or more of the Company's outstanding shares of stock having general voting rights by an unaffiliated person (other than by any person(s) acquiring any such shares directly from Shawmut within two years from the date of acquisition of such shares by Shawmut pursuant to the Joint Plan of Reorganization), entity or group, the Committee shall notify, in writing, each holder of an outstanding option of such change in control. Notwithstanding any other provision of this Plan or any option agreement, all options shall become fully exercisable on receipt of such notice. All outstanding options shall expire if not exercised within 30 days of receipt of the notice of a change of control. 13. AMENDMENT AND DISCONTINUANCE This Plan may be amended, modified or terminated by the shareholders of the Company or by the Committee of Directors, except that the Committee may not, without approval of the shareholders, materially increase the benefits accruing to participants under the Plan, increase the maximum number of shares as to which options may be granted under the Plan, change the minimum exercise price, change the class of eligible persons, extend the period for which options may be granted or exercised, or withdraw the authority to administer the Plan from the Committee or a committee of the Committee consisting solely of disinterested Committee members; provided, however, that, to the extent permitted by law, the Committee may amend the Plan without the approval of shareholders, to the extent it deems necessary to cause the Plan to comply with Securities and Exchange Commission Rule 16b-3 or any successor rule, as it may be amended from time to time. Notwithstanding the foregoing, during the one-year period following the consummation of the Joint Plan of Reorganization, this Plan may be amended, modified or terminated only in accordance with the provisions of the Joint Plan of Reorganization requiring a two-thirds (2/3) vote of the shareholders of the Company for any such action. Except as required by law, no amendment, modification, or termination of the Plan may, without the written consent of an optionee to whom any option shall theretofore have been granted, adversely affect the rights of such optionee under such option. 14. EFFECTIVE DATE The effective date of the Plan shall be the date this Plan is approved by the Company's Board of Directors provided that the Plan is approved by the Company's shareholders within 12 months before or after such approval by the Board. 15. DEFINITIONS Any terms or provisions used herein which are defined in Sections 83, 421, or 422 of the Internal Revenue Code, as amended, or the regulations thereunder or corresponding provisions of subsequent laws and regulations in effect at the time options are made hereunder, shall have the meanings as therein defined. 16. GOVERNING LAW To the extent not inconsistent with the provisions of the Internal Revenue Code that relate to incentive stock options and non-qualified stock options, this Plan and any option agreement adopted pursuant to it shall be construed under the laws of the State of Delaware. EX-10.9 3 1994 DIRECTORS STOCK OPTION PLAN STUARTS DEPARTMENT STORES, INC. 1994 DIRECTORS STOCK OPTION PLAN 1. PURPOSE The purpose of this Directors Stock Option Plan (the "Plan") is to enable the Company to attract and retain outside directors and provide them with an incentive to maintain and enhance the Company's long-term performance record by creating a long-term mutuality of interests between the outside directors and the shareholders of the Company. It is intended that this purpose will best be achieved by granting eligible directors non-qualified stock options ("options") under this Plan pursuant to the rules set forth in Section 83 of the Internal Revenue Code, as amended from time to time. 2. ADMINISTRATION The Plan shall be administered by a committee (the "Committee") consisting of three or more members of the Company's Board of Directors (the "Board"). Subject to the provisions of the Plan, the Committee shall possess the authority, in its discretion, (a) to prescribe the form of the option agreements; (b) to interpret the Plan; (c) to make and amend rules and regulations relating to the Plan; and (d) to make all other determinations necessary or advisable for the administration of the Plan. The Committee's determinations shall be conclusive and binding. No member of the Committee shall be liable for any action taken or decision made in good faith relating to the Plan or any option granted hereunder. Notwithstanding the above, the selection of the directors to whom stock options are to be granted, the timing of such grants, the number of shares subject to any stock option, the exercise price of any stock option, the periods during which any stock option may be exercised and the term of any stock option shall be as hereinafter provided, and the Committee shall have no discretion as to such matters. 3. ELIGIBLE DIRECTORS Options shall be granted under the Plan only to members of the Board who are not also full-time employees of the Company or its subsidiary. Beneficial owners of more than five percent of the Common Stock of the Company are not eligible to receive any options under the Plan. 4. SHARES AVAILABLE An aggregate of 1,000,000 shares of the Common Stock (par value $0.01 per share) of the Company (subject to substitution or adjustment as provided in Section 7 hereof) shall be available for the grant of options under the Plan. Such shares may be authorized and unissued shares. If an option expires, terminates or is cancelled without being exercised, new options may thereafter be granted covering such shares. Annual awards are limited to options for the purchase of no more than 150,000 shares of Common Stock (subject to substitution or adjustment as provided in Section 7 hereof). No option may be granted more than ten years after the effective date of the Plan. 5. TERMS AND CONDITIONS OF OPTIONS Each option granted under the Plan shall be evidenced by an option agreement in such form as the Committee shall approve from time to time, which agreement shall conform with this Plan and contain the following terms and conditions: (a) Number of Shares. Each person who is an eligible director on the Plan's effective date shall receive initial options to purchase 20,000 shares of the Company's Common Stock for each prior year or partial year consisting of six months or more of service as a non-full-time employee director of the Company . On each of September 1, December 1, March 1 and June 1 of each year after the effective date, each eligible director who is then serving on the Board shall receive options to purchase 5,000 shares of the Company's Common Stock for the preceding year or, in the case of grants to be made on September 1 of the first year following the effective date, for the period from the effective date until such date. For purposes of this Section 5(a), any fractional shares shall be rounded up to the next highest whole number of shares. (b) Exercise Price. The exercise price under each option shall be equal to the greater of $.75 and the fair market value of the Common Stock at the time the option is granted. For this purpose, fair market value shall equal the closing price of the Company's Common Stock as quoted on the National Association of Securities Dealers Automated Quotation System or any successor system then in use ("NASDAQ") on the business day immediately preceding the date an option is granted, or, if there was no trading in such stock on such date, the closing price as quoted on NASDAQ on the last preceding day on which there was such trading. (c) Duration of Option. Each option by its terms shall not be exercisable after the expiration of ten years from the date such option is granted. (d) Options Nontransferable. Each option by its terms shall not be transferable by the optionee otherwise than by will or the laws of descent and distribution, and shall be exercisable, during the optionee's lifetime, only by the optionee, the optionee's guardian or the optionee's legal representative. (e) Exercise Terms. Each option granted under the Plan shall become exercisable with respect to 33-1/3 percent of the shares subject thereto on the first anniversary of the date of grant and with respect to an additional 33-1/3 percent of such shares on each of the second and third anniversaries of such date of grant. Options may be partially exercised from time to time during the period extending from the time they first become exercisable until the tenth anniversary of the date of grant. (f) Payment of Exercise Price. An option shall be exercised upon written notice to the Company accompanied by payment in full for the shares being acquired. The payment shall be made in cash, by check or, if the option agreement so permits, by delivery of shares of Common Stock of the Company registered in the name of the optionee, duly assigned to the Company with the assignment guaranteed by a bank, trust company or member firm of the New York Stock Exchange, or by a combination of the foregoing. Any such shares so delivered shall be deemed to have a value per share equal to the fair market value of the shares on such date. For this purpose, fair market value shall equal the closing price of the Company's Common Stock as quoted on NASDAQ on the date the option is exercised, or, if there was no trading in such stock on the date of such exercise, the closing price as quoted on NASDAQ on the last preceding day on which there was such trading. (g) General Restriction. The Company shall not be required to deliver any certificate upon the exercise of an option until it has been furnished with such opinion, representation or other document as it may reasonably deem necessary to insure compliance with any law or regulation of the Securities and Exchange Commission or any other governmental authority having jurisdiction under this Plan. Certificates delivered upon such exercise may bear a legend restricting transfer absent such compliance. Each option shall be subject to the requirement that, if at any time the Board shall determine, in its discretion, that the listing, registration or qualification of the shares subject to such option upon any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the granting of such option or the issue or purchase of shares thereunder, such option may not be exercised in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Committee in the exercise of its reasonable judgment. 6. TERMINATION OF DIRECTORSHIP If the optionee's service as a director terminates for any reason, any option may be exercised by the optionee or, in the event of the optionee's death, by the optionee's personal representative at any time prior to the earlier of the expiration date of the option or the expiration of three years after the date of termination, but only if, and to the extent that, the optionee was entitled to exercise the option at the date of such termination. 7. ADJUSTMENT OF SHARES In the event of any change in the Common Stock of the Company by reason of any stock dividend, stock split, stock combination, recapitalization, reorganization, merger, consolidation, split-up, or exchange of shares, or rights offering to purchase Common Stock at a price substantially below fair market value, or of any similar change affecting the Common Stock, the number and kind of shares which thereafter may be subject to an option under the Plan and the number and kind of shares set forth in options under outstanding agreements and the price per share shall be appropriately adjusted consistent with such change in such manner as the Committee may deem equitable to prevent substantial dilution or enlargement of the rights granted to, or available for, participants in the Plan. 8. NO EFFECT ON RIGHTS OF THE COMPANY Neither the Plan, any options granted under the Plan nor any option agreement shall confer upon any optionee any right with respect to continuance as a director of the Company, nor shall they interfere in any way with any right the shareholders of the Company or the Board may have to terminate the optionee's position as a director at any time. 9. RIGHTS AS A SHAREHOLDER The recipient of any option under the Plan shall have no rights as a shareholder with respect thereto unless and until certificates for shares of Common Stock are issued to the recipient. 10. CHANGE IN CONTROL (a) Notwithstanding other provisions of the Plan, in the event of a change in control of the Company (as defined in subsection (c) below), all of an optionee's options shall become immediately exercisable, unless directed otherwise by a resolution of the Board adopted prior to and specifically relating to the occurrence of such change in control. (b) In the event of a change in control, each optionee (i) shall have the right at any time thereafter during the term of such option to exercise the option in full notwithstanding any limitation or restriction in any option agreement or in the Plan, and (ii) may, subject to Board approval and after written notice to the Company within 60 days after the change in control, or during the period ending the twelfth business day following the first release for publication by the Company after such change of control of a quarterly or annual summary statement of earnings, which release occurs at least six months following grant of the option, whichever period is longer, receive, in exchange for the surrender of the option or any portion thereof to the extent the option is then exercisable in accordance with clause (i), an amount of cash equal to the difference between the fair market value (as determined pursuant to Section 5(b) hereof) on the date of surrender of the Common Stock covered by the option or portion thereof which is so surrendered and the exercise price of such Common Stock under the option. (c) For purposes of this Section 10, a "change in control" means the occurrence, at any time after the effective date of the Plan, of any one or more of the following: (i) the acquisition by any entity, person or group (other than the Company, a subsidiary of the Company or any employee benefit plan (including, without limitation, an employee stock ownership plan) of the Company) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act of 1934, as amended (the "Exchange Act")) of 20 percent or more of the outstanding voting stock of the Company; (ii) the occurrence of a transaction requiring stockholder approval for the acquisition of the Company through purchase of stock or assets, by merger, or otherwise; or (iii) the election during any period of 24 months or less of 20 percent or more of the members of the Board without the approval, prior to or after the effective date of the Plan, of the nomination of such members by a majority of the Board consisting of members who were serving at the beginning of the period. As used in this subsection (c), "group" shall mean persons who act as described in Section 13(d)(3) of the Exchange Act and the regulations promulgated thereunder. 11. AMENDMENT AND DISCONTINUANCE This Plan may be amended, modified or terminated by the shareholders of the Company or by the Board, provided that Plan provisions relating to the amount, price and timing of awards may not be amended more than once every six months other than to comport with changes in the Internal Revenue Code or the regulations thereunder and provided further that the Board may not, without approval of the shareholders, materially increase the benefits accruing to participants under the Plan, increase the maximum number of shares as to which options may be granted under the Plan, change the timing of such grants, change the exercise price, change the class of eligible persons, extend the period for which options may be granted or exercised, or otherwise amend the Plan in any manner that would cause options under the Plan not to comply with Securities and Exchange Commission Rule 16b-3 or any successor rule. Notwithstanding the foregoing, to the extent permitted by law, the Board may amend the Plan without the approval of shareholders, to the extent it deems necessary to cause the Plan to comply with Securities and Exchange Commission Rule 16b-3 or any successor rule. Except as required by law, no amendment, modification or termination of the Plan may, without the written consent of an optionee to whom any option shall theretofore have been granted, adversely affect the rights of such optionee under such option. 12. EFFECTIVE DATE The effective date of the Plan shall be the date this Plan is approved by the affirmative vote of the holders of a majority of the Common Stock of the Company. If such approval is obtained at the Annual Meeting of Shareholders in 1994, the Plan shall be effective on the date of such meeting. 13. DEFINITIONS Any terms or provisions used herein which are defined in Sections 83 or 421 of the Internal Revenue Code, as amended, or the regulations thereunder or corresponding provisions of subsequent laws and regulations in effect at the time options are made hereunder, shall have the meanings as therein defined. 14. GOVERNING LAW To the extent not inconsistent with the provisions of the Internal Revenue Code that relate to non-qualified stock options, this Plan and any option agreement adopted pursuant to it shall be construed under the laws of the State of Delaware. Dated: May __, 1994 STUARTS DEPARTMENT STORES, INC. By: Name: Denis T. Lemire Title: President EX-10.10 4 1994 MANAGEMENT CASH BONUS PLAN STUARTS DEPARTMENT STORES, INC. 1994 MANAGEMENT CASH BONUS PLAN STUARTS DEPARTMENT STORES, INC. TABLE OF CONTENTS Section Number I. Purpose of Plan II. Eligibility III. Plan Year IV. Setting of Target Bonus Percentages and Target Bonuses V. Authorization Form VI. Notification of Employees VII. Basis for Bonus Payments VIII. Setting of Goals IX. Calculating the Bonus X. Adjustments for Personal Performance XI. Timing of Bonus Payments XII. Other STUARTS DEPARTMENT STORES, INC. 1994 Management Cash Bonus Plan I. Purpose of Plan The "Management Cash Bonus Plan" is designed to provide meaningful incentives for members of the senior management of Stuarts Department Stores, Inc. ("Stuarts" or the "Company") to increase profitability while efficiently managing the Company's assets. It is anticipated that a plan will be put in place annually for senior management. II. Eligibility A "Participant" shall mean each of the Company's president and its executive vice president and chief financial officer as well as any other senior executive designated by the Compensation Committee of the Board of Directors of the Company (the "Compensation Committee") from time to time. Participants who retire during the plan year and are aged 62 or older on the date of retirement and estates of Participants who die during the plan year will be paid bonuses (if earned) at the same time that all other Participants receive their bonuses after the end of the plan year. III. Plan Year The plan year shall mean the fiscal year of the Company which, as of the effective date of this plan, is the twelve-month period ending on the Saturday in January or February of a calendar year which falls closest to January 31 of such calendar year. IV. Setting of Target Bonus Percentages and Target Bonuses The "Target Bonus" for each Participant shall mean the bonus calculated by multiplying the Participant's aggregate base-salary received during the year by a "Target Bonus Percentage" set at the beginning of the plan year for all Participants by the Compensation Committee. The maximum Target Bonus Percentage will be set at 50% and may be revised downward by the Compensation Committee in respect of any plan year. A Participant's Target Bonus always will be based on the aggregate base-salary received during the year, not on the base-salary level at any particular point during the year (i.e., when calculating bonuses for Participants who received salary increases during the year, for Participants who are hired during the year or for Participants who retire or die during the year). V. Authorization Form Attached hereto as Exhibit A is the "Authorization Form" which shall be used by the Compensation Committee at the beginning of each plan year when designating Participants, Target Bonus Percentages and Pre-Bonus Operating Profit Targets (defined in Section VIII below). VI. Notification of Employees Attached hereto as Exhibit B is the form of memorandum which shall be used at the beginning of each plan year to inform employees of their participation in the Plan and their Target Bonus Percentages and Target Bonuses. VII. Basis for Bonus Payments After the end of the plan year, when financial results for the year are available, a calculation will be made to determine the percentage of the Target Bonus that will be paid to each Participant. The percentage of the Target Bonus earned by each Participant will depend on the following: (1) how well the Company performed relative to the Pre-Bonus Operating Profit Target; and (2) if 100% of the Target Bonus would not be payable based upon the Company's performance, the Participant's Personal Performance. All bonuses will be subject to the review and approval of the Board of Directors of the Company. VIII. Setting of Goals The "Pre-Bonus Operating Profit Target" will be set at the beginning of the plan year and will equal the Company's budgeted consolidated earnings before interest, income taxes, depreciation and amortization, as approved by the Board of Directors of the Company. The Pre-Bonus Operating Profit Target will not be revised during the plan year, except in cases where an acquisition or divestiture of a business completed during the plan year materially affects reported operating results during the plan year (including, without limitation, the closing or opening of one or more stores) or there shall have occurred another transaction, which in the opinion of the Board of Directors of the Company, fundamentally affects the business of the Company during the plan year. IX. Calculating the Bonus For each Participant, the percentage of the Target Bonus earned, before giving effect to adjustments for Personal Performance, will be calculated by multiplying the Target Bonus by the percentage in the column on the right below, opposite the percentage of the Pre-Bonus Operating Profit Target which was attained by the Company. Percentage Percentage of Target of Pre-Bonus Bonus Earned Operating Profit (Before Adjusting for Target Attained Personal Performance) less than 75.00% None 75.00 - 84.99% 11.11% 85.00 - 94.99% 22.22% 95.00 - 104.99% 33.33% 105.00 - 114.99% 40.00% 115.00 - 124.99% 46.67% 125.00 - 134.99% 53.33% 135.00 - 144.99% 60.00% 145.00 - 154.99% 66.67% 155.00 - 164.99% 73.33% 165.00 - 174.99% 80.00% 175.00 - 184.99% 86.67% 185.00 - 194.99% 93.33% 195.00% or more 100.00% (maximum) The percentage of Target Bonus earned, before giving effect to adjustments for Personal Performance, must be in the increments shown on the above chart. For example, if the Company attained 103% of the Pre-Bonus Operating Profit Target, the percentage used for each Participant would be 33.33% (not 30% or 35%). The percentages of the Target Bonus earned are "stepped," not linear. No bonuses will be earned by any Participants if less than 75% of the Pre-Bonus Operating Profit Target is attained. The maximum bonus payable cannot exceed 100% of the Target Bonus. X. Adjustments for Personal Performance In the event that less than 33.33% of the Target Bonus is earned, the difference between the amount of the Target Bonus earned, if any, and 33.33% of the Target Bonus or such portion of such difference, if any, that the Compensation Committee shall deem appropriate, will be available, at the sole discretion of the Compensation Committee, to increase the amount of the bonus payable to a Participant based upon an evaluation of the Participant's "Personal Performance" relative to that Participant's personal job objectives for the plan year as determined by the Compensation Committee. In no event can this subjective portion of a Participant's bonus cause the Participant's bonus to exceed 33.33% of the Target Bonus. XI. Timing of Bonus Payments All bonus payments will be made as soon as practicable after the end of the plan year. Before any bonus payments can be paid, (1) necessary accounting and audit work must be completed so that all bonus calculations can be made and (2) the bonus must be approved by a vote of the Board of Directors of the Company. It is anticipated that bonuses will be paid within 90 days after end of the plan year. XII. Other Bonuses will be subject to income and employment tax withholding to the extent required by applicable law. Bonuses and the right to receive bonuses cannot be pledged, assigned or alienated, voluntarily or involuntarily, by any Participant. The Management Cash Bonus Plan and any bonuses granted under the Management Cash Bonus Plan shall not confer on any Participant any right with respect to the continuance of employment by the Company, nor shall they interfere in any way with the right of the Company to terminate a Participant's employment at any time. The Management Cash Bonus Plan may be revised, modified or terminated in any way, for any reason and at any time at the sole discretion of the Board of Directors of the Company by vote of a majority of the Board at any regular or special meeting of the Board; provided however, that no such revision, modification or termination shall impair the right of any Participant to receive bonus payments which otherwise would have been earned in respect of the period beginning at the commencement of the plan year and ending at the time of such revision, modification or termination. Effective Date: January 30, 1994 (for fiscal 1995) EX-10.11 5 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT This Agreement is made and entered into as of the 5th day of August, 1994 between STUARTS DEPARTMENT STORES, INC., a Delaware corporation (the "Company"), and DAVID S. FERGUSON ("Employee"). In consideration of the mutual promises, benefits and covenants herein contained, the Company and Employee hereby agree as follows: 1. Employment. (a) The Company hereby employs Employee as President of the Company in connection with the management of the business and affairs of the Company. Employee hereby accepts such employment and agrees to remain in the employ of the Company, to perform such executive, operational and administrative duties as the Board of Directors of the Company (the "Board") may from time to time determine, to be under the direction of the Board or such other officer of the Company as the Board shall choose to designate with respect to said duties, and to abide by the terms and conditions of this Agreement. (b) During the term of this Agreement, Employee shall, except during customary vacation periods, periods of illness, and other absences beyond his control, devote his best efforts, skill and attention, and full business time to the performance of his duties on behalf of the Company. 2. Term of Employment. Employee shall be employed for a term commencing on the date set forth above and ending on February 1, 1997, unless this Agreement is renewed as provided herein or is sooner terminated pursuant to the provisions of paragraph 5 hereof. 3. Compensation. 3.1 Base Salary. During the term of his employment, Employee shall receive a base salary at an annual rate of $200,000 (the "base salary") payable in equal installments not less frequently than once per month, subject to such withholding or deductions as may be mutually agreed upon or required by law. 3.2 Bonus. During the term of his employment, Employee shall be entitled to participate in the Management Cash Bonus Plan approved by the Board, as amended from time to time. A copy of the Management Cash Bonus Plan is annexed hereto as Exhibit A. 4. Fringe Benefits. During the term of his employment, Employee shall be entitled, at the Company's expense, to the following: 4.1 Medical Benefits. Participation in the Company's health, accident and disability insurance plans to the extent that Employee is eligible under the terms and conditions of such plans. 4.2 Life Insurance. Life insurance on Employee's life in an amount equal to 3 times Employee's annual salary and which names Employee's designated beneficiary as loss payee. 4.3 Car Allowance. The Company shall pay Employee up to $600 per month for an automobile allowance. 4.4 Vacation. Employee shall be entitled to take vacation in accordance with Company policy as set forth in the Company's Employment Handbook. 4.5 Stock Options. During the term of his employment, Employee shall be entitled to participate in the Company's 1992 Employee Stock Option Plan, as amended; provided, however, that for so long as Employee is participating in such Employee Stock Option Plan, Employee shall not be entitled to participate in the Company's 1994 Directors Stock Option Plan. A copy of the Company's 1992 Employee Stock Option Plan, as amended, is annexed hereto as Exhibit B. 5. Termination. 5.1 Termination. Employee's employment may be terminated by the Company or Employee at any time with or without "Cause", as defined in paragraph 5.4 hereof. If Employee is a director of the Company at such time, such termination shall be deemed to constitute his resignation as a director. 5.2 Termination for Cause. In the event of termination of Employee's employment for Cause or upon his voluntary resignation, Employee's rights to receive any payments and benefits pursuant to this Agreement shall, effective upon termination of employment, terminate in all respects. 5.3 Termination Other than for Cause. (a) In the event that during the term of this Agreement, the Company terminates Employee's employment for reasons other than Cause, then Employee's rights to receive any payments and benefits pursuant to this Agreement shall terminate effective upon termination of employment, except that, subject to Employee's compliance with his obligations under paragraphs 6, 7 and 8 hereof, the Company shall pay Employee such severance compensation as Employee may be entitled to receive pursuant to subparagraph 5.3(b) hereof. (b) Subject to the provisions of subparagraph 5.3(a) hereof, in the event the Company terminates Employee's employment for reasons other than Cause, the Company shall pay Employee the following severance compensation: (i) if termination occurs prior to February 3, 1996 or, during the term of this Agreement, is preceded by a Change-in-Control (as defined herein) of the Company, an amount equal to Employee's annual base salary specified in paragraph 3.1 hereof or (ii) if termination occurs after February 3, 1996 and such termination is not preceded by a Change-in-Control of the Company, an amount equal to the greater of (x) the product of Employee's annual base salary specified in paragraph 3.1 hereof multiplied by .25 or (y) the balance of the base salary otherwise payable to Employee pursuant to paragraph 3.1 hereof if Employee's employment had not been terminated. Severance compensation to be paid to Employee pursuant to this subparagraph 5.3(b) shall be made, at the discretion of the Board, in one lump sum or in equal installments not less frequently than once a month over a period not to exceed twelve-months following Employee's termination. In addition, such severance compensation payments shall be subject to such withholding or deductions as may be mutually agreed upon or required by law. For purposes of this Agreement, the term "Change-in-Control" shall mean the happening, at any time after the date hereof, of any one or more of the following: (i) (x) the acquisition in any transaction or series of related transactions by any entity, person or group (other than the Company, a subsidiary of the Company, any employee benefit plan (including, without limitation, an employee stock ownership plan) of the Company, the Employee or any group (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of which the Employee is a member) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act of 1934, as amended (the "Exchange Act")) of 20 percent or more of the outstanding voting stock of the Company which acquisition is not approved by 50% or more of the members of the Board serving on the Board on the date hereof or whose nomination was approved by a majority of such members (regardless of whether such approval is otherwise required in connection with such acquisition) or (y) the election during any period of 12 months or less hereafter of 50 percent or more of the members of the Board who were not serving on the Board on the date hereof; (ii) the occurrence of a transaction requiring stockholder approval for the acquisition of the Company through purchase of stock or assets, by merger, or otherwise; or (iii) the election during any period of 24 months or less hereafter of 20 percent or more of the members of the Board without the approval, prior to or after the date hereof, of the nomination of such members by a majority of the Board consisting of members who were serving on the Board at the beginning of the period. As used in this subparagraph 5.3(b) "group" shall mean persons who act as described in Sections 13(d)(3) of the Exchange Act and the regulations promulgated thereunder. 5.4 Definition of Cause. The Company shall have Cause for termination if Employee: (a) From the date of this Agreement, takes any employment (full or part-time) with, acts as a consultant to or agent of, or receives any direct or indirect remuneration for services performed after the date hereof for, any other entity, whether competitive or not with the Company, without the prior written consent of the Company; (b) Acts dishonestly, commits an act of moral turpitude, commits an act which constitutes reckless conduct or wanton or willful misconduct, takes any action which causes either Employee or the Company to be brought into disrepute, or is convicted of a criminal act; (c) Dies; (d) Voluntarily resigns, fails to work full time for the Company, breaches his duty of trust to the Company, fails to competently perform his duties under this Agreement or otherwise breaches this Agreement, including, but not limited to, his obligations of confidentiality under paragraph 6 hereof; or (e) Becomes "physically or mentally disabled" as defined in paragraph 5.5 hereof. 5.5 Definition of Physically or Mentally Disabled. For purposes of this Agreement, Employee shall be deemed "physically or mentally disabled" if he shall have been unable to perform his usual duties for a period of 90 continuous days or 180 days in the aggregate during any twelve-month period of this Agreement by reason of any physical or mental disability. 5.6 Discussion of Continued Employment. Employee and the Company agree that, not later than approximately six (6) months before the end of the term of this Agreement, they will use reasonable efforts to meet to consider and discuss the desirability of continuing Employee's employment with the Company beyond such expiration, but neither party shall have any obligation to continue such employment. 6. Covenant Not To Pirate Employees or Disclose. Employee (i) acknowledges that he has acquired, and during the term of this Agreement shall acquire, confidential business information, knowledge and/or data concerning the Company, the disclosure of which would cause the Company any material loss, and (ii) acknowledges that his experience to be obtained pursuant to this Agreement in, and in connection with, the business of the Company and the good will which the Company has established would enable him to compete with the Company in such business and that such competition would deprive the Company of any material benefits. Therefore, Employee hereby covenants and agrees as to the matters described in paragraphs 7 and 8 hereof. Notwithstanding any provisions of this Agreement to the contrary, the provisions of paragraphs 6, 7 and 8 hereof shall survive the termination of Employee's employment hereunder or the expiration of this Agreement or any renewal term. In addition to any other remedy available to it, the Company shall be entitled to injunctive relief for any breach or threatened breach of this paragraph 6 or of paragraph 7 or 8 and shall not be required to post any bond, surety or indemnity in connection therewith. 7. Non-Pirating of Employees. 7.1 Non-Pirating Period. For a period of two years after the expiration of this Agreement or any renewal term or after termination of Employee's employment pursuant hereto, Employee shall not, without the prior written consent of the Company, solicit for employment directly or indirectly any employee of the Company or any affiliated entity of the Company who is employed at the Company or any such other affiliated entity at the time of Employee's termination of employment. 7.2 Confidentiality. Except as may be required by law, Employee shall not, while employed by the Company, or at any time thereafter, without the prior written consent of the Company, use, directly or indirectly, for Employee's own account or for the account of any person other than the Company, or disclose to any person other than the Company, any data, knowledge, information, written material, records or documents relating to the Company or any affiliated entity of the Company which are of a confidential nature, including, without limitation, any confidential information concerning the business or affairs of the Company (such as information concerning or otherwise relating to any new store locations or potential acquisitions) or of any supplier, creditor, lender, customer, employee, agent, consultant or any affiliated entity of the Company which was obtained by Employee during or in connection with his employment by or association with the Company. 8. Documentation. All written materials, records and documents, if any, made by Employee or coming into his possession in connection with his employment by the Company and all copies thereof concerning the business or affairs of the Company or any of its suppliers, creditors, lenders, customers, employees, agents, consultants or any affiliated entity of the Company, are and shall be solely the property of the Company. Upon ceasing to be employed by the Company or upon the request of the Company at any time, Employee shall promptly deliver the same to the Company or such other person as the Company may designate. 9. Representations and Warranties. Employee hereby represents and warrants that this Agreement constitutes his valid and binding obligation enforceable in accordance with its terms and that neither the execution and delivery nor the performance of this Agreement violates or conflicts with, or will violate or conflict with, any agreement, arrangement or restriction of any kind to which he is a party or by which he is bound. 10. Assignment. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, representatives, successors and assigns; provided, however, Employee may not assign this Agreement or any of his rights hereunder. 11. Sale, Consolidation or Merger. In the event of the sale, consolidation or merger of the Company with or into another corporation or entity, or the sale of substantially all of the assets of the Company to another corporation, entity or individual, the successor-in-interest shall assume in writing all liabilities of the Company under this Agreement. 12. Notices. Any notice or other communication under this Agreement shall be in writing and shall be deemed given when personally delivered or mailed by registered or certified mail, return receipt requested, postage prepaid: (i) if to Employee, addressed to: Mr. David S. Ferguson 9 Edge Hill Road Hopkinton, Massachusetts 01748 (ii) if to the Company, addressed to: Stuarts Department Stores, Inc. 16 Forge Parkway Franklin, Massachusetts 02038 Attention: Chairman of the Board or to such other address or addresses as either party shall have specified in writing to the other party hereto. 13. Severability. The invalidity or unenforceability of any one or more provisions of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement. 14. Governing Law; Jurisdiction and Venue. This Agreement shall be subject to, governed by and construed in accordance with the laws of the State of Delaware without reference to its principles of conflicts of law. Any action, suit or proceeding relating to this Agreement shall be brought in a federal or state court situate in the State of Delaware, the parties hereto hereby consenting to the jurisdiction and venue thereof. 15. Entire Agreement. This Agreement constitutes the entire agreement of the parties hereto with respect to the matters contained herein, and no modification, amendment or waiver of any of the provisions of this Agreement shall be effective unless in writing and signed by each of the parties hereto. This Agreement constitutes the only agreement between the parties hereto with respect to the matters contained herein, and any and all prior agreements and understandings, whether written or oral, including Employee's previous employment agreement with the Company, shall be invalid and of no further force or effect. IN WITNESS WHEREOF, the parties hereto have entered into this Agreement as of the date first above written. STUARTS DEPARTMENT STORES, INC. By:____________________________ S. Joseph Hoffman Chairman of the Board _______________________________ David S. Ferguson EX-10.12 6 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT This Agreement is made and entered into as of the 8th day of August, 1994 between STUARTS DEPARTMENT STORES, INC., a Delaware corporation (the "Company"), and ANTONE F. MOREIRA ("Employee"). In consideration of the mutual promises, benefits and covenants herein contained, the Company and Employee hereby agree as follows: 1. Employment. (a) The Company hereby employs Employee as Executive Vice President of the Company in connection with the management of the business and affairs of the Company. Employee hereby accepts such employment and agrees to remain in the employ of the Company, to perform such executive, operational and administrative duties as the Board of Directors of the Company (the "Board") may from time to time determine, to be under the direction of the Board or such other officer of the Company as the Board shall choose to designate with respect to said duties, and to abide by the terms and conditions of this Agreement. (b) During the term of this Agreement, Employee shall, except during customary vacation periods, periods of illness, and other absences beyond his control, devote his best efforts, skill and attention, and full business time to the performance of his duties on behalf of the Company. 2. Term of Employment. Employee shall be employed for a term commencing on the date set forth above and ending on February 1, 1997, unless this Agreement is renewed as provided herein or is sooner terminated pursuant to the provisions of paragraph 5 hereof. 3. Compensation. 3.1 Base Salary. During the term of his employment, Employee shall receive a base salary at an annual rate of $175,000 (the "base salary") payable in equal installments not less frequently than once per month, subject to such withholding or deductions as may be mutually agreed upon or required by law. 3.2 Bonus. During the term of his employment, Employee shall be entitled to participate in the Management Cash Bonus Plan approved by the Board, as amended from time to time. A copy of the Management Cash Bonus Plan is annexed hereto as Exhibit A. 4. Fringe Benefits. During the term of his employment, Employee shall be entitled, at the Company's expense, to the following: 4.1 Medical Benefits. Participation in the Company's health, accident and disability insurance plans to the extent that Employee is eligible under the terms and conditions of such plans. 4.2 Life Insurance. Life insurance on Employee's life in an amount equal to 3 times Employee's annual salary and which names Employee's designated beneficiary as loss payee. 4.3 Car Allowance. The Company shall pay Employee up to $600 per month for an automobile allowance. 4.4 Vacation. Employee shall be entitled to take vacation in accordance with Company policy as set forth in the Company's Employment Handbook. 4.5 Moving Expenses. If Employee permanently relocates to Massachusetts or Rhode Island, the Company shall pay the standard commission incurred by Employee upon the sale of his current home in Ridgewood, New Jersey. In addition, the Company shall reimburse Employee for the reasonable moving costs (up to $25,000) associated with his permanent relocation. 4.6 Stock Options. During the term of his employment, Employee shall be entitled to participate in the Company's 1992 Employee Stock Option Plan, as amended, a copy of which is annexed hereto as Exhibit B. 5. Termination. 5.1 Termination. Employee's employment may be terminated by the Company or Employee at any time with or without "Cause", as defined in paragraph 5.4 hereof. If Employee is a director of the Company at such time, such termination shall be deemed to constitute his resignation as a director. 5.2 Termination for Cause. In the event of termination of Employee's employment for Cause or upon his voluntary resignation, Employee's rights to receive any payments and benefits pursuant to this Agreement shall, effective upon termination of employment, terminate in all respects. 5.3 Termination Other than for Cause. (a) In the event that during the term of this Agreement, the Company terminates Employee's employment for reasons other than Cause,then Employee's rights to receive any payments and benefits pursuant to this Agreement shall terminate effective upon termination of employment, except that, subject to Employee's compliance with his obligations under paragraphs 6, 7 and 8 hereof, the Company shall pay Employee such severance compensation as Employee may be entitled to receive pursuant to subparagraph 5.3(b) hereof. (b) Subject to the provisions of subparagraph 5.3(a) hereof, in the event the Company terminates Employee's employment for reasons other than Cause, the Company shall pay Employee the following severance compensation: (i) if termination occurs prior to February 3, 1996 or, during the term of this Agreement, is preceded by a Change-in-Control (as defined herein) of the Company, an amount equal to Employee's annual base salary specified in paragraph 3.1 hereof or (ii) if termination occurs after February 3, 1996 and such termination is not preceded by a Change-in-Control of the Company, an amount equal to the greater of (x) the product of Employee's annual base salary specified in paragraph 3.1 hereof multiplied by .25 or (y) the balance of the base salary otherwise payable to Employee pursuant to paragraph 3.1 hereof if Employee's employment had not been terminated. Severance compensation to be paid to Employee pursuant to this subparagraph 5.3(b) shall be made, at the discretion of the Board, in one lump sum or in equal installments not less frequently than once a month over a period not to exceed twelve-months following Employee's termination. In addition, such severance compensation payments shall be subject to such withholding or deductions as may be mutually agreed upon or required by law. For purposes of this Agreement, the term "Change-in-Control" shall mean the happening, at any time after the date hereof, of any one or more of the following: (i) (x) the acquisition in any transaction or series of related transactions by any entity, person or group (other than the Company, a subsidiary of the Company, any employee benefit plan (including, without limitation, an employee stock ownership plan) of the Company, the Employee or any group (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of which the Employee is a member) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act of 1934, as amended (the "Exchange Act")) of 20 percent or more of the outstanding voting stock of the Company which acquisition is not approved by 50% or more of the members of the Board serving on the Board on the date hereof or whose nomination was approved by a majority of such members (regardless of whether such approval is otherwise required in connection with such acquisition) or (y) the election during any period of 12 months or less hereafter of 50 percent or more of the members of the Board who were not serving on the Board on the date hereof; (ii) the occurrence of a transaction requiring stockholder approval for the acquisition of the Company through purchase of stock or assets, by merger, or otherwise; or (iii) the election during any period of 24 months or less hereafter of 20 percent or more of the members of the Board without the approval, prior to or after the date hereof, of the nomination of such members by a majority of the Board consisting of members who were serving on the Board at the beginning of the period. As used in this subparagraph 5.3(b) "group" shall mean persons who act as described in Sections 13(d)(3) of the Exchange Act and the regulations promulgated thereunder. 5.4 Definition of Cause. The Company shall have Cause for termination if Employee: (a) From the date of this Agreement, takes any employment (full or part-time) with, acts as a consultant to or agent of, or receives any direct or indirect remuneration for services performed after the date hereof for, any other entity, whether competitive or not with the Company, without the prior written consent of the Company; (b) Acts dishonestly, commits an act of moral turpitude, commits an act which constitutes reckless conduct or wanton or willful misconduct, takes any action which causes either Employee or the Company to be brought into disrepute, or is convicted of a criminal act; (c) Dies; (d) Voluntarily resigns, fails to work full time for the Company, breaches his duty of trust to the Company, fails to competently perform his duties under this Agreement or otherwise breaches this Agreement, including, but not limited to, his obligations of confidentiality under paragraph 6 hereof; or (e) Becomes "physically or mentally disabled" as defined in paragraph 5.5 hereof. 5.5 Definition of Physically or Mentally Disabled. For purposes of this Agreement, Employee shall be deemed "physically or mentally disabled" if he shall have been unable to perform his usual duties for a period of 90 continuous days or 180 days in the aggregate during any twelve-month period of this Agreement by reason of any physical or mental disability. 5.6 Discussion of Continued Employment. Employee and the Company agree that, not later than approximately six (6) months before the end of the term of this Agreement, they will use reasonable efforts to meet to consider and discuss the desirability of continuing Employee's employment with the Company beyond such expiration, but neither party shall have any obligation to continue such employment. 6. Covenant Not To Pirate Employees or Disclose. Employee (i) acknowledges that he has acquired, and during the term of this Agreement shall acquire, confidential business information, knowledge and/or data concerning the Company, the disclosure of which would cause the Company any material loss, and (ii) acknowledges that his experience to be obtained pursuant to this Agreement in, and in connection with, the business of the Company and the good will which the Company has established would enable him to compete with the Company in such business and that such competition would deprive the Company of any material benefits. Therefore, Employee hereby covenants and agrees as to the matters described in paragraphs 7 and 8 hereof. Notwithstanding any provisions of this Agreement to the contrary, the provisions of paragraphs 6, 7 and 8 hereof shall survive the termination of Employee's employment hereunder or the expiration of this Agreement or any renewal term. In addition to any other remedy available to it, the Company shall be entitled to injunctive relief for any breach or threatened breach of this paragraph 6 or of paragraph 7 or 8 and shall not be required to post any bond, surety or indemnity in connection therewith. 7. Non-Pirating of Employees. 7.1 Non-Pirating Period. For a period of two years after the expiration of this Agreement or any renewal term or after termination of Employee's employment pursuant hereto, Employee shall not, without the prior written consent of the Company, solicit for employment directly or indirectly any employee of the Company or any affiliated entity of the Company who is employed at the Company or any such other affiliated entity at the time of Employee's termination of employment. 7.2 Confidentiality. Except as may be required by law, Employee shall not, while employed by the Company, or at any time thereafter, without the prior written consent of the Company, use, directly or indirectly, for Employee's own account or for the account of any person other than the Company, or disclose to any person other than the Company, any data, knowledge, information, written material, records or documents relating to the Company or any affiliated entity of the Company which are of a confidential nature, including, without limitation, any confidential information concerning the business or affairs of the Company (such as information concerning or otherwise relating to any new store locations or potential acquisitions) or of any supplier, creditor, lender, customer, employee, agent, consultant or any affiliated entity of the Company which was obtained by Employee during or in connection with his employment by or association with the Company. 8. Documentation. All written materials, records and documents, if any, made by Employee or coming into his possession in connection with his employment by the Company and all copies thereof concerning the business or affairs of the Company or any of its suppliers, creditors, lenders, customers, employees, agents, consultants or any affiliated entity of the Company, are and shall be solely the property of the Company. Upon ceasing to be employed by the Company or upon the request of the Company at any time, Employee shall promptly deliver the same to the Company or such other person as the Company may designate. 9. Representations and Warranties. Employee hereby represents and warrants that this Agreement constitutes his valid and binding obligation enforceable in accordance with its terms and that neither the execution and delivery nor the performance of this Agreement violates or conflicts with, or will violate or conflict with, any agreement, arrangement or restriction of any kind to which he is a party or by which he is bound. 10. Assignment. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, representatives, successors and assigns; provided, however, Employee may not assign this Agreement or any of his rights hereunder. 11. Sale, Consolidation or Merger. In the event of the sale, consolidation or merger of the Company with or into another corporation or entity, or the sale of substantially all of the assets of the Company to another corporation, entity or individual, the successor-in-interest shall assume in writing all liabilities of the Company under this Agreement. 12. Notices. Any notice or other communication under this Agreement shall be in writing and shall be deemed given when personally delivered or mailed by registered or certified mail, return receipt requested, postage prepaid: (i) if to Employee, addressed to: Mr. Antone F. Moreira 231 Manor Road Ridgewood, New Jersey 07450 (ii) if to the Company, addressed to: Stuarts Department Stores, Inc. 16 Forge Parkway Franklin, Massachusetts 02038 Attention: Chairman of the Board or to such other address or addresses as either party shall have specified in writing to the other party hereto. 13. Severability. The invalidity or unenforceability of any one or more provisions of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement. 14. Governing Law; Jurisdiction and Venue. This Agreement shall be subject to, governed by and construed in accordance with the laws of the State of Delaware without reference to its principles of conflicts of law. Any action, suit or proceeding relating to this Agreement shall be brought in a federal or state court situate in the State of Delaware, the parties hereto hereby consenting to the jurisdiction and venue thereof. 15. Entire Agreement. This Agreement constitutes the entire agreement of the parties hereto with respect to the matters contained herein, and no modification, amendment or waiver of any of the provisions of this Agreement shall be effective unless in writing and signed by each of the parties hereto. This Agreement constitutes the only agreement between the parties hereto with respect to the matters contained herein, and any and all prior agreements and understandings, whether written or oral, including Employee's previous employment agreement with the Company, shall be invalid and of no further force or effect. IN WITNESS WHEREOF, the parties hereto have entered into this Agreement as of the date first above written. STUARTS DEPARTMENT STORES, INC. By:____________________________ S. Joseph Hoffman Chairman of the Board _______________________________ Antone F. Moreira EX-10.13 7 AMENDMENT NO. ONE TO THE LOAN AND SECURITY AGREEMENT AMENDMENT NO. ONE TO THE LOAN AND SECURITY AGREEMENT STUARTS DEPARTMENT STORES, INC. This Amendment No. One To The Loan And Security Agreement (the "Amendment") is entered into as of the 20th day of March, 1995, by and between STUARTS DEPARTMENT STORES, INC., a Delaware corporation ("Borrower"), whose chief executive office is located at 16 Forge Parkway, Franklin, Massachusetts 02038 and FOOTHILL CAPITAL CORPORATION, a California corporation ("Foothill"), with a place of business located at 11111 Santa Monica Boulevard, Suite 1500, Los Angeles, California 90025-3333, in light of the following facts: FACTS FACT ONE: Foothill and Borrower have previously entered into that certain Loan And Security Agreement, dated December 16, 1993 (the "Agreement"). FACT TWO: Foothill and Borrower desire to amend the Agreement as provided herein. Terms defined in the Agreement which are used herein shall have the same meanings as set forth in the Agreement, unless otherwise specified. NOW, THEREFORE, Foothill and Borrower hereby modify and amend the Agreement as follows: 1. Effective as of fiscal year-ending January 31, 1995, Sections 6.12(a) and 6.12(b) of the Agreement are hereby amended in their entirety to read as follows: 6.12 (a) "Tangible Net Worth. Tangible Net Worth of at least a negative One Million Dollars (-$1,000,000), measured on a fiscal quarter-end basis." 6.12 (b) "Working Capital. Working Capital of not less than a negative Six Million Dollars (-$6,000,000), measured on a fiscal quarter-end basis." 2. Borrower shall pay to Foothill a facility fee in the amount of Twenty Five Thousand ($25,000), which shall be due and payable upon execution hereof. Said fee shall be fully earned at the time of payment and shall be non-refundable. 3. In the event of a conflict between the terms and provisions of this Amendment and the terms and provisions of the Agreement, the terms and provisions of this Amendment shall govern. In all other respects, the Agreement, as supplemented, amended and modified, shall remain in full force and effect. IN WITNESS WHEREOF, Borrower and Foothill have executed this Amendment as of the day and year first written above. FOOTHILL CAPITAL CORPORATION STUARTS DEPARTMENT STORES,INC. By By Lisa M. Gonzales Its Assistant Vice Presdient Its EX-10.14 8 SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT WHEREAS, on December 16, 1993, Stuarts Department Stores, Inc., a Delaware corporation ("Borrower"), entered into a Loan and Security Agreement ("the Loan Agreement") and other documents evidencing the credit facility, as amended by a Amendment No. One To The Loan And Security Agreement dated March 20, 1995 (the Loan Agreement and the other documents are collectively referred to as the "Pre-Petition Loan Documents") with Foothill Capital Corporation ("Foothill"); and WHEREAS, the principal amount outstanding which is due and owing Foothill under the Pre-Petition Loan Documents as of this date is $2,515,945.89 and in addition, Foothill is also owed accrued interest and Foothill expenses under the Pre-Petition Loan Documents (the "Pre-Petition Obligations"); and WHEREAS, the Loan Agreement provides in Section 8.5 that the filing of an Insolvency Proceeding by the Borrower constitutes an Event of Default under the Loan Agreement; and WHEREAS, Borrower has represented to Foothill that it intends to file an Insolvency Proceeding pursuant to Chapter 11 of the Bankruptcy Code; and WHEREAS, Foothill has been requested to provide Borrower with Post-Petition Debtor-In-Possession financing on a secured basis for use in the ordinary course of its business (the "Post-Petition Obligations"); and WHEREAS, Foothill has agreed to extend, renew and amend the terms and provisions of the Loan Agreement effective as of the date stated herein upon the terms and in accordance with the provisions of the Loan Agreement as amended by the provisions set forth below; NOW, THEREFORE, Borrower and Foothill hereby agree that effective as of the date stated herein as the date of execution by Borrower, being May 17, 1995, the Loan Agreement shall be amended to contain the provisions set forth below and shall be superseded to the extent necessary to give effect to the provisions set forth below: 1. The definition of Collateral as set forth in Section 1 of the Loan Agreement shall be deleted in its entirety and the following inserted in lieu thereof: "Collateral" means each of the following: the Accounts; Borrower's Books; the Equipment; the General Intangibles; the Inventory; the Negotiable Collateral; any money, or other assets of Borrower which now or hereafter come into the possession, custody, or control of Foothill; and the proceeds and products, whether tangible or intangible, of any of the foregoing including proceeds of insurance covering any or all of the Collateral, and any and all Accounts, Borrower's Books, Equipment, General Intangibles, Inventory, Negotiable Collateral, money, deposit accounts, or other tangible or intangible property resulting from the sale, exchange, collection, or other disposition of any of the foregoing, or any portion thereof or interest therein, and the proceeds thereof, and all leases and rights of occupancy whether oral or written for real property occupied by Borrower including all rents, revenues, income, royalty, sub-lease revenue and other sources of funds in connection therewith or derived therefrom. 2. Section 2.1(c) of the Loan Agreement shall be deleted in its entirety and the following inserted in lieu thereof: "(c) Foothill shall have no obligation to make advances hereunder to the extent they would cause the aggregate outstanding Pre-Petition Obligations and Post-Petition Obligations to exceed the lesser of (i) the from time to time applicable Credit Line, or (ii) Six Million Dollars ($6,000,000.00) (the "Maximum Credit Line")." 3. Section 2.1(d) of the Loan Agreement shall be deleted in its entirety. 4. Section 2.2(d) of the Loan Agreement shall be amended by deleting the reference to "two and one-half percent (2.5%)" and inserting in lieu thereof "four percent (4.0%)". 5. Section 2.4 of the Loan Agreement shall be deleted in its entirety. 6. Section 2.5(a) of the Loan Agreement shall be amended by deleting the reference to "one and three-quarters (1.75) percentage points above the Reference Rate" and inserting in lieu thereof "four (4.0) percentage points above the Reference Rate ". 7. Section 2.5(c) of the Loan Agreement shall be amended by deleting the reference to "seven and one-quarter percent (7.25%)" and inserting in lieu thereof "nine and three-quarters percent (9.75%)". 8. Section 2.5(e) of the Loan Agreement shall be amended by deleting the reference to "six percent (6.0%)" and inserting in lieu thereof "nine percent (9.0%)". 9. Section 2.8(a) of the Loan Agreement shall be deleted and the following inserted in lieu thereof: "(a) Closing Fee. A one time closing fee of Sixty Thousand Dollars ($60,000.00) which is earned, in full, as of the date stated herein, and is due and payable by Borrower to Foothill in connection with this Agreement on the date stated herein." 10. Sections 2.8(b) and 2.8(c) of the Loan Agreement shall be deleted in their entirety. 11. Section 3.1(i) of the Loan Agreement shall be deleted in its entirety. 12. Section 3.3 of the Loan Agreement shall be deleted in its entirety and the following inserted in lieu thereof: "Term. This Agreement shall become effective upon the entry of an order of the United States Bankruptcy Court ratifying the Motion For Entry Of Order Approving Borrowing On Priority And Security And Use Of Collateral And For Use Of Cash Collateral filed by Borrower (the "Order Date") and shall continue in full force and effect for a term ending on the date that is six months from the Order Date. The foregoing notwithstanding, if at any time after two months following the Order Date, Borrower has not achieved eighty-five percent (85%) of (a) projected revenues; (b) projected collections; or (c) projected availability, and if Borrower's actual expenses are more than fifteen percent (15%) greater than budgeted pursuant to Borrower's budget, a copy of which is attached hereto as Exhibit A, then Foothill shall at any time thereafter have the right to cease making advances hereunder." 13. Section 3.4 of the Loan Agreement shall be deleted in its entirety and the following inserted in lieu thereof: "3.4 Termination. Notwithstanding the provisions of the Loan Agreement, Foothill shall not be permitted to exercise its rights against Borrower or the collateral until such time that it has been granted relief from the automatic stay imposed by Section 362 of the Bankruptcy Code. Foothill shall have the right to apply for such relief upon not less than three days prior notice to Borrower and such other parties as the Bankruptcy Court may direct, and Borrower agrees not to contest the filing of a request for relief from the automatic stay by Foothill." 14. Sections 3.5 and 3.6 of the Loan Agreement shall be deleted in their entirety. 15. Section 4.1 of the Loan Agreement shall be deleted in its entirety and the following inserted in lieu thereof: "4.1 Grant of Security Interest. Borrower conducts business under the following tradenames: Stuarts, Stuarts Stores, Harry's, Uncle Joe's $1, Hot Stuff. Borrower, as used in this Section for the purpose of granting Foothill a security interest, shall include a grant of a security interest by Stuarts, Stuarts Stores, Harry's, Uncle Joe's $1, Hot Stuff in all currently existing and hereafter acquired or arising Collateral in order to secure prompt repayment of any and all Obligations and in order to secure prompt performance by Borrower of each of its covenants and duties under the Loan Documents. Foothill's security interests in the Collateral shall attach to all Collateral without further act on the part of Foothill or Borrower. Anything contained in this Agreement or any other Loan Document to the contrary notwithstanding, and other than sales of Inventory to buyers in the ordinary course of business, Borrower has no authority, express or implied, to dispose of any item or portion of the Collateral, other than obsolete items of Collateral. 16. Section 4.3 of the Loan Agreement shall be deleted in its entirety and the following inserted in lieu thereof: "4.3 Collection of Accounts, General Intangibles, Negotiable Collateral. Foothill, Borrower, and the Lock Box Banks shall enter into the Lock Box Agreements, in form and substance satisfactory to Foothill in its sole discretion, pursuant to which all of Borrower's cash receipts, checks, and other items of payment (including insurance proceeds, proceeds of cash sales, rental proceeds, and tax refunds) will be forwarded to Foothill on a daily basis. Borrower agrees to provide Foothill with a separate accounting for each store location of all cash receipts, checks, and other items of payment (including insurance proceeds, proceeds of cash sales, rental proceeds, and tax refunds) on a daily basis. At any time, Foothill or Foothill's designee may: (a) notify customers or Account Debtors of Borrower that the Accounts, General Intangibles, or Negotiable Collateral have been assigned to Foothill, or that Foothill has a security interest therein; and (b) collect the Accounts, General Intangibles, and Negotiable Collateral directly and charge the collection costs and expenses to Borrower's loan account. Borrower agrees that it will hold in trust for Foothill, as Foothill's trustee, any cash receipts, checks, and other items of payment (including, insurance proceeds, proceeds of cash sales, rental proceeds, and tax refunds) that it receives and immediately will deliver said cash receipts, checks, and other items of payment to Foothill in their original form as received by Borrower." 17. Section 5.4 shall be deleted in its entirety and the following inserted in lieu thereof: "5.4 Location of Inventory and Equipment: The Inventory and Equipment are not stored with a bailee, warehouseman, or similar party (without Foothill's prior written consent) and are located only at the locations identified on Schedule 6.14 attached hereto." 18. Sections 5.10 and 5.11 of the Loan Agreement shall be deleted in their entirety. 19. Section 6.4 of the Loan Agreement shall be amended and modified by adding the following provision as a separate paragraph after the last paragraph contained in Section 6.4: "In addition to the Financial Statements, Reports and Certificates required pursuant to this Section, Borrower shall submit the following information to Foothill: (a) actual weekly budget as compared with projected weekly budget; and (b) a new operating budget for a period not to exceed eight weeks which is acceptable to Foothill in its discretion at least two weeks prior to the end of the then current term reflected in the last supplied operating budget." 20. Section 6.12 of the Loan Agreement, as amended, shall be deleted in its entirety. 21. Section 6.14 of the Loan Agreement shall be amended and modified by adding the following provision as a separate sentence after the last sentence contained in Section 6.14: "Schedule 6.14 has been amended to reflect a current list of Inventory and Equipment at each of the locations identified on Schedule 6.14 as of the date stated herein." 22. Section 6 of the Loan Agreement shall be amended and modified by adding the following provision: "6.17 Crisis Manager. Borrower agrees to continue to use the services of the existing crisis manager, "The Recovery Group" or a replacement therefor which is acceptable to Foothill." 23. Section 7.18 of the Loan Agreement shall be deleted in its entirety. 24. Sections 8.4, 8.5, 8.9 and 8.10 of the Loan Agreement shall be deleted in their entirety. 25. Section 8 of the Loan Agreement shall be amended and modified by adding the following provision: "8.14 At any time after two months following the Order Date, if Borrower has not achieved eighty-five percent (85%) of (a) projected revenues; or (b) projected collections; or (c) projected availability, and if Borrower's actual expenses are more than fifteen percent (15%) greater than budgeted." 26. Section 9 of the Loan Agreement shall be amended and modified by adding the following provision: "9.3 Notwithstanding the provisions contained in this Section, the rights and remedies of Foothill shall be subject to a grant to it by the Bankruptcy Court of relief from the automatic stay imposed by Section 363 of the Bankruptcy Code. Foothill shall have the right to apply for such relief upon not less than three days prior notice to Borrower and such other parties as the Bankruptcy Court may direct, and Borrower agrees not to contest the filing of a request for relief from the automatic stay by Foothill." 27. Section 13 of the Loan Agreement shall be amended and modified by adding the following provision after the last sentence contained in Section 13: "Notwithstanding the provisions contained in this Section, Foothill and Borrower hereby acknowledge the jurisdiction of the Bankruptcy Court and the application for the Bankruptcy Code to the transaction described herein." 28. Section 15 of the Loan Agreement shall be amended and modified by adding the following provision: "15.10 Foothill has the right, from time to time, to deduct from the Borrowing Base a reserve for any carve out mandated by the Bankruptcy Court under Section 503 of the Bankruptcy Code, which carve out is for professional fees and expenses, administrative and priority claims and claims for severance pay for certain executives of the Borrower. The initial amount of such carve out shall be $362,500.00. 29. Section 15 of the Loan Agreement shall be amended and modified by adding the following provision: "15.11 Debtor consents and agrees that all advances received as post-petition advances shall be secured by all pre-petition Collateral and by any post-petition Collateral of the Debtor." 30. Except as herein amended, all of the terms and provisions of the Loan Agreement as amended shall remain in full force and effect. 31. Borrower and Foothill agree that this Second Amendment To Loan And Security Agreement has been prepared by the mutual effort of both parties and that in the event of a conflict or interpretive question with respect to any term, provision or section contained in either this Second Amendment To Loan And Security Agreement, and the Amendment No. One To The Loan And Security Agreement dated March 20, 1995 and the Loan and Security Agreement dated December 16, 1993 shall not be construed more strictly against any one party than any other party; it being agreed that both Borrower and Foothill have equally negotiated the terms hereof and thereof. STUARTS DEPARTMENT STORES, INC. By Its Duly Authorized FOOTHILL CAPITAL CORPORATION By Its Duly Authorized EX-10.15 9 STIPULATION REGARDING POST-PETITION FINANCING UNITED STATES BANKRUPTCY COURT DISTRICT OF MASSACHUSETTS WESTERN DIVISION In re: ) Chapter 11 STUARTS DEPARTMENT STORES, INC., ) Case No.:95-42199-JFQ Debtor ) STIPULATION REGARDING POST-PETITION FINANCING AND USE OF CASH COLLATERAL Stuarts Department Stores, Inc., Debtor-in-Possession (the "Debtor"), and Foothill Capital Corporation, a California corporation (the "Lender"), hereby stipulate and agree as follows: 1. On May 16, 1995 the ("Petition Date"), Debtor filed a Voluntary Petition (the "Petition") under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code"), in this Court (the "Bankruptcy Court"). 2. The Debtor is engaged in the business of the retail sale of merchandise in twelve (12) department stores located in Massachusetts, Rhode Island and New Hampshire. 3. The term "Pre-Petition Lending Documents" shall mean any and all documents, agreements, instruments, and financing statements executed between Debtor and Lender prior to the Petition Date in this matter including without limitation, a Loan and Security Agreement dated as of December 16, 1993, as amended by Amendment No. One to Loan and Security Agreement dated March 20, 1995, a true copy of which is annexed hereto as Exhibit "A" (the "Loan and Security Agreement"). 4. Each of the Pre-Petition Lending Documents was validly and duly executed by an authorized officer of the Debtor and the obligations created thereby are and shall continue to be the binding obligations of the Debtor. All of the security interests granted in the Pre-Petition Lending Documents have been validly, duly and properly perfected, and shall continue in full force and effect as between Debtor and Lender. 5. (a) Debtor is indebted to Lender under the Loan and Security Agreement in the principal amount of $2,515,945.89 plus accrued interest thereon and certain of Lender's expenses as of the Petition Date. (b) the loan described in subsection (a) of this paragraph 5. is fully secured by all of the assets of Debtor upon which Lender has a lien. Lender may collect and apply toward the reduction of any outstanding indebtedness from Debtor to Lender all proceeds of its pre-petition collateral without further order of this Court. 6. Lender has a perfected, first-priority security interest in the Debtor's Collateral as that term is defined in the Loan and Security Agreement including accounts, inventory, general intangibles and the proceeds and products of the foregoing, including insurance proceeds relating to the foregoing and books and records relating thereto, and substantially all of Debtor's other assets (the "Pre-Petition Collateral"). 7. Debtor has no unencumbered assets with which to secure post-petition financing. Debtor cannot obtain unsecured post-petition financing and can obtain secured post-petition financing only from Lender. 8. Debtor has requested that Lender, on and after the Petition Date, make financing available to it for its operations ("Post-Petition Financing"), and to allow Debtor to use Lender's cash collateral and Lender is willing to fulfill said requests in accordance with and subject to the terms, covenants and conditions of this Stipulation, and the Second Amendment to Loan and Security Agreement attached as Exhibit "B" hereto. 9. To provide adequate protection to Lender and in order to secure the indebtedness incurred by the Post-Petition Financing and as may be authorized by order of the Bankruptcy Court, Lender is hereby granted a security interest and lien pursuant to e364(c)(2) and e364(c)(3) of the Bankruptcy Code (the "Post-Petition Security Interest") upon all of Debtor's Collateral, as defined in the Second Amendment to the Loan and Security Agreement as set forth in Exhibit "B" hereto, now owned and hereafter acquired personal property including, without limitation, all of the following of Debtor's property: the Accounts; Borrower's Books; the Equipment; the General Intangibles; the Inventory; the Negotiable Collateral; any money, or other assets of Borrower which now or hereafter come into the possession, custody, or control of Foothill; and the proceeds and products, whether tangible or intangible, of any of the foregoing including proceeds of insurance covering any or all of the Collateral, and any and all Accounts, Borrower's Books, Equipment, General Intangibles, Inventory, Negotiable Collateral, money, deposit accounts, or other tangible or intangible property resulting from the sale, exchange, collection, or other disposition of any of the foregoing, or any portion thereof or interest therein, and the proceeds thereof, and all leases and rights of occupancy whether oral or written for real property occupied by Borrower including all rents, revenues, income, royalty, sub-lease revenue and other sources of funds in connection therewith or derived therefrom (the "Post-Petition Collateral"). 10. The Post-Petition Security Interest: (a) is and shall be in addition to all other security interests and liens existing in favor of Lender on the date of Debtor's petition. (b) shall secure the diminution of the value of Lender's Pre-Petition Collateral, and any and all indebtedness and liability of Debtor to Lender arising after the Petition Date in this matter, including but not limited to any Post-Petition Financing authorized by this Stipulation and granted to Debtor by Lender; (c) shall remain superior in right to any other lien or security interest hereinafter created or arising unless Lender consents in writing; (d) shall be deemed valid and perfected without the execution of any further agreements or the filing of any further financing statements (although Lender, at its sole option, may require Debtor to execute such additional agreements and financing statements if it so chooses.) 11. To the extent that Lender provides post-petition financing to Debtor, such post-petition financing, in addition to the other security and benefits conferred under this Stipulation, shall enjoy the benefit of e364(c)(1) of the Bankruptcy Code. 12. The provisions of this Stipulation and any action taken pursuant hereto shall survive the entry of any Order confirming a Plan of Reorganization, dismissing Debtor's Chapter 11 case, or converting Debtor's Chapter 11 case to a Chapter 7 case under the Bankruptcy Code. The terms and conditions of this Stipulation, as well as the lien and security interest granted to Lender pursuant hereto, shall continue in full force and effect in those or any other superseding proceeding under the Bankruptcy Code affecting the Debtor and such liens and security interest shall retain their priorities as provided in this Stipulation unless satisfied or discharged. Upon request from Lender, Debtor is authorized and directed to execute and deliver any supplemental note, security agreement, receipt, acknowledgement, financing statement or other document evidencing this Post-Petition Security Interest, and any Post-Petition Financing extended by Lender thereunder and/or any other right or benefit granted to Lender hereunder. 13. Lender agrees to provide Debtor with Post-Petition Financing on a secured basis for its use in the ordinary course of its business under the terms of the Pre-Petition Lending Documents except that the terms of the Loan and Security Agreement are amended by the Second Amendment to the Loan and Security Agreement, a copy of which is annexed hereto as Exhibit "B". 14. All Post-Petition Financing shall be made in accordance with the terms, conditions and covenants contained in the Pre-Petition Lending Documents as the same are modified or amended by Exhibit "B" including, without limitation, payment terms, which terms and conditions Debtor expressly assumes. 15. Lender shall have the right to inspect any and all of its collateral and to inspect and copy during the normal working hours of Debtor, any books or records of Debtor with respect to any transaction relating to the sale, transfer, or other disposition of its collateral for any period through the continuation of Debtor's Chapter 11 case, and any books and records relating to receipts and disbursements covering that same period; and Debtor, its officers, employees, and agents shall maintain all of the books and records of Debtor at the Debtor's principal place of business for the same period. Upon request from Lender, Debtor shall furnish to Lender accounts receivable and accounts payable schedules and agings, inventory reports, check and disbursement registers, bank statements as received, payroll records, profit and loss statements, and current balance sheets in the manner and with the frequency it has heretofore provided such information to Lender or as Lender may otherwise, from time to time, request. 16. Debtor shall provide the Lender detailed weekly operating reports in addition to any other operating reports required under the Loan and Security Agreement. 17. Debtor shall provide directly to Lender and its counsel, immediately upon filing, copies of all reports made to the U.S. Trustee. 18. If Debtor breaches any term or condition of this Stipulation or the Loan and Security Agreement as amended through this date then Lender shall have all rights and remedies granted to it under the Loan and Security Agreement as amended of even date. 19. This Stipulation shall become effective upon entry as an Order by the Bankruptcy Court specifically approving the terms and provisions hereof. This Stipulation shall be of no force and effect unless an Order is entered by the Bankruptcy Court on an interim basis within fourteen (14) business days from the Petition Date approving this Stipulation and shall be terminated at Lender's option if an Order is not entered by the Court granting a final approval of this Stipulation with thirty (30) days of the Petition Date. Lender may, in its sole discretion, extend such time periods, but any such extension shall only take effect if in writing and signed by the Lender. 20. The Post-Petition Collateral shall be subject to claims allowed in the Debtor's Chapter 11 Case (and any subsequent Chapter 7 case) under e503 of the Bankruptcy Code and with respect to amounts payable to the President and Executive Vice President of the Debtor on account of severance payments, but only to the extent of Three Hundred Sixty-Two Thousand Five Hundred and 00/100 Dollars ($362,500.00) in the aggregate, and only to the extent allowed by the Bankruptcy Court. 21. As of the date hereof, there are no claims, setoffs, or defenses to the payment by Debtor to Lender of Debtor's liabilities and indebtedness to Lender. Debtor is authorized and directed to, and hereby does, waive and affirmatively agree not to allege or otherwise pursue any defenses, affirmative defenses, counterclaims, claims, causes of action, setoffs, or other rights that it may have, as of the date hereof against Lender for any reason whatsoever including, without limitation: (i) Lender's enforcement of its rights under the Pre-Petition Lending Documents and this Stipulation, (ii) any events of default under the Pre-Petition Lending Documents, whether or not declared by Lender; (iii) any provisions of the Pre-Petition Lending Documents of this Stipulation; (iv) the right of Lender to all rents, issues, profits, and proceeds from any Pre-Petition Collateral and/or Post-Petition Collateral; (v) the security interest or liens of Lender in any property (whether real or personal, tangible or intangible), right, or other interest, now or hereafter arising; or (vi) the conduct of Lender in administering credit lines, financing accommodations and loans to the Debtor, in exercising any and all rights under the Pre-Petition Lending Documents, or otherwise. Provided, however, that the waivers of Debtor provided for herein shall be subject to an action being commenced in the Debtor's case by Debtor to the official Creditors' Committee to be appointed herein within forty-five (45) days of the entry of a final Order approving this Stipulation or within sixty (60) days, whichever is earlier. All defenses and claims of every kind or nature, whether existing by virtue of state, federal, bankruptcy, or nonbankruptcy federal law, by agreement or otherwise, against Lender and its respective consultants, successors, assigns, directors, officers, agents, employees, and attorneys, whether known or unknown, whether in dispute or not, whether liquidated or contingent, foreseen or unforeseen, whether in contract, tort, equity, or otherwise, whether heretofore or now existing, arising out of or related to any transactions or dealings between Lender on the one hand and Debtor on the other, or otherwise, are hereby forever waived, relinquished, and released, including without limitation, any affirmative defenses, counterclaims, setoffs, deductions or recoupments, by Debtor. Dated as of the 16th day of May, 1995. STUARTS DEPARTMENT STORES, INC. BY:_______________________________ J. Robert Seder Its attorney Seder & Chandler 339 Main Street Worcester, MA 01608 (508) 757-7721 FOOTHILL CAPITAL CORPORATION BY: ____________________________ Richard B. Polivy Its attorney DeGregorio & Polivy Six central Row Hartford,CT 06103 EX-10.16 10 AGENCY AGREEMENT BETWEEN COMPANY AND GARCEL, INC. AGENCY AGREEMENT This Agency Agreement together with all schedules, exhibits and attachments hereto dated May 3, 1995 (the "Agreement") is made by and between a joint venture comprising Garcel, Inc. d/b/a Great American Asset Management, a California corporation with its principal offices at 2812 Santa Monica Boulevard, Suite 204, Santa Monica, CA 90404 and Hilco Trading Company, Inc., an Illinois corporation with its principal offices at 5 Revere Drive, Suite 206, Northbrook, IL 60062 (collectively, "Agent") and Stuarts Department Stores, Inc., a Delaware corporation with its principal offices at 16 Forge Parkway, Franklin, MA 02038 ("Merchant") for the express purpose of Merchant engaging Agent as its sole and exclusive agent to assist Merchant in conducting a store closing sale with respect to Merchant's Retail Inventory (as hereinafter defined) in four (4) of Merchant's Stuarts stores as set forth on Schedule A attached hereto and made a part hereof (the "Stores"). WITNESSETH: WHEREAS, Merchant currently operates twelve (12) Stuarts stores throughout the Northeastern United States, in four (4) of which Merchant wishes Agent to conduct the Sale (as hereinafter defined). WHEREAS, Merchant desires to engage Agent to provide certain disposition services and to serve as Merchant's sole and exclusive agent as provided above for the purposes of conducting a store closing sale (the "Sale") whereby Agent assists Merchant in selling its entire Retail Inventory located in the Stores upon the terms and conditions and in the manner set forth in this Agreement; and, WHEREAS, Agent is willing to provide certain disposition services to Merchant and serve as Merchant's sole and exclusive agent for purposes of conducting the Sale upon the terms and conditions and in the manner set forth in this Agreement. NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth hereinafter, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. DEFINITIONS For purposes of this Agreement, the terms listed below shall have the meanings indicated: "Assumption Motion" shall mean that motion filed in the Bankruptcy Court seeking the assumption and approval of this Agency Agreement, pursuant to Section 365 of the Bankruptcy Code, and the approval of all payments and obligations of the Merchant to be made and fulfilled herein. "Augmentation Fee" shall mean a fee equal to five percent (5%) of the Sale Proceeds realized from the sale of the Augmented Merchandise during the Sale Term. "Augmented Merchandise" shall mean those items of merchandise that Agent adds to the Sale for sale to the public during the Sale Term which merchandise is in addition to the Retail Inventory and for which Agent shall pay Merchant an additional fee. "Bankruptcy Court" shall mean that court of the United States Bankruptcy Court having jurisdiction over the prospective voluntary or involuntary petition for Chapter 7 or Chapter 11 relief to be filed by, on or behalf of, or against the Merchant. "Bonuses" shall mean all discretionary incentive bonuses paid by Agent to the key Sale Employees. "Damaged Merchandise" shall mean merchandise that is damaged, dented, ripped, soiled, scratched, faded, torn, stained, worn, broken, mismatched, mechanically defective, or, in the case of perishable items, because the manufacturer's sale expiration date has expired or will expire within thirty (30) days, or otherwise unsaleable as goods with the quality ordinarily sold by Merchant in the ordinary course of Merchant's business. "Display Merchandise" shall mean merchandise which Merchant utilizes in the Stores for display purposes (e.g., small appliances, hardware, sporting goods, electronics, furniture, etc.) and shall be valued as set forth in Section 3.4. "Foothill" shall mean Foothill Capital Corporation, a California corporation with its principal offices at 11111 Santa Monica Boulevard, Santa Monica, CA. "Guaranteed Payment" shall mean an amount in U.S. dollars equal to forty-nine percent (49%) of the Retail Inventory Value the total of which Agent shall deliver in accordance with the terms of Section 4.1 hereof. "Independent Third Party" shall have the meaning set forth in Section 7 herein. "Inventory Service" shall mean RGIS or a similar independent professional inventory taking service who shall be employed by Agent. "Lease Departments" shall mean the J. Baker shoe departments contained within the Stores in which Merchant maintains a lease arrangement with J. Baker whereby J. Baker supplies the shoe inventory and staffs and operates this department for which Merchant receives a fee equal to a percentage of the net shoe department sales. "Material" shall mean any dispute where the amount in question exceeds ten thousand dollars ($10,000), or any equivalent thereof. "Merchant" shall mean as defined herein and shall include any successors or assigns including an Assignee or Trustee in Bankruptcy. "Net Proceeds" shall mean difference between the Sale Proceeds collected and the expenses, including Sale Expenses paid or arising to Merchant, incurred during the period between the Sale Commencement Date and the Date of Termination of this Agency Agreement pursuant to Section 5.7 hereof. "Payroll Expenses" shall mean all direct and indirect employee costs of the Sale Employees, temporary employees hired by Agent in the Stores to assist with the Sale and the Supervisors consisting of basic wages, salaries and benefits [including employer contributions for taxes, workers' compensation, insurance premiums, unemployment taxes, statutory disability, fringe benefits, group life insurance, pension or similar benefits, sick pay, holiday pay and vacation pay] that are actually earned by Merchant's employee and actually accrued by Merchant during the Sale Term (collectively, "Benefits") which Benefits shall be limited to 18% of base payroll. "Retail Inventory" shall mean all of Merchant's saleable merchandise as determined pursuant to the Store Inventory contained in the Stores or any offsite warehouses or storage areas which Merchant and Agent agree shall be delivered to the Stores prior to the Store Inventory and all Seasonal Merchandise, Display Merchandise and Damaged Merchandise to which Merchant and Agent assign an agreed upon value. Retail Inventory shall specifically exclude all items of Damaged Merchandise, Display Merchandise or Seasonal Merchandise for which Merchant and Agent cannot assign an agreed upon value, all consignment merchandise, merchandise retained by Merchant as bailee, FF&E, all merchandise subject to 'special orders', merchandise owned by any concessionaires or lessees, merchandise held for layaway or those held by Merchant for repair. "Retail Inventory Value" shall mean the value of the Retail Inventory determined by the procedures set forth in Section 3 herein. "Retail Price" shall mean the lowest ticketed price for each item of Retail Inventory from April 28, 1995 until the Store Inventory date for each Store, except Damaged Merchandise, Display Merchandise and Seasonal Merchandise not already reduced which items shall be separately valued pursuant to Schedule B and the provisions of Sections 3.4 herein. All items of Retail Inventory bearing either a red and/or green price ticket and all fine jewelry shall be valued at fifty percent (50%) of the regular retail price for each such item of merchandise. "Sale" shall mean the sale of Merchant's Retail Inventory located at the Stores as provided for in this Agreement. "Sale Commencement Date" shall mean the date mutually agreed upon by Merchant and Agent, but in any event no later than May 5, 1995 for each Store upon the completion of the Store Inventory in each such Store. "Sale Employees" shall mean those employees of Merchant as selected from time to time by Agent and any temporary employees engaged by Merchant and/or Agent who shall work in the Stores during the Sale Term to assist Agent in conducting the Sale. "Sale Expenses" shall mean only direct expenses incurred during the Sale Term in connection with the Sale, which expenses shall be limited to Payroll Expenses and Bonuses, occupancy costs (including rent, real estate taxes, percentage rent, CAM, HVAC and utilities) which costs shall be prorated during the actual Sale Term, cost of additional Supplies, security costs, all advertising, signage and promotional expenses, Store cleaning, trash removal, telephone charges and other direct costs of the Sale which costs and expenses shall be prorated daily during the Sale Term. All other costs and expenses incurred by Merchant or Agent on behalf of Merchant as a result of the Sale, including without limitation, major repairs, Merchant's association dues, all central or head office and administration charges and expenses of any kind, lease payments for personal property and machinery or equipment, use taxes, and building and property insurance maintained by Merchant relating to the Stores shall remain Merchant's sole responsibility and not the responsibility of Agent. "Sale Proceeds" shall mean all collections, receipts or payments realized during the Sale Term upon the sale or other disposition of the Retail Inventory as well as the fee income generated by the Lease Departments less applicable sales taxes including, but not limited to, any insurance proceeds realized thereon. "Sale Term" shall mean the period of time beginning with the Sale Commencement Date and ending on the Sale Termination Date which Sale Term shall be approximately eight to ten (8-10) weeks but in any event shall be no later than July 29, 1995. "Sale Termination Date" the last day the Sale is conducted in any Store which shall be no later than July 29, 1995. "Seasonal Merchandise" means (i) Retail Inventory intended to be sold during special holidays not occurring during the Agreement Period (such as Halloween, Thanksgiving, Christmas, Valentine's Day, Easter, Passover or any other similar holiday) (i) Fall, Winter and Clearance merchandise and (iii) those items of Retail Inventory set forth on Schedule B attached hereto and made a part hereof. For purposes of the Sale, Seasonal Merchandise shall be included in Retail Inventory at the values set forth on Schedule B or if not addressed on Schedule B, at a price mutually agreed upon by Merchant and Agent. "Stores" shall mean any one Stuarts Store listed on Schedule A and "Stores" shall mean all of the Stuarts Stores listed on Schedule A including all Uncle Joe's $1 stores located at the Stuarts Stores listed on Schedule A. "Store Closing Date" shall mean the last day the Sale is conducted in a Store which shall be no later than July 29, 1995. "Store Inventory" shall mean the counting of the Retail Inventory by the Inventory Service as provided for in Section 3 hereof. "Supervisors" shall mean such individuals as Agent may engage to assist Agent in conducting the Sale on behalf of Merchant. "Supplies" shall mean all supplies located at the Stores including, but not limited to, signs, bags, boxes, ribbons, hangers, twine, tape, paper and similar sale materials. 2. AGENT'S RIGHTS AND OBLIGATIONS 2.1 Merchant hereby retains Agent, and Agent agrees to serve, as Merchant's agent in connection with the sale of Retail Inventory located in the Stores upon the terms and conditions hereinafter set forth, commencing as of the date of this Agreement. Agent shall provide Merchant with the following services: * supervising, scheduling and staffing all Sale Employees necessary to conduct the Sale which employees shall be employees of Merchant and not of Agent; * managing the Sale, including the discounting/pricing of the Retail Inventory and determining all intra-store and inter-store transfers and consolidations of the Retail Inventory and whether merchandise should be accepted for inclusion in the Sale from any outside vendors of Merchant; * designing, scheduling and implementing an advertising program for the Sale with Merchant's cooperation and approval which approval shall not be unreasonably withheld; and * creating and implementing all strategy with respect to the sale of the Retail Inventory and, for purposes of the Sale, all operational and merchandising decisions. 2.2 Merchant hereby appoints Agent as Merchant's sole and exclusive agent for purposes of conducting the Sale in the Stores. Agent hereby accepts such exclusive appointment and agrees to act as Merchant's agent in accordance with the terms and conditions of this Agreement. 3. INVENTORY 3.1 Merchant and Agent shall cause the Inventory Service to take a physical inventory of the Retail Inventory at the Stores commencing on May 3, 1995 in Store numbers 7 and 10 and on May 4, 1995 in Store numbers 1 and 26. The procedures to perform the inventory taking and its verifications are set forth in Exhibit 3.1. Merchant shall close the Stores as of the normal closing time on May 3, 1995 for Store numbers 7 and 10 and May 4, 1995 for Store number 1 and 26 shall keep each Store closed for inventory taking purposes until completion of the Store Inventory in that Store. Upon completion of the Store Inventory in each Store, Merchant and Agent shall reopen the Stores and from the time of reopening onward, Agent shall be credited with all Sale Proceeds realized in each Store. The Inventory Service shall be instructed to tabulate the Retail Inventory Value by aggregating the Retail Price for each item of Retail Inventory. The Inventory Service shall be instructed to prepare and deliver within twenty-four (24) hours of the Store Inventory to both Merchant and Agent a copy of the report certifying the Retail Inventory Value. 3.2 Each of the parties shall have the right to have its own employees and representatives present at the Stores to observe the physical counting and review the listing and tabulation of Retail Inventory Value and verify and test the same. Each party shall bear the cost of its employees and representatives used in observing and verifying the taking of the Store Inventory. 3.3 The costs and expenses of the Inventory Service shall be borne solely (100%) by Agent. 3.4 All Damaged Merchandise, Display Merchandise and Seasonal Merchandise shall be segregated from the Retail Inventory and not included therein unless Agent and Merchant can agree upon the Retail Price with respect to such item of merchandise. If Merchant and Agent cannot reach an agreement as to a mutually acceptable Retail Price for such item(s) of merchandise, then such item(s) of merchandise shall be excluded from the Sale hereunder provided, however, that Agent will accept these items, at Merchant's sole election, as 'Merchant Goods' for sale at the Stores at prices Agent establishes solely and Agent shall be paid a separate fee for these items as set forth in Section 8.2 below. 3.5 Merchant estimates that the beginning retail dollar value of all of Merchant's merchandise contained in the Stores and in any warehouses or other offsite storage areas together with any merchandise which is on order from or is to be delivered by outside vendors or other similar sources is approximately $5,500,000 in the Stores as of the Sale Commencement Date. 3.6 Subject to applicable law, Agent shall have the election to supplement the Retail Inventory with Augmented Merchandise during the Sale Term, Agent shall maintain separate inventory and sales records with respect to the Augmented Merchandise and shall pay to Merchant an Augmentation Fee as part of the Final Reconciliation. 4. PAYMENT TO MERCHANT/ACCOUNTING FOR SALE PROCEEDS 4.1 Within 24 hours after the later of the execution of this Agency Agreement and the delivery to the Agent release of all liens held by Foothill in and to the Retail Inventory, the Agent shall deliver to the Merchant the Guaranteed Payment in immediately available funds. In the event the Sale is stopped by the Merchant's action or omission, the Agent shall have the right to enforce its rights and exercise its remedies as a secured party in the Retail Inventory as provided in the Uniform Commercial Code as adopted in the Commonwealth of Massachusetts and the State of new Hampshire, subject to the obligation to obtain relief from the automatic stay pursuant to Section 362 of the Bankruptcy Code in the event the Merchant is subject to the provisions of 11 U.S.C. s101 et seq. at the time the Sale is stopped all obligations of the Agent hereunder shall immediately and forever cease, absent an arrangement mutually acceptable to the parties. 4.2 Agent shall retain all Sale Proceeds from the Sale and deposit same in a segregated account(s) established by Agent at a bank of its choosing. Merchant shall execute and deliver all necessary documents to open and maintain all such accounts and Agent shall have sole signatory powers over all such accounts. All such Sale Proceeds retained and earned by Agent hereunder shall remain Agent's sole and exclusive property which, in the event Merchant becomes subject to a bankruptcy or other Insolvency proceeding shall not be deemed property of the Merchant pursuant to Section 541 of the Bankruptcy Code. 4.3 One (1) business day prior to each day that Merchant must fund the Payroll Expenses or other Sale Expenses, Agent shall pay to Merchant the estimated amount of such expenses. Two (2) business days after each payment of any Sale Expense by Merchant, Agent shall pay the amount, if any, by which the actual Payroll and/or Sale Expense exceeded the amount transferred and Merchant shall pay Agent the amount, if any, by which the amount transferred exceeds the actual Payroll or Sale Expense. During the Final Reconciliation, as set forth in Section 7.3 herein, Merchant and Agent shall make a final determination of the FF&E Proceeds and FF&E Fee, if any, Merchant Goods Fee, if any, Augmentation Fees, if any, Sale Expenses and make any necessary adjustments and reciprocate payments, if any, within thirty (30) days after the Sale Termination Date. 5. CONDUCT OF THE SALE 5.1 Agent shall conduct the Sale on behalf of Merchant with respect to the Retail Inventory at the Stores on the terms and conditions set forth in this Agreement and in compliance with applicable law. Agent shall use its best efforts to sell all of the Retail Inventory in conducting the Sale. Agent, with the assistance of the Sale Employees and Merchant's employees, agents and representatives shall vacate each Store within forty-eight (48) hours of the Store Closing Date and shall leave each Store in a neat and orderly condition other than the existence of any unsold FF&E or other leased personal property maintained by Merchant. 5.2 Merchant shall assist Agent in establishing the requisite systems to monitor and report sales, cash collected and Sale Proceeds on a daily basis and Sale Expenses on a weekly basis. 5.3 Agent shall collect all sales and use taxes payable on the sale of the Retail Inventory ("Taxes") which Taxes shall be added to the sale price of each item of Retail Inventory sold during the Sale and shall be paid by the customer at the time such item of merchandise is purchased. Agent shall promptly pay over to Merchant all such Taxes. Merchant shall remit on a timely basis all such Taxes together with all required returns, reports, documents and statements in respect thereof to the appropriate taxing authorities. Merchant hereby agrees to indemnify and hold Agent harmless from and against any and all damages, fines, penalties, losses, claims or expenses (including, without limitation, attorneys' fees) that Agent may incur or sustain arising out of Merchant's failure to pay over to the appropriate taxing authority any Taxes paid over to Merchant by Agent generated by and collected from the Sale. 5.4 Agent shall directly retain and engage the Supervisors who shall be independent contractors of Agent. The Supervisors are not employees or agents of Merchant in any manner whatsoever nor do the Supervisors have any relationship with Merchant by virtue of this Agreement or otherwise which creates any liability or responsibility on behalf of Merchant for such Supervisors other than for liability directly caused by the willful or illegal acts or wanton misconduct of Merchant and/or its employees, representatives, agents or principals (other than Agent, Supervisors or any person acting under the direction of Agent or any Supervisor). 5.5 Agent, as Merchant's exclusive agent, shall have the right, subject to applicable law, to: a. Conduct the Sale in the name of "Stuarts Stores","Uncle Joe's $1" and/or "Stuarts" and during the Sale Term, for the purposes of the Sale, Agent shall have the license and right to use all operating assets of the Merchant and the Stores, including, but not limited to, trade names, logos, customer lists, supplies, credit card facilities, tax identification numbers, computer hardware and software, and FF&E. b. Create and arrange all advertising and promotion for the Sale, provided that Merchant shall have the right to approve all advertising, which consent shall not be unreasonably withheld; and that all advertising and promotion shall be submitted to Mr. Dave Ferguson, via Facsimile (508) 520-4557, and, unless objected to within twenty-four (24) hours of submission, shall be deemed accepted provided that all advertising shall indicate that none of Merchant's other stores are closing; c. Select and schedule the number and type of Sale Employees required by Agent to conduct the Sale; d. Subject to the requirements of applicable law, determine the discount from the Retail Price at which the Retail Inventory is to be sold and consolidate the Retail Inventory among the Stores for purposes of the Sale. e. Merchant covenants that it shall provide Agent with the peaceful use and occupancy of the Stores for the purpose of conducting and advertising a store closing or similar type sale in the Stores and take all reasonable steps necessary including obtaining any necessary consents to maintain Agent's right to conduct the Sale in the Stores during the Sale Term. If any such consent(s) are required and Merchant fails to obtain them or make alternate provisions acceptable to Agent, then this Agreement is null and void, the Agent shall have the option to enforce its rights and exercise its remedies as a secured party in the Retail Inventory as provided in the Uniform Commercial Code as adopted in the Commonwealth of Massachusetts and the State of New Hampshire, subject to the obligation to obtain relief from the automatic stay pursuant to Section 362 of the Bankruptcy Code in the event the Merchant is subject to the provisions of 11 U.S.C. s101 et seq. f. All Sales of Retail Inventory pursuant to the Sale shall be final. The purchase price of all Retail Inventory sold pursuant to the Sale shall be paid by cash or by major, third-party credit card; g. Agent shall have the right to use all Supplies in the course of the Sale without cost or expense and shall have the right to reasonably obtain or order from Merchant or its supplier additional supplies at Merchant's cost; h. Agent, its employees, Agents and representatives have the right to be physically present on the premises to conduct the Sale in each of the Stores and take all affirmative steps necessary to maintain such right uninterrupted throughout the Sale Term; i. With prior written consent of Merchant, Agent shall have the right to extend the Sale in any Store beyond the Sale Termination Date; j. Except as otherwise provided herein, to make all merchandising, payroll, employment, advertising and other related operational decisions with respect to the Sale; In addition, the following rights and covenants shall be observed, granted and provided, subject to applicable law, as to the Stores; k. Agent shall have the uninterrupted right to use, or receive the services of, as the case may be the Store premises, all utilities and all trade fixtures, equipment, furniture and appurtenances therein including, without limitations, cash registers and/or point of sale systems, Store keys, case keys, security codes, safe and lock combinations to gain access to and operate the Stores and any applicable storage areas and any security systems. Merchant shall take all reasonable steps necessary to maintain such rights; l. Agent shall accept during the Sale Term gift certificates, store credits for the Sale Stores only, returns, promotional give-aways or any other related discounts or allowances issued prior to the Sale Commencement Date for which Merchant shall reimburse Agent for the face amount of all such accepted items; m. Agent shall separately account for all returns and allowances on merchandise sold prior to the Sale Commencement Date, for which Merchant shall reimburse Agent and which returns and allowances shall not be included for purposes of calculating the Sale Proceeds realized during the Sale Term, except in accordance with Section 5.5 (n) herein; n. All merchandise received by Merchant as a result of a return for sales made prior to the Sale Commencement Date ("Return Item") shall be added to the Retail Inventory Value at the Retail Price for that item less the prevailing discount in that Stores if the Return Item is not Damaged Merchandise. For Damaged Merchandise that is a Return Item, Merchant and Agent shall agree upon the appropriate value for each such Return Item as an express condition to such item being included as part of the Retail Inventory; and o. Agent shall have the absolute right, subject to entering into an appropriate arrangement with J. Baker, to retain all fee income generated by the Lease Departments which sum shall be included in the Sale Proceeds. 5.6 Agent shall have the right and authority to transfer Retail Inventory between the Stores, the cost of which shall be included in the Sale Expenses. In addition, Agent shall have the right and authority, at its sole discretion, to close any Store during the course of the Sale. Except as otherwise expressly provided herein Agent shall not be entitled to sell or otherwise dispose of any inventory or assets other than those of Merchant at the Stores. 5.7 In the event the Merchant commits a breach of any obligation under this Agency Agreement, including but not limited to the performance of the obligations set forth in Section 5.5, 7.1, 9.7 or 9.8 of this Agency Agreement and the covenants set forth in Section 10.10 of this Agency Agreement, or in the event the conditions or deadlines for action or determination as provided Section 9.7 and 9.8 of this Agency Agreement are not met, the Agent shall have the right to terminate this Agency Agreement and to enforce its rights and exercise its remedies as a secured party in the Retail Inventory as provided in the Uniform Commercial Code as adopted in the Commonwealth of Massachusetts and the State of New Hampshire, subject to the obligation to obtain relief from the automatic stay pursuant to Section 362 of the Bankruptcy Code in the event the Merchant is then subject to the provisions of 11 U.S.C. s101 et seq. In the event the Agent so terminates this Agency Agreement for the reasons set forth in this subsection the Agent shall have a claim entitled to administrative priority under Section 507(a)(1) of the Bankruptcy Code equal to the difference between Guaranteed Payment and the total of the Net Sale Proceeds and the net return on the Retail Inventory realized by the Agent through the exercise of its rights and remedies as a secured party.. 5.8 At the conclusion of the Sale and the clean-up at each Stores, Agent shall forward to Mr. Art Landay, Director of Construction and Store Planning, via facsimile (508) 520-4556, written notice of the turnover of each Stores to Merchant on a form similar to that attached hereto as Schedule 5.8. 5.9 Agent shall provide Merchant with daily and weekly reports of sales in a form and manner mutually agreeable between the parties. 5.10 As consideration, in part, for the services provided by Agent, all Retail Inventory that remains unsold after the Sale Termination Date shall become the sole and exclusive property of the Agent, free and clear of all liens, claims, charges and encumbrances of any kind or nature whatsoever and, in the event Merchant obtains bankruptcy relief or involuntarily enters into such relief, such unsold Retail Inventory shall not be deemed property of the estate for purposes of Section 541 of the Bankruptcy Code. Should Agent exercise such right at the conclusion of the Sale, Agent shall remove such unsold Retail Inventory, at its sole cost and expense, within forty-eight (48) hours of each Store Closing Date. 6. EMPLOYEES 6.1 Agent with Merchant's reasonable approval shall have the right to select the Sale Employees to be retained for the purposes of completing the Sale. Agent may cease using any Sale Employee at any time during the Sale Term, however, at least seven (7) days prior thereto, Agent will notify Merchant of any Sale Employee who Agent will no longer require for the purposes of completing the Sale, unless such decision was made 'for cause' such as dishonesty, fraud, breach of employee duties, and Agent shall not be responsible for incurring any further Payroll Expenses of such Sale Employees for the purposes of the Sale. Agent shall notify Merchant immediately of any Sale Employee dismissed for cause, which notice shall state among other things, the basis for such termination. 6.2 Merchant shall make available to Agent all reasonably necessary personnel to conduct the Sale and process and handle requisite office tasks and paperwork that Agent reasonably requires in conducting the Sale. 6.3 All Sale Employees shall for all purposes remain the sole responsibility of Merchant, and Agent, subject to Section 7.1 herein, shall have no liability whatsoever to and for the Sale Employees including, without limitation, liability to any of Merchant's former employees with respect to severance pay, termination pay, vacation pay, pay in lieu of reasonable notice of termination, or any other liability arising from Merchant's employment of such Sale Employees prior to, during and subsequent to the Sale other than for liability directly caused by the willful or illegal acts or wanton misconduct of Agent and/or its employees, representatives, agents or principals. 6.4 During the Sale Term, Merchant shall process the base payroll for all Sale Employees who were employed by Merchant and retained by Agent as of the Sale Commencement Date. 6.5 Agent, at its sole discretion, may provide Bonuses to certain key Sale Employees who work in the Stores during the Sale Term and do not voluntarily leave employment or are not terminated 'for cause'. The allocation of such Bonuses shall be in Agent's sole discretion and Merchant agrees to process any such Bonuses as if they were part of Merchant's payroll. 7. EXPENSES 7.1 Agent shall be responsible for and assume all Sale Expenses. Merchant further agrees that, subject to the Sale Expenses, Agent shall not incur or be responsible in any way for any other cost or expense associated with the Sale including, without limitation, all severance costs, employee termination costs, shutdown expenses and any other related costs. 7.2 Merchant shall provide to Agent, on a weekly basis, a statement of the Sale Expenses (which statement shall be furnished with invoices or such other documentation substantiating such actual Sale Expenses) for the prior week including all weekly payroll reports. 7.3 Within thirty (30) days after the Sale Termination Date, Merchant and Agent shall reconcile (a) the actual Sale Expenses to the estimated Sale Expenses Agent has previously paid and (b) the FF&E Proceeds, FF&E Fee, Augmentation Fee and Merchant Goods Fee to determine any and all amounts due and owing each party as a result of the Sale (the "Final Reconciliation"). As part of the Final Reconciliation, Agent shall provide Merchant and Merchant shall provide Agent with all information maintained by each party during the Sale Term relating to the foregoing items including Merchant providing Agent with all invoices as well as any and all documentation, including Merchant's weekly payroll reports, substantiating each item of actual Sale Expenses. If Merchant and Agent are unable to resolve any dispute which arises as a result of the Final Reconciliation or which may arise under this Section 7 or any other Section of this Agreement relating to the Sale Expenses within thirty (30) days, Merchant and Agent further agree to immediately submit any such unresolvable Material dispute to an Independent Third Party to be mutually agreed upon by Agent and Merchant whose decision as to any such dispute(s) shall be binding upon by both parties. 8. AGENT'S FEES 8.1 In consideration for its services as agent hereunder, Agent shall be entitled to retain for its sole benefit and as its exclusive property all Sale Proceeds. 8.2 In the event Merchant elects to supply Agent with Merchant Goods for sale at the Stores, Agent shall receive a separate and additional fee equal to twenty-five percent (25%) of the sale receipts generated by Agent's sale of the Merchant Goods ("Merchant Goods Fee"). Agent shall retain all such sales receipts in a segregated account at the Bank and shall deliver to Merchant on each Wednesday seventy-five percent (75%) of such sales receipts generated for the previous week (Sunday through Saturday). 9. AFFIRMATIVE DUTIES OF MERCHANT 9.1 Merchant shall cooperate with and, upon Agent's reasonable request, assist Agent in obtaining all necessary Sale permits and/or licenses required in by applicable federal, provincial, local or other governmental authorities for Merchant to conduct the Sale in the Stores. 9.2 Merchant shall provide Agent, at Merchant's sole cost, sufficient space, telephones, fax machine and copier access and support services to the extent available within Merchant's corporate/head offices which Agent requires and reasonably requests Merchant to provide throughout the Sale Term. Agent estimates that during the Sale Term, it will need one office, two telephone lines and copier and facsimile access to properly supervise and conduct Sale. 9.3 Merchant shall maintain in working order the cash registers, heating and air systems, Store alarm systems and all other key mechanical devices used in the ordinary course of operations of the Stores and ensure continuous essential utility services are provided to the Stores (the "Essential Systems") without interruption during the Sale Term. Any such costs incurred with respect to ordinary maintenance and repairs to the Essential Systems shall be included in Sale Expenses, however, any extraordinary and/or major repairs to any of the Essential Systems shall be borne solely by the Merchant and shall not be included in Sale Expenses. To the best of Merchant's knowledge, none of the abovereferenced items are in need of major repair. Agent shall bear no cost or responsibility in connection therewith. 9.4 Merchant shall remain solely responsible for all contracts, agreements or other obligations relating to all items of Damaged Merchandise, Display Merchandise or Seasonal Merchandise for which Merchant and Agent cannot assign an agreed upon value, all consignment merchandise, merchandise retained by Merchant as bailee, FF&E, all merchandise subject to 'special orders', merchandise owned by any concessionaires, merchandise held for layaway or those held by Merchant for repair as well as processing, handling and, as of each Store Closing Date, removing from the Stores all such . 9.5 Merchant shall not ship, transfer, direct or redirect any merchandise or Supplies between or among the Stores or Merchant's other retail locations or storage facilities from April 28, 1995 onward so as to materially alter the mix or quantities of the merchandise or Supplies of the Stores that existing in the Stores on April 28, 1995 provided that Merchant (a) may ship or transfer to or from any Stores merchandise excluded from the Sale hereunder, (b) may make shipments to or from the Stores or other locations of Merchant in the ordinary course of business and consistent with Merchant's past practices and the terms of this Agreement, and (c) may redirect to Merchant's other stores any merchandise on order from vendors that Merchant and Agent agree shall be excluded from the Sale. 9.6 Merchant agrees that during the Sale Term it shall not aggressively discount the merchandise in its non-Sale stores located within the same local advertising market of any Store such that a substantial portion of any such store's merchandise is at a discount and/or selling price equal to or lower than that in any Sale Store. 9.7 Merchant shall file the Assumption Motion in the same form attached hereto as Exhibit 9.7 hereof as well as a motion for expedited determination thereof and an emergency hearing thereon, the same day that an order of the Bankruptcy Court for relief is entered pursuant to Section 301, 302 or 303 of the Bankruptcy Code or upon the same day that a voluntary petition for relief pursuant to Chapter 7 or 11 of the Bankruptcy Code is filed, the Assumption Motion. In the event assumption of this Agency Agreement is not approved by the Bankruptcy Court, Merchant hereby stipulates to a grant of relief from the automatic stay pursuant to s362(d) of the Bankrupcty Code for the purpose of allowing Agent to exercise its rights as a secured party in the Retail Inventory, subject to the Bankruptcy Court's approval. The Assumption Motion shall seek, in the event that the assumption of this Agency Agreement is denied, the Bankruptcy Court's allowance of relief from the automatic stay, immediately upon the date of the order so denying assumption and without the need for further action of the Bankruptcy Court, in favor of the Agent for the purpose of permitting the Agent to exercise its rights and remedies as a secured party in the Retail Inventory, provided however, that the Agent shall have a reasonable period thereafter in which to maintain the Retail Inventory in the Stores and to have access to the Stores for the purpose of securing and collecting the Retail Inventory. 9.8 After the filing of a petition under 11 U.S.C. '101 et seq. for the Merchant, the Merchant shall take all steps necessary to retain and preserve the Merchant's and the Agent's rights to occupy and conduct the Sale in the Stores during the Sale Term and the Merchant shall oppose any effort by interested parties to enjoin or interfere with the Sale in the Stores. 9.9 In the event the Merchant properly files the Assumption Motion, the motion for expedited determination/emergency hearing thereon, and all necessary, related pleadings in accordance with the terms of Section 9.7 hereof, and the Bankruptcy Court denies thereafter despite the best reasonable efforts of the Merchant to obtain such approval the claim of the Agent arising, pursuant to Section 502(a) of the Bankruptcy Code, from the rejection of this Agency Agreement shall be equal to the difference between the Guaranteed Payment and the total of the net Sale Proceeds and the net return on the Retail Inventory realized by the Agent through the exercise of its rights and remedies as a secured party. 10. REPRESENTATIONS AND WARRANTIES OF MERCHANT Merchant represents and warrants as follows: 10.1. Merchant has taken all necessary action and possesses the right, power and authority required to execute, perform fully its obligations hereunder and deliver this Agreement and to consummate the transactions contemplated hereby. No additional Board of Directors' or other corporate approval is necessary to effectuate this Agreement nor is any court order or decree of any federal, provincial or local government authority or regulatory body is in effect that would prevent or impair consummation of the transactions contemplated by this Agreement and any and all required consents have been obtained from third parties. 10.2 The Retail Inventory may be sold by Agent through the Sale, subject to the terms hereof, free and clear of all liens mortgages, pledges, charges, encumbrances or claims of whatever nature other than those created by or with respect to Agent. 10.3 Merchant has not raised any of the Retail Prices marked on any of the Inventory since April 28, 1995 and has not raised any of the Retail Prices in anticipation of this Agreement. Merchant shall conduct business at the Stores in the ordinary course between the date hereof and the Sale Commencement Date, and there have not been, and there shall be no, promotions, advertised sales or other discounting of inventory at the Stores outside the ordinary course pending the Sale Commencement Date. Store operations, profile and business will remain consistent with historic operations, profile and business customary to the Stores pending the Sale Commencement Date. Since February 1, 1995, Merchant has maintained its pricing files of goods in the ordinary course and all costs listed for the goods purchased by Merchant represent the actual costs of each item of merchandise listed and that the prices charged to the public for goods (whether in-store, by advertisement or otherwise) are true and accurate. 10.4 This Agreement is the valid and binding obligation of Merchant and is enforceable in accordance with its term. 10.5 Within the past 5 years, Merchant has not used any business or trade names other than the name "Stuarts Stores", "Uncle Joe's $1" or "Stuarts" at the Stores. 10.6 Merchant is not aware of any items of Retail Inventory not being in compliance with all applicable consumer product safety standards or rules. Merchant shall defend, indemnify and hold Agent harmless from and against any liens, mortgages, pledges, charges, encumbrances, equities or claims against the Retail Inventory or any liability of Agent resulting therefrom or from Merchant's breach of the representations and warranties in this Section 10.6. 10.7 Merchant knows that Agent is relying upon the truth and accuracy of all financial and other information provided to Agent in writing prior to the date hereof and in connection with this Agreement, and to the extent any such information becomes inaccurate, outdated or no longer true, Merchant shall notify Agent of same as promptly as practicable. Any information provided to Agent by Merchant in connection with the Sale and the services of Agent hereunder shall remain subject to verification by Agent until Merchant fulfills all obligations hereunder. 10.8 No broker, finder, agent or similar intermediary has acted for or on behalf of Merchant in connection with the Sale or this Agreement, and no broker, finder, agent or similar intermediary is entitled to any broker's, finder's or similar fee or other commission in connection with the Sale or this Agreement. 10.9 No legal action or proceeding has been instituted against Merchant or, to its knowledge, threatened which would affect the consummation of this transaction. In addition, Merchant has no knowledge of nor has it received any notice of any involuntary bankruptcy filing or threat of such filing by any of Merchant's creditors. 10.10 During the Sale Term, the Merchant shall not take any action that seeks to or would have the effect of altering, terminating or rejecting any lease, license or other agreement relating to the Stores, their operations, administration or the Retail Inventory of other merchandise as well as the Stores' equipment, machinery, inventory, goods, or accounts, as such terms are defined under the Uniform Commercial Code as in effect in the Commonwealth of Massachusetts. In connection herewith, the Merchant covenants that during the Sale Term it shall not file any motion, application or other pleading with the Bankruptcy Court seeking, pursuant to the Section 365 of the Bankruptcy Code, to reject, alter, amend and/or terminate the Store Leases or any other lease, license or other agreement relating to the Stores' equipment, machinery, inventory, goods, or accounts, as such terms are defined under the Uniform Commercial Code as in effect in the Commonwealth of Massachusetts and that it shall, within fifteen (15) days of entry of an order for relief under the Bankruptcy Code, file such pleadings as are necessary to extend the deadlines provided under Section 365 of the Bankruptcy Code for assumption of all such leases, licenses or other agreements relating to the Stores such that any such deadlines would extend beyond the Sale Term. Notwithstanding the foregoing, Merchant may take any action with respect to the Store Leases so long as the right of Agent to occupy the Store premises for the purpose of conducting the Sale as set forth in this Agreement shall remain unaffected during the Sale Term, including no material change in occupancy costs related thereto. 11. REPRESENTATIONS AND WARRANTIES OF AGENT Agent represents and warrants as follows: 11.1 Agent has taken all necessary action required to authorize the execution, performance and delivery of this Agreement and to consummate the transactions contemplated hereby. 11.2 This Agreement is a valid and binding obligation of Agent enforceable in accordance with its terms. 11.3 No legal action or proceeding has been instituted against Agent or, to its knowledge, threatened which would affect the consummation of this transaction. 11.4 No broker, finder, agent or similar intermediary has acted for or on behalf of Agent in connection with the Sale or this Agreement, and no broker, finder, agent or similar intermediary is entitled to any broker's, finder's similar fee or other commission in connection with the Sale or this Agreement. 12. INSURANCE 12.1 Effective as of the date of this Agreement until the expiration of the Sale Term, Merchant shall continue in force all worker's compensation, general liability (including product liability and completed operations) and property coverages in such amounts as Merchant currently has in effect. In addition, Merchant shall add Agent as an additional insured for the purpose of Merchant's general liability and inventory insurance and Agent shall provide Merchant with evidence of similar coverage. 12.2 During the Sale Term, Agent shall maintain, at its cost, comprehensive public liability insurance for injury to persons and for property, naming Merchant as an additional insured. 12.3 In the event of an uninsured loss to the Retail Inventory occurring subsequent to the Store Inventory and prior to the Sale Termination Date, the proceeds of such insurance attributable to the Retail Inventory, but specifically excluding any proceeds of business interruption insurance, shall be accounted for by Merchant and such proceeds shall be deemed to be included as part of the Sale Proceeds. Any portions of such insurance proceeds due Agent shall be paid promptly to Agent upon receipt thereof. 13. INDEMNIFICATION 13.1 Merchant hereby agrees to indemnify, defend, protect and hold harmless Agent and its officers, directors, shareholders, employees, agents and representatives from and against all demands, claims, actions, assessments, losses, damages, liabilities costs and, arising from demands by third parties claiming a security interest in, or lien or encumbrance against, the Retail Inventory, or proceeds thereof, any claims with respect to Sale Employee severance and/or termination liability, any claims with respect to consigned merchandise, and any claims concerning any matters with respect to which Merchant warrants, represents and covenants herein. 13.2 Agent agrees to indemnify, defend and hold Merchant harmless from and against any and all Claims and expenses (including but not limited to reasonable attorneys' fees and costs of suit), of any kind and nature whatsoever, arising out of or in connection with the services rendered by Agent and Supervisors pursuant to this Agreement resulting from the gross negligence or willful misconduct of Agent or Supervisors in performing such services, including without limitation, Agent's breach of any term of this Agreement. 14. LIMITATION OF AGENT'S LOSS/DAMAGE 14.1 Notwithstanding anything to the contrary contained in this Agency Agreement, any and all loss and/or damage of Agent on account of any and all claims of Agent against Merchant arising hereunder shall be limited, in the aggregate, to an amount equal to the difference between: (a) the Guaranteed Payment; and (b) the Net Sales Proceeds plus the net amount realized by Agent on the Retail Inventory through the exercise of Agent's rights and remedies as a secured party, having acted in a commercially reasonable manner and in accordance with applicable law. Agent's claim for such loss and/or damage may be asserted by Agent against Merchant as an administrative claim with the priority afforded to it by '507(a) (1) of the Bankruptcy Code. 15. OPERATING PROVISIONS 15.1 Each of Merchant and Agent shall from time to time, both before and after the date of this Agreement, diligently take or cause to be taken such action and execute and deliver or cause to be executed and delivered to the other such documents and further assurances as may, in the reasonable opinion of counsel for the other, be necessary or advisable to give effect to this Agreement. 15.2 Each party shall provide to the other such information and copies of such records and documents as the other may reasonably request for the purpose of confirming the calculation of any amounts hereunder. Except as required by applicable law, Agent shall keep all information and records relating to Merchant, the Stores, the Sale and this Agreement in strictest confidence and shall not disclose any such information or records to any person or entity other than its own financial, legal and accounting professionals for Agent's internal purposes only. 15.3 Any notice or other communication under this Agreement shall be in writing and may be delivered personally or sent by facsimile or by prepaid registered or certified mail, addressed as follows: (i) in the case of Agent: Mr. Rick Rosenbloom Hilco Trading Company, Inc. 5 Revere Drive, Suite 206 Northbrook, IL 60062 Telephone: (708) 509-1020 Facsimile: (708) 509-1150 with a copies to: Mr. Gary Mintz Great American Asset Management 2812 Santa Monica Blvd., Suite 204 Santa Monica, CA 90404 Telephone:(310) 310-1515 Facsimile: (310) 315-9225 George M. Kelakos, Esq. Cohn & Kelakos 265 Franklin Street Boston, MA 02110 Telephone: (617) 951-2505 Facsimile: (617) 951-0679 (ii) and in the case of Merchant: Mr. David S. Ferguson Stuarts Department Stores, Inc. 16 Forge Parkway Franklin, MA 02038 Telephone: (508) 520-4540, Ext. 224 Facsimile: (508) 520-4557 with a copy to: J. Robert Seder, Esq. Seder & Chandler 339 Main Street Worcester, Massachusetts 01608 Telephone: (508) 757-7721 Facsimile: (508) 831-0955 15.4 Time shall be of the essence of this Agreement. 15.5 All references to currency in this Agreement shall be references to U.S. dollars. 15.6 This Agreement is expressly subject to the following conditions: (a) Merchant shall obtain all consents and approvals necessary for Merchant to execute and perform this Agreement; and (b) Merchant shall obtain all consents and approvals necessary to prevent, cure or waive any breaches or defaults under any agreement to which Merchant is a party whether or not occasioned by the execution and performance of this Agreement necessary to perform its obligations under this Agreement. 15.7 This Agreement shall be governed by and interpreted in accordance with the laws of the Commonwealth of Massachusetts. 15.8 This Agreement constitutes the entire agreement between the parties with respect to the subject matter and supersedes all prior negotiations and understandings. 15.9 This Agreement shall not be assigned by either party without the written consent of the other and shall inure to the benefit of, and be binding upon, the parties and their respective successors and permitted assigns. 15.10 This Agreement may be executed in several counterparts, each of which when so executed shall be deemed to be an original and such counterparts, together, shall constitute one and the same instrument. Delivery by facsimile of this agreement or an executed counterpart hereof shall be deemed a good and valid execution and delivery hereof. 15.11 It is expressly agreed that Agent is acting as an independent contractor in performing its services hereunder. Merchant shall carry no Worker's Compensation insurance or any health or accident insurance to cover Agent nor Supervisors, or any employees of either. Merchant shall not pay any contribution to Social Security, unemployment insurance federal or state withholding taxes, nor provide any other contributions or benefits to Agent nor Supervisors, or employees of either. 15.12 Neither Agent nor Supervisors shall have or hold themselves out as having, any right, power, or authority to create any contract or obligation, either express or implied, on behalf of, in the name of, or binding upon Merchant, or to pledge Merchant's credit, or to extend credit in Merchant's name unless Merchant shall consent thereto in advance in writing. 15.13 Agent and Supervisors shall perform their duties in strict compliance with all, and shall not cause Merchant to be in violation of any, applicable laws, rules and regulations of duly constituted governmental authorities, and shall obtain all licenses, registrations or other approvals required by law in connection with the services to be rendered hereunder. 15.14 Nothing contained herein shall be deemed to create any relationship between the parties other than the relationship of Agent and Merchant. It is stipulated that the parties are not partners, or joint venturers, or, except as expressly provided to the contrary herein, agents of one another. 15.15 Upon the entry of an order for relief for the Merchant pursuant to Sections 301, 302, and 303 of the Bankruptcy Code, the Bankruptcy Court shall have exclusive jurisdiction over any and all disputes arising out of this Agency Agreement, including the interpretation and enforcement hereof and the performance of the parties hereunder. IN WITNESS WHEREOF, the parties hereto have entered into this Agreement on the day and year first written above. Great American Asset Management By: __________________________ Name: Gary Mintz Position: President Hilco Trading Company, Inc. By:___________________________ Name: Rick Rosenbloom Position: Vice President/General Counsel Stuarts Department Stores, Inc.* By:__________________________ Name: David S. Ferguson Position: President and COO *Dave Ferguson's signature represents the binding obligation of Stuarts with full Board of Directors' approval. -----END PRIVACY-ENHANCED MESSAGE-----